O2micro International Ltd (OIIM) 2020 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 2020. 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 February 5, 2021, 9 am Pacific Time or 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, Audra. Good morning, everyone, and thank you for joining O2Micro's financial results conference call for the fourth quarter of 2020, ending December 31, 2020. 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 facts are forward-looking statements within the meaning of the federal securities laws. Actual results may differ materially due to numerous risk factors. Such risk factors are enumerated in the company's 20-F annual filings, our annual reports and other documents filed 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 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 fourth quarter of fiscal year 2020, ending December 31, 2020. Perry?

Thank you, Dan. We will now review our financial results for Q4 2020. 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, one-time 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 2020 was $23.2 million. GAAP net income in the fourth quarter of 2020 was $4.4 million. If we exclude stock-based compensation of $364,000, net gain recognized on long-term investment of $133,000 and onetime Paycheck Protection Program, $604,000, the non-GAAP net income will be $4 million.

GAAP net income per fully diluted ADS in the fourth quarter of 2020 was $0.14. Non-GAAP net income per fully diluted ADS was $0.13. Gross margin was 51.3% in Q4. The gross margin reflects the current revenue level and the product mix. R&D expense was $3.8 million or 16.4% of revenue. This amount excludes stock-based compensation expense of $80,000.

SG&A expense was $4.1 million or 17.7% of revenue. This amount excludes stock-based compensation expense of $284,000. The nonoperating income was $920,000. Income tax was $215,000 in the fourth quarter and is mainly reflecting the actual tax provisions on each taxable location.

In Q4 2020, there was no stock repurchase. Q4 2020, revenue by end market breaks down into the following percentages: consumer was 41% to 43% of revenue; computer was 2% to 4% of revenue; industrial was 53% to 55% of revenue; communications was almost 0.

At this moment, I would like to provide some additional information. O2Micro finished the fourth quarter with $47.8 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of $1.76 per ADS. In addition, O2Micro has no debt. Account receivable at the end of Q4 was $16.4 million. Our DSO is 64 days. DSO is more than 60 days mainly from account mix. Inventory was $12.6 million at the end of the fourth quarter. This represents 101 days of inventory and inventory turns was 3.6x in Q4.

Net cash generated from operating activities in the fourth quarter was about $5.6 million. Capital expenditure was about $1.2 million in the fourth quarter for R&D and IT equipment. Depreciation and amortization was $981,000 in Q4. At the end of the fourth quarter of 2020, O2Micro had 303 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 2021. Net revenues are expected to be down 4% to up 6%. 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 $4 million to $4.5 million.

SG&A expenses, excluding stock-based compensation, are expected to be in the range of $4.1 million to $4.6 million. Stock-based compensation should be in the range of $450,000 to $550,000. Nonoperating income expected to be in the range of $200,000 to $300,000, excluding foreign exchange gains 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 asset 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 20.3 million ADS shares for $101.3 million. As of the end of Q4, we had $7.6 million remaining in our share buyback authorization.

In 2021, there are many dynamic factors associated in the business development. We will carefully plan and execute to target revenue growth and maintain gross margin in the first half 2021. First is to continue to invest in new products while allocating some resources for the second source development for the capacity support and to invest in-house R&D testing center and buy more advanced testers for testing capacity required for advanced ICs in both the lighting and the battery management product group. We also monitor the supply chains tightly and have added or in process to support the dynamic demand for multiple end market timing.

In Q4 2020, 424,000 shares of EMC was sold and about $1.6 million cash-in. The average selling price of EMC in Q4 is around $3.9 per share with original cost of $0.53 per share. All EMC shares were sold by end of November 2020. The initial investment in EMC was about $1.96 million in 2010, and the net exit total cash received was $12.9 million from Q3 2018 to Q4 2020. Returns to shareholders are very much on our minds 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.

Given the uncertain demand and the macro environment, we are prepared to continue to manage cost as needed. Although we believe we have aligned current costs based on current and anticipated revenue levels. I would like to thank everyone for participating and turn the call over to Jim to talk more about our business. Jim, please?

