O2micro International Ltd (OIIM) 2022 Q1 法說會逐字稿

Good day, and welcome to the 2022 first quarter earnings release conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Daniel Meiberg. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining O2Micro's financial results conference call for the first quarter of 2022 ending March 31, 2022. This is Daniel Meiberg, Corporate Communications for O2Micro. If you'd like a copy of the press release reissued this morning, you can call me at (408) 987-5920, Extension 8888, and we will email you a copy. It is also posted on our 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. Following the presentation by management, the conference will be open for questions and answers.

I'd like to remind listeners that the discussion on 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 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 here 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'd like to introduce Perry Kuo, CFO of O2Micro for a discussion of the financial highlights of the first quarter of fiscal year 2022, ending March 31, 2022. Perry?

Thank you, Dan. We will now review our financial result for Q1 2022. Please know that financial result will be presented our GAAP basis unless we designate otherwise. The landscape result is (inaudible) based compensation expense. One-time charges, non-recurring gains and losses. Our (inaudible) result are available in our press release that was issued earlier today.

GAAP revenue in the first quarter of 2022 was 21.6 million. GAAP net income in the first quarter of 2022 was 915,000. If we exclude stop-based compensation of 574-, and one-time spatial project expense of 136,000, the non-GAAP income will be 1.6 million. GAAP net income per free diluted ADS. In the first quarter of 2022 was 3 cents. Non-GAAP income per fully diluted ADS 5 cents. Gross margin was 52.6% in Q1. The gross margin reflects the current revenue label and the product mix. R&D spend was 4.8 million or 20% -- 22% of revenue.

This amount is excluding stop-based compensation expense of 207,000. SG&A expense was 5.1 million or 23.4% of revenue. This amount is excluding stock based compensation expense of 367,000. And the one -time special project expense of 136,000.

The non-operating income was 285,000. Income tax was 203,000 in the first quarter is mainly based on the estimated effective tax rate on each test location. In Q1 2022, we repurchased 110,924 ADH units at a cost of 463,000.

Q1 2022 revenue by a market breaks down into the flooring percentages. Industrial was 50 to 62% of revenue. Consumer was 36 to 38% of revenue. Computer was 2% to 4% of revenue. Communication was almost zero. At its moment. I would like to provide some additional information. O2Micro finished the first quarter with 48.2 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of $1.55 per ADS.

In addition, O2Micro has not debt. Accounts receivable at the end of Q1 was 16.2 million. Our DSO is 73 days. DSO is more than 60 days mainly from account mix. Inventory was 21.8 million at the end of the first quarter. This represents 181 days of inventory and inventory turnover was 2x in Q1.

The strategic increase in inventory is mainly for waiver (inaudible) and the battery IC's.

Net cash using operating activities in the first quarter was about 1.2 million. Capital expenditure was about 728,000 in the first quarter for tester, R&D and IT equipment. Depreciation and amortization were 1.3 million in Q1. At the end of the first quarter of 2022, O2Micro had 319 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 Q2 2022. Net revenues are expected to be 20.5 million to 22.7 million as compared to Q1 2022 of 21.6 million. Product gross margin is expected to be in the range of 51% to 53%. R&D expenses excluding stock-based compensation are expected to be in the range of 4.8 million to 5.3 million. SG&A expenses, excluding stock-based compensation and one-time expense for spatial projects, are expected to be in the range of 5 million to 5.5 million.

Stock-based compensation is expected to be in the range of 550,000 to 650,000. Non-operating income is expected to be in the range of 200,000 to 300,000, including foreign exchange gain or loss. 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, we have been active in this program historically. Since 2002, we have repurchased over 20.5 million ADS shares for $102.2 million. As of the year of Q1, we had 6.7 million remaining in our shared buyback authorization.

There are still many dynamic factors associated in the business development. We will carefully print and managing the inventory through our 2022 and maintain at a strong cash level in the balance sheet. Given the uncertain demand and the macro environment, we are continuously investing in R&D, patent filing, expanding our supply chain with second sourcing suppliers and capabilities in testing (inaudible) product and capacity.

