O2micro International Ltd (OIIM) 2021 Q3 法說會逐字稿

Good morning, and thank you for joining us today to discuss O2Micro's financial results for the third 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 through November 14, 2021 at 9 a.m. Pacific Time or by visiting the O2Micro website under the heading Investors. Following the presentation by management, the conference will be open for question and answers as time permits. Gentlemen, you may begin.

Thank you. Good morning, everyone, and thank you for joining O2Micro's Financial Results Conference Call for the Third Quarter of 2021 Ending September 30, 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 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 third quarter of fiscal year 2021, ending September 30, 2021. Perry?

Thank you, Dan. We will now review our financial results for Q3 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. This was issued earlier today.

GAAP revenue in the third quarter of 2021 was $27.3 million. GAAP net income in the third quarter of 2021 was $3.7 million. If we exclude stock-based compensation of $443,000 the non-GAAP net income will be $4.1 million.

GAAP net income per fully diluted ADS in the third quarter of 2021 was $0.12. Non-GAAP net income per fully diluted ADS was $0.13. Gross margin was 52% in Q3. The gross margin reflects the current revenue level and the product mix.

R&D expense was $5 million, or 18.4% of revenue. This amount excludes stock-based compensation expense of $98,000. SG&A expense was $5.1 million, or 18.7% of revenue. This amount excludes stock-based compensation expense of $345,000.

The nonoperating income was $342,000. Income tax was $279,000 in the third quarter and is mainly based on the estimated effective tax rate of each taxable location. In Q3 2021, there was no stock repurchase.

Q3 2021, revenue by end market breaks down into the following percentages. Industrial was 63% to 65% of revenue. Consumer was 32% to 34% of revenue. Computer was 1% to 3% of revenue. Communication was almost 0.

At this moment, I would like to provide some additional information. O2Micro finished the third quarter with $50.7 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of $1.78 per ADS. In addition, O2Micro has no debt.

Accounts receivable at the end of Q3 was $16.7 million. Our DSO is 55 days. DSO is less than 60 days mainly from account mix. Inventory was $18 million at the end of the third quarter. This represents 117 days of inventory, and inventory turnover was 3.1x in Q3.

Net cash generated from operating activities in the third quarter was above $4.3 million. Capital expenditure was about $968,000 in the third quarter for R&D and IT equipment. Depreciation and amortization was $1.1 million in Q3. At the end of the third quarter of 2021, O2Micro had 344 employees, 58% of them of which are engineers.

Based on current market situation and the base updated managerial rolling forecast, the company has the foreign guidance for Q4 2021. Net revenues are expected to be $25.5 million to $26.5 million, or down 3% to down 7% as compared to Q3 2021 of $27.3 million.

Product gross margin is 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 $5 million to $5.5 million.

SG&A expenses, excluding stock-based compensation are expected to be in the range of $5 to $5.55 million.

Stock-based compensation should be in the range of $550,000 to $650,000.

Nonoperating income expected to be in the range of $150,000 to $250,000, excluding foreign change, 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 asset on the balance sheet.

Regarding our share purchase program, we have been active in this program historically. Since 2002, we have repurchased over 20.3 million ADS shares for $101.3 million. As of the end of Q3, we had $7.6 million remaining in our share buyback authorization.

There are still many dynamic factors associated in the business development. We will carefully plan and execute the target revenue and maintain gross margin in the Q4 2021, and these efforts will be focused to continue in 2022.

We also monitor the supply chains tightly and have added timely both work-in process level and the inventory to support the dynamic demand from accounts in multiple end markets. In Q3, we added more [dry bulk] to support Q4 2021 and Q1 2022.

The wafer capacity remains very tight in the coming quarters. In Q4, we expand the investment in R&D, new ISO training, new tape-out, patent filing and expanding our supply chain with more complete second sourcing suppliers, testing capabilities of company's product and capacity with new purchase testers in 2021.

We will always watch the expense carefully and continue to manage it -- continue to manage costs as needed, although we believe we have a nice current cost based on current and anticipated revenue levels. 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 shareholder 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. Jim?