Thank you, Perry. Good morning, everyone. We were pleased with our Q4 2020 results and expect Q1 2021 revenues to remain strong despite Chinese New Year holidays that will result in some interruptions in product flow from our supply chain partners. We would note that Q1 2021 revenue projections are up over 40% from Q1 of 2020, and over 75% from Q1 of 2019. This ongoing revenue growth reflects the strengthened market position of both our intelligent lighting and battery management product lines.

Our ongoing revenue growth and profitability continue to be driven by several factors. First, our product groups have successfully developed next-generation patented products that appeal to top-tier and brand name OEMs that we now proudly call customers. Secondly, our company's market focus of developing energy-efficient products that enhance mobility was thrust into the limelight with the COVID-19 pandemic. It immediately increased demand for mobility-based products and helped drive our company revenues upward as markets we serve experienced a surging demand from several factors, including employees being equipped to work-from-home, with computers and monitors.

Remote learning that increased sales of tablets, notebooks and monitors. Stay-at-home regulations that increased sales of high-end TVS, high-end monitors for gaming, battery-managed garden equipment, power tools and vacuum cleaners. COVID-19 hospitalizations that increased sales of advanced monitors for diagnosis. Travel restraints and social distancing that led to an upsurge in the sale of e-books. Although vaccines may return part of our lives to normal, much of that new normal will include increased work-from-home, education-from-home and higher performance home entertainment systems. Battery-managed power tools, vacuum cleaners, garden tools, e-bikes and e-vehicles will continue to expand in usage.

The pandemic will have lasting impact on the way we live, as increased mobility is here to stay. We would add that our rapidly expanding revenues would not have been possible without our disciplined and dedicated operations team that worked tirelessly to overcome many COVID-19 obstacles to keep product flowing, from wafer fabs to assembly, to test with shipment onward to our customers.

Finally, I will make some abbreviated remarks about our product lines. Our intelligent lighting product line enjoyed excellent growth throughout calendar 2020. This was the result of our many design wins that include both 4K and 8K TV and expansion of HDR monitors into gaming, medical and industrial applications, along with expanded home usage. While we have a leading position in higher end products for TVs and monitors, we have not ignored our overall market share and continue to expand design activity in lower end TV and monitor products using our patented, highly energy-efficient backlighting products with integrated MOSFETs. This market positioning is expected to enable our ongoing growth.

Additionally, our intelligent lighting R&D efforts in the industrial and automotive lighting have enabled ongoing progress in design wins. This includes advanced products for robotics and autonomous driving applications, where we continue to have good product acceptance. While these design wins take longer to generate revenue, we believe this will help enable long-term growth of our intelligent lighting group.

Our battery management product line had excellent growth throughout calendar 2020, driven by the expansion of our design wins with major OEMs in power tools, e-bikes, e-vehicles, vacuum cleaners, garden tools and energy storage systems. As previously noted, our battery management products include ARM-based microcontroller technology for market applications where some of our existing customers need more sophisticated battery management. This has enabled us to engage with higher end customers, including those in the rapidly growing energy storage market.

Customers are moving forward to design our ARM-based battery management products into their next-generation high-performance systems. We continue to file battery management patent claims for our new products to protect both our company and our customers' market positions. Our major customer list [includes] to grow, and includes Bissell, Black & Decker, Dyson, Electrolux, Lexy, LG, Makita, Murata, Panasonic, Philips, Samsung, Sharp and TTI.

I will now turn the call over to our CEO, Sterling, for closing remarks. Thank you.

I'm sorry, Sterling, we're not able to hear you, you may be muted?

Yes. Thanks, Jim. O2Micro reported the fourth quarter 2020 revenue of $23.2 million. Revenue was up 4.5% from the previous quarter and up 30.1% from the same quarter prior year. The gross margin in the fourth quarter of 2020 was 51.3%, and gross margin was down from 51.8% of previous quarter, which is in our company average range.