We always watch the expenses carefully and continue to manage costs as landed. Although we believe we have a current cost based on current and anticipated revenue labels, returns to shareholders are very much on our minds and will continue to be focus in the future. We will provide updates to the additional measures to enhance shareholders value throughout this year. I would like to thank -- to thank everyone for participating and turn the call over to Jim to talk more about our business.

Thank you, Perry. Good morning, everyone. Both our Q1 2022 revenue of 21.6 million and projected revenue of Q2 reflect ongoing supply chain issues that affect all phases of our business, including wafer supply, assembly, and test as well as customer demand for our products.

Previously existing supply chain issues were further complicated by the well-publicized lockdowns in China, which not only impact our deliveries from key China suppliers, but also impact our customer's ability to project their business needs for building in products. Additionally, the lockdown reduced customer demand in the internal China market.

The slowdown in China demand coupled with historically low demand in power tools, garden tools, and e-bikes in the winter months has enabled us to greatly reduce delinquencies to customer requests and rebuild some strategic inventories and key product areas in battery management. We also believe some battery management customers have built strategic inventories that could reduce their Q2 demand for product.

Regardless of any temporary inventory situation, our fundamental battery management business remains strong as we continue to see expanding customer base and design when activity, while our market positioning garden tools, power tools, vacuum cleaners, and e-bikes remain strong. We see expanding design wins for our battery management business in e-scooter, household energy storage and industrial energy storage systems.

In intelligent lighting, we remain very constrained in the supply of our products as customer product demand remains at a high level and exceeds our ability to supply. We are working diligently to expand wafer supply in the intelligent lighting product area. This includes expansion into new wafer suppliers, as well as expansion into additional processes at existing suppliers that can enhance our existing wafer supply. Both activities are well underway and are expected to contribute to expanded product supply in Q3. In parallel, we are expanding our assembly capability into additional suppliers and continue to expand our testing capability.

Our design win activity during the quarter remains strong in intelligent lighting as well as battery management. As we continue to aggressively develop new products focused on serving rapidly expanding applications for lithium battery applications, as well as advanced lighting systems using mini-LEDs.

As Sterling Du, our CEO, will explain later in more detail, our new products are targeted at more complex consumer, industrial and automotive market applications that will broaden our market focus and expand our customer base while generating higher ASPs. These new products are based on our unique technology, backed by a large intellectual property patent portfolio that is significantly larger than most companies our size. We strongly believe that these new products will continue to drive 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 that. Major OEMs that already use our product and battery management include Bezel, Black and Decker, Bosch, Dyson, Electrolux, Hitachi, Lexi LG Makita, Merada, Panasonic, Phillips, Samsung, Shark, TPI and Toshiba. Major OEMs that use our lighting products include BOE, Dell, HP, Hisense, Honda, Honhi, Foxconn, Lenovo, Panasonic, Samsung, Sharp, Sony, Skyward, TCL, and Toyota. Given our excellent 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 is with the guidance publicly release on January 26th, 2022, and our design activity and the growth opportunity remain very strong. Our high-end analog technology support advanced power management product in both intelligent lighting and the battery management markets. New products are targeted at more complex 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.

On the other hand, by the supply chain continue to be high demand mode. The trend to integrate market resistor enable higher SP in the larger size in the roadmap. Therefore, the new products, which are based on our proprietary technology based by a large IT patent portfolio will not only grow a unit number, but higher SP. We strongly believe that a new product will continue drive our revenue expansion in 2022 and beyond.

While our major customer can carry our product to a higher revenue, we also increase our penetration of their product family. Our intelligent lighting group business continue to grow as a global 4k TV market size is expected to reach us 380 billion by 2025 in a compound annual growth rate of 21.2%, according to the report that the (inaudible) research. We foresee today, AK high-end will become mainstream product line in 2025 and beyond.

