O2micro International Ltd (OIIM) 2021 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 2021. 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. Following the presentation by management, the conference will be open for questions and answers as time permits. Gentlemen, you may begin.

Thank you. Good morning, everyone, and thank you for joining O2Micro's Financial Results Conference Call for the fourth quarter of 2021, ending December 31, 2021. 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 meanings 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 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 & 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 fourth quarter of fiscal year 2021, ending December 31, 2021. Perry?

Thank you, Dan. We will now review our financial results for Q4 of 2021. 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 fourth quarter of 2021 was $24.4 million. GAAP net income in the fourth quarter of 2021 was $2.8 million. If we exclude stock-based compensation of $588,000, the non-GAAP net income will be $3.4 million.

GAAP net income per fully diluted ADS in the fourth quarter of 2021 was $0.09. Non-GAAP net income per fully diluted ADS was $0.11. Gross margin was 54.3% in Q4. The gross margin reflects the current revenue level and the product mix.

R&D expense was $4.8 million or 19.6% of revenue. This amount excludes stock-based compensation expense of $200,000. SG&A expense was $5.3 million or 21.7% of revenue. This amount excludes stock-based compensation expense of $388,000.

The nonoperating income was $395,000. Income tax was $196,000 in the fourth quarter and is mainly reflected in actual tax provisions of each taxable location. In Q4 2021, we repurchased 93,679 ADS units at a cost of $482,000.

Q4 2021 revenue by end market breaks down into the following percentage. Industrial was 60% to 62% of revenue. Consumer was 36% to 38% 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 fourth quarter with $50 million in unrestricted cash and short-term investment. This represents cash and cash equivalents of $1.75 per ADS. In addition, O2Micro has no debt.

Account receivable at the end of Q4 was $18.8 million. Our DSO is 65 days. DSO is more than 60 days mainly from account mix. Inventory was $19.5 million at the end of the fourth quarter. This represents 152 days of inventory. And inventory turnover was 2.4x in Q4. The increase in Q4 inventory from Q3 mainly is the wafer and work in process inventory for battery product line. This buffer will support on the higher demand in seasonal demand starting from Q2 2022.

Net cash generated from operating activities in the fourth quarter was about $1.3 million. Capital expenditure was about $1.9 million in the fourth quarter for R&D, IT and test equipment.

Depreciation and amortization was $1.2 million in Q4. At the end of the fourth quarter of 2021, O2Micro had 315 employees, 56% of which are engineers. Based on current market situation and the best updated managerial rolling forecast, the company has the following guidance for Q1 2022.

Net revenues are expected to be $20 million to $22 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 $5 million to $5.5 million. SG&A expenses, excluding stock-based compensation, are expected to be in the range of $5 million to $5.5 million.

Stock-based compensation should be in the range of $500,000 to $600,000. Nonoperating income expected to be in the range of $200,000 to $300,000, excluding 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 shareholders' value. We have accomplished this by taking the necessary steps, which included managing operating expenses and monetizing asset on the balance sheet.

In regard to our share repurchase program, we have been active in this program historically, and we will continue to be active. Since 2002, we have repurchased over 20.4 million ADS shares for $101.8 million. As of the end of Q4, we had $7.1 million remaining in our share buyback authorization. There are still many dynamic factors associated in the business development. We will carefully plan and execute to target revenue growth and maintain gross margin in 2022 compared to 2021.

Jim and Sterling later will talk more about our focused efforts and investment for revenue growth with major accounts and product expansion by second source development and test facilities for more supply to ensure delivery. We also monitor the supply chains tightly and have added both wafer and volume process for battery in Q4 2021 to support the coming seasonal demand in 2022.

Given the uncertain demand and the macro environment, we are continuously investing in R&D patent filing, expanding our supply chain with more second source suppliers, testing capabilities of compressed product and capacity. And we always watch the expenses carefully and continue to manage costs as needed, although we believe we have [a noncurrent] costs based on current anticipated revenue levels. With new testers and the new IC shift, we now guided Q1 gross margin 51% to 53% from earlier quarters guided between 50% to 52%.

In 2022, we expect gross margin can be improved from product mix and the cost reduction program, but could be offset by some cost up from suppliers.

Returns to shareholders are very much on our mind and will continue to be a focus in the future. We will provide update 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. Our Q4 revenue was reduced from our initial projection for the quarter due to an unexpected delay in wafers from one of our key wafer suppliers due to an internal processing issue at their facility. This negatively impacted our intelligent lighting product line revenue but had no significant impact to battery management revenue.