Our revenue is in line with the guidance publicly released on October 30, 2020. Our major growth driver, intelligent lighting groups, high end 4K, 8K, local dimming backlight product had another strong growth quarter. It came from the rising demands of all sectors, including TV, monitor, tablet and notebook computers. The mini LED is the trend for the next advanced technology, which is over 1/100th size of its package die compared to the conventional package LED.

It means the same local dimming unit area could be deployed 100x more mini LED unit versus conventional LED packaged die. Therefore, panel pixel HDR achieved much more fine resolution with a much higher contrast ratio. We see this first deployment happening in the tablet or smaller-sized professional monitor as initial high cost. We expect the mini LED costs will be curved down in the coming years.

Our new market scan LED backlight ICs for the LCD display is further effective for mini LED local dimming. The multi-scan could be a combination of 2 scan, 4 scan, all the way up to 32 scans. It reduces motion blur and so-called halo effect in an optimized way with the multiscan local dimming technology being applied to the mini LED. The experience of the panel display improve, increase the ability when the object moves fast.

In general, the customers spend more time at home, work-from-home, education-from-home, or virtual meeting, conference, even concert from home. It has 2 factors: the growing number of the TV or monitor as well as the high-quality of the TV and monitor where the business grew. The global 4K TV market size expect to reach a USD 380 billion by 2025, at a compound annual growth rate 21.2% according to some report.

We also see our battery product revenue grow strongly at all sectors such as cordless, the floor care products, the cordless household appliance, our internal power system, battery storage system and so on. With the energy density improved, the battery management IC require higher resolution for voltage, current and accurate temperature measurement.

Our analog front end and our battery management unit were designed embedded with 14-bit high accuracy A/D converter delta sigma could meet the customer needs. In some example, we could reach 15-millivolt resolution performance, while this is well beyond the customer expectation. Regarding the power tool market potential, the projected growth from USD 30 billion in 2020 to $36 billion by 2025. The key factor in the growth of this industrial market, including the increasing adoption of cordless power tools, rising demand for the fasten tool in industry environment and growing construction industry in emerging economies.

Lithium-ion battery cell cost dropped 90% from 2010 to 2019, 9 years. Meanwhile, the lithium-ion battery product sales grew 15x from 2010 to 2020 with 10 years, 15x. Furthermore, the lithium-ion battery industry experts also forecast the cell manufacture capacity will grow another 5x through 2030. So we continue to grow the business despite a dynamic market situation. We are optimistic for the fundamental of our business. We focus on high margin, high-performance business as well as operating expense management in order to create the best return for shareholders.

We always keep the shareholder's best interest in mind, especially in the current dynamic situation. At this moment, thank you for listening our conference call and turn back to Dan, please.

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

(Operator Instructions) We'll go first to Tore Svanberg at Stifel.

And congratulations on the results. First question, you didn't talk a whole lot about capacity and supply. Obviously, there's a lot of constraints out there right now in the industry. So could you maybe talk a little bit about how your company is positioned in regards to capacity?

So Perry, do you want to address that?

Yes, Perry, do you want to address it?

Yes. Perry, please.

Regarding the capacity here, we are continuously -- we are working on the incremental increase. We do get a very good support from our vendors for our long-term forecast already released to the vendor. So for this area, actually, we get a very good support. That's why also we can see that we have very stable working process in the inventory area to support Q1, and we continue to see this trend.

And for the incremental area, I think the 2 areas that we continue to work with our vendors are foundry partner and also the back-end. Actually our product enjoy longer product life cycle and also a good high-performance area. So this is actually kind of the good area that we can continue to work with our vendors to get the capacity.

However, the flexibility is not so big as in 2020. So in 2021, we may continue to see this kind of growth, as we mentioned, through the quarters. Also, we are continuing to invest in our testers to enhance our testing capacity to support our special IC which is requiring more testing time. So this is the update from this area. So Sterling may probably comment on this area too.

So for a little detail, that for the bottleneck of testing, we move our IC across the multiple type of tester to testing it. And as Perry also mentioned that we -- CapEx to buy, acquire some new tester, and they're arriving. And some of them go to the consignment; some of them, we have our small [trough] to testing goes the hot item, the popular item.