For the full array, local teaming technology dominant TV and the data monitor today, our IC, we roll up process the ability to capture the teaming through either analog function or PWM pathway function. 2 in one mode, to further simplify the TV system design architect, if our customer design to support a different type panel teaming solution with one IC. The next generation IC following the flow rate, local teaming is mini-LED. Mini-LED solved the issue by multiplying the number of LED chips and mounting LED dye on substrate, therefore reducing the spacing between each line and the thickness of the big light.

More importantly, they also can significantly increase the number of zones, which should be reduced by the brooming and have an effect by the bright object of the highlight much smoother and individual diming zones of display against very dark background.

Also mini-LED (inaudible) enhanced L C D contract performance to the label, close to the organic LED will maintain an LCD (inaudible) in a long lifetime. They can also reduce core consumption as the most zone will be off in the dark image, or the brightness will be dimmed.

This mini-LED technology, over much smaller size compared to the conventional package LED size, enable the system to design the more ability to design the diming layout while over the (inaudible) technology. With the (inaudible) scan, the mini-LED co easily to compose many redefine smaller local area due to its smaller size. This technology represents crystal clear picture, even with fast moving objects in a display. We are expecting by our new mini-LED technology, and we have a total of 9 different solutions to address this market. Each solution meets a different customers need. We believe our mini-LED business will ramp up step by step in the coming years.

Our battery design wing activity grew strongly in all the sectors despite the dynamic market and the supply chain situation. We observed the higher number of sales applications to more market share. It was targeting from the cost curve sharply as well as battery quality improve, which enhance the year rate of high sale number battery pack. We believe the strong growth coming from both consumer and the industry sectors.

On the other hand, we see the new battery power devices produce for the light transportation, innovative household energy storage and the industrial grading and inter power supply October 1st, 2021, last year, USB 4, our delivery type C announced the standard expand to the new power tools 240 watts from existing 60-watt standard. This news expands the USB type to power tool market size, and a few the future growth on power tools to the next level.

Meanwhile, the higher energy density means higher resolution and a faster AD converter are needed. Our analog front end and our business management, our battery management unit were designed with a 14-beat high accuracy AD converter could meet customer needs. Our high accuracy AD converter reached 15 mini volt resolution. This performance is well beyond customer expectation.

Our arm-based all in one, the battery management systems solution enables power tool to be connected as IOT devices and the 5G deployment will further enrich the power tool connectivity. We expect to grow the business despite the dynamic market situation and the tight supply chain. We are optimistic for the fundamentals of our business and the focus on high margin, high performance in the sector. We started several expansion projects, a few quarters ago to address the automotive market, second source re-engineering and recruiting more engineers outside China.

We always watch expand carefully will build the base to drive future momentum. We always keep the shareholder best interest in mind, especially in the current situation. At the moment like to thank you for listening our conference call and I turn back to Dan. Dan, please.

Thank you, Sterling. We will shortly be opening up the lines for questions. We will not be addressing any privatization-related questions on this call. As disclosed in the O2Micro international limited press release as of March 18th, 2022, O2Micro's board has received a preliminary non-binding proposal letter dated March 14, 2022, from FNOF Precious Honor Limited to acquire all of the upstanding shares of the company for a purchase price of US $5.50 cents per ADS or Us 11 cents per ordinary share in cash.

Following receipt of the proposal, O2Micro International Limited -- sorry O2Micro International has formed a special committee consisting solely of independent directors to evaluate and consider the proposal and proposed transaction and has engaged its own financial and legal advisors. The special committee is 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 binding commitment. The O2Micro international limited has been making SCC filings and issuing press releases in connection with the proposal and will continue to do so pursuant to the requirements of the SEC and rules and regulations. We encourage you to periodically check the company's SEC filings for more information regarding the proposal or proposed transactions. Thank you.

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

(Operator Instructions) And we'll take our first question from Theodore O'Neill with Litchfield Hills.