Thank you, Perry. Good morning, everyone. Let me highlight our company's growth over the past 2 years. Q3 2021 represents 23% growth over Q3 of 2020. Q3 2021 represents 70% growth over Q3 of 2019. Our Q4 projection takes into account multiple factors that include seasonality for battery management based on a traditional slowdown in demand for power tool, garden tool and e-bike products as we head into the winter for the U.S., Europe and China; growing supply chain issues affecting both our customers' ability to produce systems and meet new product introduction target dates. Causes of these supply chain issues include COVID-19, resulting in lengthy plant closures for customers operating in significantly impacted countries like Malaysia and Vietnam; power outages in China impacting both our suppliers' production schedules and our customers' ability to build systems; a myriad of ongoing material shortages preventing customers from maintaining normal production schedules.

While supply chain issues have impact on our revenue growth rate, our strong financial position has enabled us to accelerate expansion of our production capability in anticipation of ongoing growth in 2022 and beyond. For wafer fab, this includes expansion into new wafer suppliers as well as expansion into additional processes and existing suppliers that can enhance our wafer supply. We have also expanded our assembly capability into additional suppliers and have significantly expanded our test capability.

We continue to aggressively develop new products for both our intelligent lighting and battery management product lines. As Sterling will mention in his quarterly commentary, many new products are specifically focused on serving rapidly expanding applications for lithium-ion battery applications as well as advanced lighting systems using many LEDs.

New products are targeted at more complex consumer, industrial and automotive markets 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 our revenue expansion in 2022 and beyond.

While we continue to expand our revenue base, the major customers we 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, Skyworth, TCL and Toyota. Given our excellent technology in 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 a third quarter 2021 revenue of $27.3 million. Revenue was up 4.1% from the previous quarter and up 22.6% from the same quarter last year. The gross margin in third quarter of 2021 was 52%. The gross margin was up from 51.5% of previous quarter in our company's average range. Our revenue is within the guidance publicly released on July 30, 2021.

The price of lithium ion battery cell declined by 97% in the past 3 decades. Our battery, with the capacity of 1 kilowatt hour, cost about $7,500 in 1991 and was just $181 in 2018, and the lithium battery pack even dropped to $137 per kilowatt hour in 2020, which is last year, and are expected to drop further in the coming years. So lithium ion battery are one of the most efficient energy storage device mobile.

The recent report shows a global lithium ion sale manufacturer capacity. The pipeline could be rise fourfold from 2019 to 2030. That is 1.3 terawatt hour. Asian production base come from 80% of worldwide production volume. With a high growth demand of battery industry innovative technology, we continue to improve the energy density and strategy continue to expand.

For example, the CATO is produced in 2019, 32.5 gigawatt hour and will grow 5x in the next 5 years by 2025. Our battery business grew strongly at older sector despite the dynamic market and the supply chain situation. We observed the higher number of the sales application took more market share. It was partly from the cost curve drop shortly as well as the bad quality improved, which enhanced the year rate of the high sales number battery pack.

And one of the growth driver is called flow care product, which come from the strong household demand as the work from home or flexible working hour from home continues. The second contract has gotten to in the professional tools. We believe a strong growth coming from both consumer and construction industry. On the other hand, we will see the new battery power devices produced from light, transportation, innovative household energy storage and industry-grade uninterrupted power systems.

October 1, 2021 this year, USB4 Power Delivery Type-C announced expanded to a new standard, 240 watts from a 60 watts standard. This news expanded USB Type-C to the power tool to a marketplace and will fuel the future growth of the power tool to the next level.

Meanwhile, the higher energy dense file resolution and faster A/D converter are needed. Our AFE Analog Front End and BMU were designed with a 14-bit high accuracy AD converter to meet customer needs. Our high accuracy AD converter reached 15-million watts resolution performance, which is way beyond the customer expectation.

We also have ARM-based OE1 PMA solution enabled the power tool to be connected as IoT devices, 5G deployment to further enhance the power tool connectivity. For our Intelligent lighting group, the business continue to be winners in [earnings] and spend. We believe the supply chain reveal the early sign of normalization, though delivery remains critical.

We see flexible working hour, work from home continue to accelerate the high-end TV market share. So we are confident in our post COVID-19 business. The global 4K TV market size expected to reach the U.S. about 80 billion by 2025 at a compound annual growth rate at 21.2% according to some reports for Grand View research. We foresee the 2-day 8K will become the mainstream product in the coming years.