Without this wafer supply problem, we were positioned with backlog to meet our original revenue projection. Even with this wafer supply problem, our revenues continued to increase year-over-year with Q4 2021 having 5% growth over Q4 2020, and Q4 2021 having 36% growth over Q4 of 2019. The wafer supply problem that delayed shipments of product in Q4 will also negatively impact the Q1 revenue for intelligent lighting, but is expected to abate by Q2 as we remain optimistic about our growth opportunities in 2022.

In fact, the customer demand for our lighting products remains at record high levels. We also see ongoing growth for battery management product in 2022, although Q1 does reflect normal market seasonality, along with some battery management inventory that exists in the channel. While this supply chain impacted our revenue growth expectation, our strong financial position has enabled us to accelerate expansion of our production capability in anticipation of ongoing growth and making up for some of the Q1 shortfall in later quarters.

For wafer fab, 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 should contribute to expanded wafer production capability in Q2. 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 remained strong in both intelligent lighting and battery management as we continued to aggressively develop new products focused on serving rapidly expanding applications for lithium battery applications as well as advanced lighting systems using many LEDs.

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 products will continue to drive revenue expansion as we proceed through 2021.

The major customers we have already penetrated can carry our company to much higher revenues as we increase our product footprint with them.

Major OEMs that already use our products in battery management include Bissell, Black & Decker, Bosch, Dyson, Electrolux, Hitachi, Lexy, LG, Makita, Murata, Panasonic, Philips, Samsung, Sharp, TTI, and Toshiba. Major OEMs that use our lighting products include BOE, Dell, HP, HiSense, Honda, Hon Hai Foxconn, Lenovo, Panasonic, Samsung, Sharp, Sony, Skyworth, 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. O2Micro reported the fourth quarter 2021 revenue of $24.4 million. The revenue was down 10.6% from the previous quarter and up 4.9% from the same quarter prior year.

The gross margin in the fourth quarter of 2021 was 54.3%, and gross margin was up from 52% of the previous quarter, which exceeds our company average range. Our revenue is within the revised guidance publicly released on January 4, 2022.

Our battery product group continue to come on the new technologies and a new product to address what customers need. The battery cost down curve drives the high sale number applications up, which needs more sophisticated safety protection and high-grade battery management system.

On the other hand, how to better integrate the CPU and ample stimulates social development environment remain a critical task. One of the challenge for the power tool company is develop a stable and fast response on demand software. Our technology not only shorten the design cycle but provide segmented module software that better make use of our high-trade analog-to-digital converters and other functions to achieve the high standard safety battery management.

Among [many] battery business growth driver, vacuum cleaner and e-Bike continue to be the range in the coming quarters. We observed the cordless floor care products coming from the strong household demand as (inaudible), the flexible working hour from home situation. The e-bike market resumed its growth rate as the spring and the summer are the high season. On the other hand, the construction industry will resume their parts to grow after the winter.

As we mentioned, the high sale number power tool take share for the no-sale power tool. The USB4 power delivery Type-C further standardized the power tool charging structure, which enabled the further growth.

Our intelligent lighting group business continued to win design with new technologies such as the full array local dimming control. We also penetrate more market share in monitor business as high-end monitors, which favor our technologies. We took the market share in the last quarter. So the supply chain reveal an early sign of a delivery lead where we continue to see the supplies under demand, especially the recent COVID impact. There were a few packaging testing houses were under delivery pressure.

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 from Grand View Research. We foresee today 8K high-end will become mainstream product line in the following years. And 8K TV need more the local dimming zones to highlight the fine pixel of the LCD screen. As a Sony XVR85Z.8K TV with 85-inch comes with thousands of local dimming zones in example.

In order to provide a cost-effective beta interoperative, our latest IC has the ability to control the dimming to the either analog function or PWM, pulse width function. This 2-in-1 mode control facilitate a system designed to simplify the TV system design architecture and a better interoperative. Since the mini LED technology offer a much smaller size compared to the conventional package LED size, it gives the TV system designer and monitor designer greater freedom to design the market scan technology.

As motion blur on the LCD display comes from a stable factor, including the pixel transitions and persistence, our multi-scan technology reduced the motion blur effect by refresh the many predefined smaller local area LED zoning from a different direction simultaneously. With multi-scale, the mini LED could easily to compose many predefined more than local area because it's smaller size. This technology present critical clear picture even with the fast-moving object in the display. We continue to grow the business despite a dynamic market situation, tight supply chain. We are optimistic for the fundamental of business. We'll continue to focus on the high margin and high performance [compared] to analog IC.