So my question is about your guidance for Q2. The midpoint of the range of the guidance is also the same number of revenues reported in Q1. So, it's flat. And -- and the -- the question is if I look at sort of electronic distributors -- and I know this is probably not a fair comparison -- but if I look at Arrow Electronics as an electronics distributor, they're guiding for a, a healthy increase from this quarter into the next quarter and yours is flat. And so, it just sort of begs the question. If you could give us some more detail on -- on why you -- you're, you're not seeing the -- your revenue rise in Q2?

Yes. I'd be happy to address that. First of all, you are right. We can't be compared to a distributor because demand's still out there for the broad base of products that they have, and they can basically ship everything they can get their hands on, basically. There are several fundamental reasons for us being flat. Intelligent Lighting's pretty simple, we're wafer limited. And we expect to be wafer constrained until we get into Q3.

So very simply put, we can't ship additional lighting product until we get additional wafer supply. On the battery management side, the issues are several. First of all, you're in a seasonality situation going into Q2 for some of the power tool, garden tool type products, as we mentioned on the call. Secondly, we do have some -- and we know we have with, with some of our major customers some inventory that is in place. They built some strategic inventories during the shortage, which we were able to deliver to them last year, even. And so, at this point they are going to work through some -- some inventory issues. So, we do expect Q2 to be flat as well in the battery management area. That's my comments on it.

Our next question from Tore Svanberg with Stifel.

My first question is on the inventory. So obviously it's -- it's higher now. I assume that's mainly going to be on the battery management product thinking about the -- about the mix. So yes, either Perry or Jim, if you can confirm that that's where the inventory increase happened.

Confirmed.

Yes. Yes. Sorry, yes. Yes, sorry. Yes. (inaudible).

I had just a one-word answer, confirmed. Go ahead, Perry.

Yes. Let's -- I think the inventory increase is our strategic inventory. Yes. I think this is arranged to meet the future upside from the key account after they consume some inventory, as Jim just indicated. And the demand from the key customers in China and also in other areas actually for some battery product, the upside orders, it comes actually in a very short lead-time as we experience in the Q2 last year. So that's why we have done some strategic inventory. Also -- we -- we also experienced some longer testing time for the battery product. So, let's also -- we increased our -- an area to support our customers. Yes.

Very good. And just sticking with battery management. So if it's seasonally week right now, it sounds like they have some strategic inventory going into Q2. So, I mean, Q3 is usually, you know, seasonally strong, but by then, would you also expect your customer to have digested their inventory?

Yes, I -- I think that -- oh sorry. I think that the -- starting from Q2, the end of the Q2 inventory will be down in terms of the imagery turns will up. So, this is what I simulate currently. So, Jim, you like to -- to add your comment?

Yes, I'll simply add, Perry, that we do see forecast from customers indicating a reasonable Q3 in terms of growth for us.

Very good. And your DSO remained elevated compared to historical, and you mentioned that's because of mix. So, could you maybe elaborate a little bit on that? Is this again, sort of the dynamics in lighting being very different from the dynamics that you're currently seeing in battery management?

Yes, I think the account is due to what we -- we are shipping more to the key customers and always the global key customers. They are -- they're asking for the longer terms of the credit line, and this is why (inaudible) this is kind of the account mixed. So, we -- in general, it's the -- we like to keep it in the area of the 60 days. Yes.

Very good. Last question for Sterling. Sterling, you talked about several R&D initiatives for new products you know, including more integrated solutions and so and so forth with higher ASPs. Should we assume that those will eventually drive gross margins as well?

Yes. it counts with the new technology always enjoy higher gross margin. Yes, it is. Yes.

We'll take our next question from Lisa Thompson with Zacks.

So what -- going back to your capacity constraints and back lighting, I know you spent a lot of money last year, trying to increase capacity. When that comes online, how much more will you have, and can you translate that into like revenue per quarter?

It's difficult for us to give a specific answer to that because there's a number of factors in the wafer supply area. What we can tell you is that we have successfully produced first products that can be high-volume products coming out of a new wafer supplier based upon our constraints at other wafer supply areas. And those products now have been through this qualification process with customers. And we are prepared now to begin to move that into production. We are working with that wafer supplier to discuss long term wafer supply commitment. So, it's a little bit early to describe that, but we certainly will be getting wafers out of them even this quarter that will enable us to grow our revenues in Q3, but we can't give you a lot of specifics going forward on the amount of -- of wafers at this time. That's still under discussion and negotiation.