Now the full array local TV, which we call local TV, have until now dominate TV and digital monitor. For the TV high-end 4K and 8K local TV beta product, the demand continued to be very strong. Our latest IC will roll out as the ability to consider demand through either analog function or PLM, which is a pathway function. The 2-in-1 mode control further simplified the TV system design architect if our customers desire to support different type panel gaming solution with only 1 IC. However, one of the full array local TV issue is by placing the LED on the back of the display facing a viewer. The thickness of the device increases, not only the LED package cell relatively thick but also some sufficient distance between the prior for the life of individual chips to spread evenly throughout this point. That is (inaudible) the hotspot.

So the mini-LED, on the other hand, solved this issue by multiplying the number of LED chips and (inaudible) on the subject, therefore reduce the space between each light source and also the thickness of the thick light. More important, they also can significantly increase the number of zone, which will reduce the grooming, which is like a halo effect, which is the small, small area, right, but it is smaller than the dimming zone. And thus, you have created help. Also the mini-LED backlight has enhanced LCD contract performance level to close to the OLED LED, while maintaining LCD high brightness [coloristics] and long lifetime. They can also reduce the power consumption as small zones will be off in a top image, all the brightness will be dimmed.

So since the mini-LED technology over a much smaller size compared to conventional package LED size, it also gives the TV system design a great space to design a dimming layout, while others offer the multiscale technology. With the market scan mini-LED easily compose many predefined smaller local area due to its smaller fans, the technology presents crystal-clear future even with a fast-moving object in a display.

Last but not least, both our LED backlighting and battery technology group continue to receive the patent brand in the last quarter. We continue to grow the business despite the dynamic market situation, supply chain management.

We are optimistic for the fundamental of the business and focus on high-margin and high-performance business. We started several expansion project, which incur additional expense for new quarters, including increment automotive-grade ISO 26264 SGS.

Second source foundry qualification tape-out expand the packaging and the testing facility supply chain to ensure delivery on time. We always want to expand carefully while we face to drive the future momentum. We always keep shareholder base interest, especially at current dynamic situation.

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

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

(Operator Instructions) Our first question comes from Theodore O'Neill with Litchfield Hills Research.

Congratulations on the good quarter. My question is about capital expenditures. So there seems to be a global mandate to move to everything electric and your quarterly revenue has almost doubled in the last 15 months. Are you seeing any constraints to continued growth? And could you sort of talk about, at least in general terms, CapEx might look like to keep up with this kind of growth?

This is Perry. Let me answer to the CapEx. Regarding the CapEx, this is more related to the testing capacity. Due to the IC development, our testing time, the new -- for the new IC, the testing time is much longer than the original IC, which means the complexity and also higher entry barrier to other competitors, and also, we may sell it at higher ASP. And this will continue. And the testing time, this is a much more time than the ASP growth so that we need to invest in the testing. And currently, the testing capacity is still very tight in Taiwan and also in China. So our testing capacity for the CapEx in 2021 will enable us to launch more new IC, and this certainly will continue to keep our -- the momentum to grow in the sales for the future in the battery area and also some complete LED products.

So you're comfortable that there's -- that you can get the equipment that you need to keep this growth going?

We already get 90% of the tester already in-house, and we are running and we are doing the -- I think 90% of the test are already in-house and 70% to 80% already have the first run, first trial. And already, we enhanced our testing capacity.

Our next question comes from Tore Svanberg with Stifel.

A few questions. First of all, Jim, in regards to the guidance for Q4, had it not been for the supply constraints, do you think it would grow sequentially? Or does the seasonality in power tool kind of still take the revenues down sequentially?

We think we'd have actually grown, Tore. And I did not mention, we actually have some major customers that are shut down for us. We have one very major shutdown in Malaysia, several are in Vietnam, and they have plants totally shut down. So some of the supply chain issues have really interrupted some of the growth capability simply due to production capability of our customers.

Understood. And just a clarification question for Perry. Perry, when you gave the SG&A guidance, was it $5 million to $5.5 million, similar to RMB? Perry, are you there?

Yes. Tore, it is $5 million to $5.5 million. Sorry, yes, yes. $5 million to $5.5 million. Yes.

Okay. Perfect. Just wanted to clarify that. Lastly, to you, Sterling, could you talk a little bit about some of the new applications and new products that are going to be ramping next year? It sounds like 2021 was a bit of an investment period for the company, so just trying to get some insights into new product ramps in 2022.