So for the packaging, the strategy we did is, we try to find out the third source or fourth source for the packaging, the bottleneck, and we are lucky to find a few of the qualified appropriate alternative across the Taiwan and China. And for the wafer, and we should be careful to work with our customer for the forecast. In the meanwhile, some of the long-term high-volume one, we're also looking for internal second source for the alternative of the foundry. So these are 3 level we are doing.

Very good. And I assume you're probably 100% booked. Are you experiencing any delinquencies at all? Or are your customers able to get what they need?

Well, I think some of the glitches always happen because nowadays, people like to get more inventory. And we -- so far, we are working very close with our customer. Some of the IC, 100%, but some is not. And we internally sometime accommodate some of the capacity, the customer -- the supplier providing, we are able to meet the requirement of customers with a very tight schedule.

And one thing I'd like to point out that due to this dynamic situation, though, so the supply feasibility is reduced. So we have been working day to night to make sure those low visibility and try to meet the customer request date. So that's very time consuming and keeps us very busy.

Very good. Last question. You referred a few times to battery storage as an opportunity or a market you continue to sell into. Is that basically the sort of consumer battery packs? Or are you doing something beyond that, perhaps in the industrial or auto area as well?

The answer to that is, yes, we are doing work in the industrial area, Tore.

Okay. Very good. So that will basically be for things like power tools and things like that?

Yes. And solar storage, that kind of situation.

And we'll go next to Lisa Thompson at Zacks Investment Research.

So I have a few questions on how things are going. First, can you talk a little bit about the battery management business? What's your feeling about the growth rate this year versus 2020? Is it going to continue? Or is it going to accelerate because you're in more areas now?

Yes. We actually expect very dynamic growth this year because, as Sterling mentioned in his portion of the call, we continue to see the cost of the lithium-ion come down. And as that has occurred, it's really dramatically expanded the market. So we really see growing opportunities in all of these areas, and we've really seen acceleration of movement away from the traditional power cord over to battery-managed products.

As I mentioned on my portion of the call, one of the areas where there is very significant growth that has historically not been there is the whole e-bike area. Because we've seen with the COVID-19 situation, many countries begin to limit activity in terms of driving, and we see more and more people turn to e-bikes. Also many countries and major cities are limiting their car traffic downtown while they're opening up things for bikes, including shared e-bikes. And many of those at this point are growing very rapidly. So we certainly have the opportunity to grow the battery management at a pace that's possibly higher than last year.

Great. Which actually leads right into my second question. So I was going to ask you about e-bikes. Could you get a little bit more specific as to what products you're selling to that market? I mean, which person, entity are we selling it to? Is it the component people or the people who make the bikes themselves? And then contrast that with what you might sell into an e-vehicle as you move up? And also throw in kind of the value of what goes into a bike versus the value of what goes into a car.

Sterling, do you want to answer that?

Yes. So Lisa asked many questions. Yes, so let's take it one-by-one. So the bike, we are -- the share bike is an electrical bike that we are focused, and the battery pack is the immediate customer for us, battery pack manufacturer. Normally, they pack about 10 to 14 battery cell, average is about 14 cells and some even go to 17 cells. It depends on how heavyweight of the bike want to go, how far the distance.

And for those 14 or 17 or 10 cells, they're packed together and the most concerning will be the life of the battery pack, and that's driven by the imbalance of the battery and also external environment, which we call ambient temperature. And that effect of temperature, voltage and current, so need very precise ICs to tell which cell of this 14 cell or 17 cell has been in low capacity or low quality. And then to certain corresponding action, including the balance or do certain after the [bleeding] for the battery cell.

So our part is decided in 2 portions: One is measure the temperature, voltage and current. And we can -- now if you look at when the battery cell from the 10 to 14 to 17, so every time you make your 1 cell. And as your number of the cells growing, so the measurement time should be very fast. And also the major -- the resolution should be sensitive so we can do the leading A/D converter to achieve that goal. As I mentioned, we can do resolution pretty meaningful. And that's very key because when the battery cell go to the CV mode, CC mode, the constant current and then constant voltage from the CC to the CV. So the voltage variation is a very limit, and that you need to tell very minor -- the difference of your voltage go up or go down.