We started automotive grade ISO-26262 SGS-qualified program. And second-source foundry qualification expand packaging the test ability to ensure delivery on time and so on. We always watch expense carefully and keep shareholders' best interest in mind, especially at current dynamic situation.

At this moment, thank you for listening to our conference call and turn back to Dan. Dan, please.

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

(Operator Instructions) We will now take our first question from Theodore O'Neill at Litchfield Hills Research.

Congratulations on a good quarter. Question about inventory, so your inventory level is more than twice what it usually runs pre-COVID. And so I was wondering if you could sort of talk us through how that number goes back down and if it does? And what, if any, is there risk that some of this inventory goes obsolete before it's been able to sell?

Yes. Our inventory is -- I think the Q4, the inventory is about $2.2 million more in the wafer area. So in the regular area, time we'd like to keep the inventory turns around 3x. Currently because of the longer logistic time, and also, we'd like to keep the wafer up. So we relaxed our inventory policy, try to get the wafer. And about the wafer as we are the design win product and product is actually enjoy longer product life. So the concern to the inventory on the idle inventory -- which is much less.

And also according to our historic data, we don't have a lot of the idle inventory problem. So to answer your question, yes, the Q4 -- the inventory -- the increase in the Q4 compared to Q3, mainly from the -- mainly for the wafer and volume processed for the battery product. And in the future, we'd like to keep it in the [sweet] turnover in 3x.

Okay. And it seems like everyone and his brother is trying to make electric vehicles now. And I was wondering if you could talk about your market opportunity selling product into the EV space.

So on the EV, yes, we mentioned about we do the ISO-262 SGS program, that's auto grading. So come from [2 part 1] internal, that probably take about another 1.5 years to finish internal 26262. And external is the packaging and testing wafer partner we are using, they also process this auto-rating ability. So we have been an upgrade and started the architecture to the EV battery management part. And that's still in a so-called documentation area, and we continue gathering the information. So right now, it's too early to reveal what kind of schedule we're going to proceed. But yes, we are aiming at this one.

So that depends on number one, is a 26262 qualification; number two, while internal should we come out certain [nutritive] innovative solution for the EV battery management. But on the other hand, we do have the IC go to the EV or for the smart car per se. We have multiple parts right now in the sampling stage to support the full measure for the sensor, including infrared and the cameras. As we know, each automotive in the future, especially the EV for the driver assistance system is made up about at least 10 cameras. So we are very happy to see our -- the multiple ICs right now. We see the welcome from the auto industry, the larger maker or intermediate makers.

We'll move to our next question, Tore Svanberg of Stifel.

Congratulations to getting above $100 million again for the year. Jim, could you elaborate a little bit more on the process technology issue your fab partner had, I mean how easy to fix is this? It does sound like it's now -- it's going to be behind you and that things will be normalized by Q2. But if you could just share a little bit more detail on that, that would be great.

Yes, we'll give you as much detail as we feel comfortable with, which isn't necessarily going to totally explain their issue, but it was equipment related in the fab. And this created simply a shortage of wafers for us that did impact us in the second half of the quarter and on goes into the January time frame for us.

So it was equipment related. That equipment issue has been resolved. We do not expect any ongoing problem, and we do expect that we'll see normal wafer flow. As we mentioned, we are well along the path also of bringing up some alternate sourcing in the wafer area for lighting product and specific, and that will also begin to have some impact as we move into Q2.

Very good. And on that particular topic, could you share with us your plans there? We know historically, you've worked with foundries primarily in Taiwan and China, but are you looking at perhaps foundries in other regions as well?

Sterling, do you care to give that information?

Yes. We did have other foundry partner in the Asian country other than Taiwan and China. We did have the previous production -- the relation with them, but just we're expanding this product production base further and to address this issue because, as you know, we have -- probably have to concentrate on certain foundry in China. But right now, we try to reduce the weight and bring up other country foundry percentage and then we can achieve that, we can get enough wafer on-time delivery.

Very good. And a question on gross margin for this year. Obviously, it came in higher because of the industrial mix in Q4. I'm just wondering what are going to be some of the moving parts for this margin this year? Obviously, lighting is going to come back, so that will have an impact. But you also talked about the ability to deliver some higher ASP products and then some of that will be offset by higher supply costs. So obviously, there's a lot of dynamics here, but could you see a path to improving gross margin from here on out?

Yes. Tore, this is Perry. Yes, we still improve the product mix by the high-performance IC and with higher ASP, as Jim mentioned. And also, we have improved our cost structure by -- on testing facilities. But however, we may probably experience some further cost up from suppliers which may not be so big as last year, but we may probably experience some in the coming quarters.