Yes. We are excited by our mini LED. We have total 9 different solutions to address this market, and each solution has a different schedule, but some of them already in sampling and close to preproduction. And we also see this mini LED will be become sort of a trend for the notebook and also go to certain high-end desktop monitors. And we probably see the new mini LED has been filled by the interest, the new Apple introduced their notebook. Although they are not belong to our customer, I can say that.

However, the mini LED will, one, increase our ASP. Second, the mini LED will enable the regular LCD panel to reach the performance like OLED LED. As we know, OLED still have been cost -- sell costly due to the production, the difficulty and a challenge. And also number three, we have several patterns to cover, as I just mentioned, the market scan. The way of the market scan in mini LED is much superior to the local dimming. It is because the LED is easy to divided into a more smaller zone, and you have a more number of the small zone and easier to do. And that will increase our -- the contrast, brightness and also reduce the burden in the moving objects.

So for our battery, we have long discussed our ARM-based, the BMU, and we'll be excited to see several ARM-base BMU roll into the market and close to the PP. In the next year, those ARM-based CPU, the BMU will be take to a major account, and that will enable the new way for the power tool to be connected. And meanwhile, we also do the cost arm for those ARM-based CPU BMU and also add more functionality to it.

In the meanwhile, both European- and Japan-based customer, they all require certain function LED to add to our existing product, and they all already be either tape-out or already in a sampling stage. So we believe the next year 2022 of our battery product portfolio will continue to be more bright, more spread. And also, together with the support, the battery capacity production has been going to grow every year, compound growth rate. I think in China, certain base will be 70%. And those will be the major momentum for our growth driver for the battery.

Our next question comes from Lisa Thompson with Zacks Investment Research.

So I would like to ask a little bit about the revenue breakdown this quarter. It looks like TV sales were flat to down versus last year. Is that the industry that you cut those Malaysia and Vietnam customers are shut down in?

No. The Malaysia and Vietnam are in the battery management area. The TV business, as you mentioned, has been somewhat down, particularly we've noticed out of China suppliers. However, the monitor business continues to be quite strong.

Is that because they have critical path constraints? Or is it just demand is down?

In TV, what we see is some market shifts going on and basic overall demand has gone down in TV, but not monitor.

Okay. So that's one. All right. As far as the battery products, you keep mentioning automotive. Yet, are you selling anything to that market now? And if not, when does that happen?

I'm sorry. Jim, go ahead.

Yes. Well, first of all, let me just say, and I'll just briefly indicate, in automotive, we've actually -- we do have penetration in the automotive market and have had for some time in the intelligent lighting area. For battery management, I think Sterling indicated that we are going through a lot of ISO activity to prepare to supply into that market, so I'll let Sterling cover that for you.

The ISO 26262 will be expended about more than almost 2 years. And we -- so that's reasonable to expect that even though we have some sampling probably to 2022, but meaningful will be 2023. Yes.

And can you just describe a little bit about kind of what volumes and ASPs that business will have? Is it significantly different?

These are probably -- I need to do more research because the battery pack for each automotive, we are not directly talk to the automotive guys. We talk to the battery pack manufacturer. And the ASP is high, but the number of the chip utilize the battery pack, that depends on the topology and the architect each automotive they're going to use. And we are currently still early stage before that.

Right now, we are doing the IC alone, and that IC can control the certain cluster and then one battery pack, including many clusters. So that probably needs more time. We do the customer investigation where we know -- where we will have a more clear idea.

Okay. Good. Interesting. Going back to the TV market and the shutdowns in Malaysia and Vietnam, do you think that it's possible then that Q1 will be sequentially up quarter if they open back up? How is -- how do you think that's going to work out?

Yes. That's certainly possible. It's very, very hard to project, Lisa, given the current situations in the market. Issues are very dynamic. We have some customers who actually aren't even projecting what they can deliver in Q4 because of various parts shortages and material problems. So we're not going to project Q1 at this point, but that is possible, yes.

At this time, I would like to turn the call back over to Dan for any closing remarks.

Thank you. 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. I'd like to wish everyone a wonderful day, and thank you again for your time and attention. Goodbye.

This concludes today's conference. All participants may now disconnect.