So ultimately, what's the plan though, as far as your capacity? What -- what are your goals for increasing what you can produce?

Well, our goal is pretty simple. Not to be wafer constrained. So basically, we're not only bringing up products in -- in one new wafer supply but we're also working with another potential wafer supply. We do have opportunities that we feel are very significant including what Sterling mentioned in the mini-LED area, and we're looking at those opportunities and we will want to negotiate wafer supply that can fully enable us to -- to full fulfill the -- the potential requirements in those areas. So, it could be very significant growth for us, Lisa.

All right. And given the strange start to the year and the constraints, do you expect that Q4 is going to be significantly larger than Q3, just because of production issues?

Well, we certainly believe that -- that once we're through the wafer constraints in the Q3 timeframe on lighting, the lighting revenues will increase. And once we're through the inventory issues, this quarter in battery management, battery management will increase. So, our current projections are for good increases in revenue in both product areas as we move into the second half of next year. Obviously, we'll continue to watch market situations. As everyone is well aware, there's a lot of concern over some of the market situations, but right now we are forecasting growth in both areas as we move into the second half of the year.

And could you talk a little bit about what's going on in China as far as lockdowns and those things? Are things getting worse or better, or what the heck's going on over there? Because I don't understand in the end.

Well, I think the Shanghai area in the neighborhood it's experienced a lockdown and that is quite limit the transportation. The factory manufacturer property is still ongoing because they are kind of isolate quarantine, but you just cannot ship out. Or when they use all the -- the raw material, they cannot ship in. So that's basically -- that's the issue, that's the transportation issue.

So for example, when we -- we don't have a wafer manufacturer in Shanghai area, but we do have assembly and testing nearby the Shanghai area. And so, what we do is waiting for some -- some break and then ship out those test IC out, or we ship the package IC for the tester. And then that takes some multiple times for transportation because you go to the different provinces, you probably need a different -- the path and -- or you have to some traffic jam once the people all come out to transport or the truck was lineup. So that's dynamic we are seeing.

But fortunately, we are not using Shanghai city or Shanghai areas function. Our function is outside of Shanghai. But however, our Foundry still have a limited supply. So that's the issue that Jim just talked about. And -- and that is under the so-called that we expect that will be solved by the -- our second source engineering and that probably going to happen in the new future. But that is a different issue other than lockdown in Shanghai.

Okay. Sounds like a challenge. One question about -- you had the one-time charge for a special project. Can you talk -- say how that -- I don't remember that ever happening before, and is that something you're expecting Q2 also?

Yes, this is a special project for the privatization. So, it may probably go through several quarters, but this is -- we -- we account this as the onetime expense. Yes.

And then I'll give it a shot on the takeover bid. Do you have, at least -- do you have some idea of what the timing might be as to how long it takes to look at it and make a decision?

No, no. I have no comment on this.

We will take another question from Tore Svanberg with Stifel.

Yes, I just had a follow up for Sterling. Sterling, the 14 bit (inaudible) on the battery management side is -- is that a product that's currently shipping? And when I think about that from a competitive landscape perspective is -- is it fair to say that, you know, there's probably only one or 2 other competitors that possibly can deliver such a high position analogue front end?

Yes. Our major competitor is TI, and yes, we were told that TI is doing some new -- new IC release, try to catch up. Yes. But in the meantime, we also ongoing, right. So, it's kind of the competition area, yes. Major is GI.

But is the 14-bit analogue front end solution shipping at this point or just sampling?

It's shipping right now. Yes.

There are no further questions at this time. Mr. Meiberg, I'll turn the call back to you for closing remarks.

Great. Great. Thank you. Thank you, everyone, 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. I'd like to thank everyone, and have a great day for your time and attention. Goodbye.

That concludes today's call. Thank you for your participation. You may now disconnect.