So based on this, I think that we are moving up from the 50% to 52% in our regular guidance range to the 52.5% area, I think, in the first half and probably will move to 53% in the second half of this year. So this is my -- based on current situation, I give you the best estimate.

Yes, that's great color. Last question for you, Sterling. Sterling, when you talked about battery, you mentioned some seasonality for e-bikes, and that also sounds like the construction companies tend to see seasonality strong Q2. Should we take that to understand that your Q2 backlog is actually pretty strong and you should return to sequential growth by then?

Yes, Yes. We are, yes.

Our next question from Lisa Thompson of Zacks Investment Research.

So looking at the results, you had the highest -- I think that was the highest gross margin ever for the quarter, if you take out the one quarter you had that license fee. So -- and that was all due to having a bigger mix of battery. Is that correct?

Yes. And also, we have improved our product mix in the lighting area as well in Q4.

Okay. Great. And Perry, did I get that right? Did you say $1.3 million for CapEx?

For the Q4, it's 9 -- $1.9 million Q4.

Okay, $1.9 million. So could you go over what you expect for 2022 because I know it's supposed to be a lot lower, right?

Yes. In Q1, I think it will be in the area of $1.5 million to $2 million for the final payment. The major portion will be for the final payment for the purchase last year. And from the Q2, we don't have any payment for the test owning for the R&D and also for the tester some equipment and also IT, internal IT. So that will be around $2 million for the rest of the quarter in 2022. It could be $500,000 to $1 million per quarter, yes.

Okay. So yes, no, I know. I'm thinking what you just said. So $2 million for the rest of the other 3 quarters added up?

Yes, yes. So it will be about $3 million to $5 million for 2022.

Okay. Got it. All right. So that ought to help. So also, you talked about possibly like in the Chinese TV market that China might be losing market share but then factories are shut down, could you explain what the heck is going on in China between cities being shut down and ports being shut down? And I don't really know where you make stuff and where you ship stuff and whether you put anything on boats or whether you can fly the stuff. Can you just go through that all? Because it's very confusing what's going on over there.

So Perry, do you want to answer that? Production...

So these are your -- can you -- the production of our products our product or...

Yes, between where you get parts for your product and where they go? Like are they just going from a factory in China to another factory in China? Were they going outside of China? And do these shutdowns of various cities affect you?

So actually, we do have -- we have a wafer and then do the wafer probing and then the assembly and the testing. And sometimes we have to do some kind of screening. So as we are a fairly designed house, so we make use of the excess manufacturing capacity and also special parts from the different factories. So actually, the major production line actually across the borders between the Asian countries.

So it actually give us kind of the longer logistic than others. So normally, it may probably go through 2 to 3 countries and go through 2 to 3 customs. So in general, our parts need to go through 2 to 3 cities or 2 to 3 countries.

And have you been affected by anything in logistics that way recently from shutdown?

Yes, we do experience some COVID-19, the lockdown by the city and breakout in some cities last quarter in China. And sometimes [led] also, we are also affected by the long holidays by different countries due to the customs clearance.

Okay. All right. Because I remember in the past, you had problems 1 year and that you had higher logistic costs because you were using air freight or something. Is that a solution to anything, as...

The high logistic -- in the past, maybe we can just extend our way from one province to another province in China from the north to south, from south to north. But during the COVID-19, it's forbidden in some period of time that we need to transport from one province to the border, and the goods need to transfer to the truck, to the -- another province. So we need to transfer from one to one.

So in the COVID-19, the highly control times in China, that we need to pass from one province to another province. We cannot ship direct from one city to another city which are located in different provinces. It has been very difficult times in the year 2021.

Okay. So we'll keep an eye on that. So that means that costs should go down once everything opens up, correct?

Yes. Like currently in Xi'an City, some factory affected, and currently in Tianjin City also. So these are actually the dynamic factor which I have reported. I didn't go into the detail because every week, we may have a different story and a different cases we need to resolve.

Okay. It's hard to predict, then, I guess. You did mention that you thought maybe Chinese TV manufacturers might be losing market share to other countries? Do you see that or not?

So Jim, you'd like to cover this?

Yes. We believe that for the international market that -- we have seen some loss of market share from China. And again, that may have to do with the combination of production issues there, which are very complex shipping issues, and God knows what else may occur. But nevertheless, we have seen, in our opinion, particularly in higher-end systems that there has been perhaps some market share loss from some of the Chinese manufacturers.

With no other questions holding, I'd like to turn the conference 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 (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. Goodbye.

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time, and have a great day.