Second, is the current. The current was most identified safety issue when you have short circuits or cell and that had to be responding very quickly because any 1 cell of the 17 or 14 has an issue, and you need to scan, the most you have scan 17x to reach that particular problematic cell, right? So the responding time is also very fast. So we are one of the fastest in A/D converter responding time, through the cycle. So these 2 make us the major choice for the battery pack company for the electrical bike.

Now, as you just can be imagining that, and we have also some customer from our -- the battery pack customer, they also sell to a light electrical vehicle, not to the full-size electrical vehicle and studies maybe they need more class throughout the battery pack. But go to the fuel car, we have a few customers utilize our battery pack, which is using our IC inside, right?

So that's the transportation. And then go to the downward, then you can looking at -- like a scooter, like the other 2-wheel or 3-wheel personal transportation. But for those sectors, their battery cell is not as high as like 14 or 17 cell. Our advanced technology ICs may not be showed up particular advantages, so our market is still focused on the electrical bike. And they are not only do the domestic in China use. They do the sale or share bike and they also exportation to many places in the world, including, as Jim indicated, Europe also has a major -- the marketplace, they're shipping those electrical bikes. And that could be a 14 and 17 cell.

Okay. So what's like the pricing that you would sell to a bike versus to a scooter? Is it the same product for the same amount of money? Does the bigger vehicles get charged more?

Yes. We have a EMU, we have AFE, we have a DFE. And for all these different product lines, we have 4 cell, we call the 4 cell, 5 cells, that's 1 group. And we have 7 cells, 10 cells, 14 and 17. So each product, we have ordered different combination of the ICs because the voltage is different. So that's the higher voltage one, higher cell one. Higher cell number IC is always more expensive because it's different technology to do it.

Okay. Great. That makes sense. So -- but the numbers now, I mean, the fact that you're having a sequentially up first quarter is very exciting because I don't remember that ever happening before. It's usually the horrible quarter. So could we expect then sequentially each quarter will be improving this year?

Well, we certainly hope to. Because you're right. Traditionally, you actually see some pullback in late December and then a softer market in Q1 due to the TV, in particular; that market tends to be lower in that time frame. However, what we've seen this year is -- and by the way, some of the major TV manufacturers have seen those trends.

But nevertheless, we have other markets, including the battery management market, that has continued to grow our revenue through that normal downtrend. So basically, we do see the opportunity to continue to grow quarter-to-quarter. That's what we certainly hope to see. And that's, I think, as Perry and Sterling mentioned, we are, in fact, buying testers and really getting prepared for higher level demands.

That's great. And the only other difference I see, it looks like you might be spending a little bit more than you did in 2020 based on what you're saying for the first quarter, and that should continue?

Perry, do you want to answer that? Perry?

Yes. Lisa, can you -- I have some noise here. So can you ask again? Sorry.

It looks like that you might be spending more than last year, just based on what you're saying about Q1. Is that accurate as far as operating expenses?

Yes, the OpEx -- I think that there are some factors. Of course, the variable one could be proportional to the increase of the revenue. So this is -- this would probably only the smaller amount increase in the OpEx. And the second is actually a result from the weakened U.S. dollar. Our salary here is paid by local currency, renminbi, Japanese yen, Korean Yuan, and also NT dollar. So weakened U.S. dollar probably will result -- the weakened U.S. will result in some increases in OpEx.

Also, the -- I expect that some of the increase in the freight for the delivery. And also, I do expect some traveling in the second half of 2021. It's probably -- we can get back some traveling. But however, I think that the total OpEx rate will be lower than last year, that will be low. Yes.

The dollar amount would be low?

The percentage.

The percent. Okay.

The percentage will be lower than the last year.

And that does conclude the question-and-answer session. I'd like to turn the call back over to Dan for any closing remarks.

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. Goodbye, everyone.

And that does conclude today's conference. Again, thank you for your participation.