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Edited Transcript of OIIM earnings conference call or presentation 6-Feb-20 2:00pm GMT

Q4 2019 O2micro International Ltd Earnings Call

GEORGE TOWN Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of O2micro International Ltd earnings conference call or presentation Thursday, February 6, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chuan Chiung Kuo

O2Micro International Limited - CFO, Secretary & Director

* Daniel Meiberg

O2Micro International Limited - Corporate Communications Officer

* James Elvin Keim

O2Micro International Limited - Head of Marketing & Sales and Director

* Sterling Du

O2Micro International Limited - Chairman of the Board & CEO

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Conference Call Participants

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* Lisa R. Thompson

Zacks Investment Research, Inc. - Senior Technology Analyst

* Tore Egil Svanberg

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

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Presentation

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Operator [1]

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Good morning, and thank you for joining us today to discuss O2Micro's financial results for the fourth quarter of fiscal year 2019. 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's also posted on the O2Micro website at, www.o2micro.com under the heading Investors. There will be a replay available through February 13, 2020, 9:00 a.m. Pacific Time or by visiting the O2Micro website under the heading Investors. (Operator Instructions) Gentlemen, you may begin.

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Daniel Meiberg, O2Micro International Limited - Corporate Communications Officer [2]

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Thank you. Good morning, everyone, and thank you for joining O2Micro's financial results conference call for the fourth quarter of 2019, ending December 31, 2019. This is Daniel Meiberg, Corporate Communications for O2Micro. I'd like to remind you listeners that the discussions 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 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. Statements made herein are dated information. The company assumes no responsibility to provide updates to this information. With me today are Perry Kuo, CFO and Director; Jim Keim, Head of Marketing and Sales and Director; and Sterling Du, O2's founder, CEO and Chairman. After the prepared remarks from these gentlemen, the floor will be open for your questions.

At this point, I would like to introduce Perry Kuo, CFO of O2Micro for a discussion of the financial highlights of the fourth quarter of fiscal year 2019 ending December 31, 2019.

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Chuan Chiung Kuo, O2Micro International Limited - CFO, Secretary & Director [3]

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Thank you, Dan. We will now review our financial results for Q4 2019. 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 year results are available in our press release that was issued earlier today.

GAAP revenue in the fourth quarter of 2019 was $17.9 million. GAAP net income in the fourth quarter of 2019 was $1,787,000. If we exclude stock-based compensation of $378,000, net gain recognized on long-term investment of $245,000 and a gain on sales of real estate of $500,000, the non-GAAP net income will be $1,420,000. GAAP net income per ADS in the fourth quarter of 2019 was $0.07. Non-GAAP net loss per ADS was $0.05. Gross margin was 57.7% in Q4. The higher gross margin remained 49% to 51% guided earlier, reflect the product mix of factors from the strategic agreement with Feit Electric. R&D expense was $4.3 million or 24.2% of revenue. This amount excludes stock-based compensation expense of $68,000. SG&A expense was $4.5 million or 25.3% of revenue. This amount excludes stock-based compensation expense of $310,000. The nonoperating income was $1.1 million. Income tax was $250,000 in the fourth quarter and is mainly reflected in the actual tax provision of each taxable location.

In Q4 2019, we repurchased 71,390 ADS unit at the cost of $91,000. Q4 2019, revenue by end market breaks down into the following percentages: consumer was 43% to 45% of revenue, computer was 5% to 7% of revenue, industrial was 48% to 50% of revenue, communication was almost 0.

At this moment, I would like to provide some additional information. O2Micro finished the fourth quarter with $46.4 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. Accounts receivable at the end of Q4 was $10.3 million. Our DSO is 57 days. DSO is less than 60 days, mainly from account mixed. Inventory was $8.8 million at the end of the fourth quarter. This represents 108 days of inventory, and inventory turnover was 3.3x in Q4.

Net cash provided by operating activities in the fourth quarter was about $5.2 million, mainly from the net profit of $1.8 million, decreases in AR $2 million and the increase in account payable $889,000. Capital expenditures were about $371,000 in the fourth quarter for testers and the IT equipment.

Depreciation and amortization was $470,000 in Q4. At the end of the fourth quarter of 2019, O2Micro had 378 employees, 63% of which are engineers. Based on our current market situations and the best updated [majority] of rolling forecast the company has following guidance for Q1 2020: net sales are expected to be down 15%, plus and minus 4%, compared to Q4 2019. Our net sales are expected to be up 19%, plus and minus 6%, from comparable quarter of Q1 in 2019. Product gross margin for Q1 is expected from 15% to 52%. R&D expenses, excluding stock-based compensation, are expected to be in the range of $4.5 million to $5 million. SG&A expenses, excluding stock-based compensation, are expected to be in the range of $4.5 million to $5 million. Stock-based compensation should be in the range of $350,000 to $400,000 in the first quarter. Nonoperating income are expected to be in the range of $200,000 to $300,000 in the first quarter, excluding foreign exchange gain or loss and net gain or loss recognized on long-term investment. Income tax expense is expected to be in the range of $200,000 to $300,000.

The goal of our management team and 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 regards to our share repurchase program, we have been active in this program historically, and we plan to continue going forward. Since 2002, we have repurchased over 20.2 million ADS shares for $101.1 million. As of the end of Q4, we had $7.8 million remaining in our share buyback authorization. As reported in last quarter, we will continue to manage the operating expenses in Q1, but we will continue to invest in new product development with full support of underlying expenses and the related tools, as these projects are important -- as this new project are important growth drivers for 2020.

We believe our cash breakeven point now is between $16 million to $18 million in quarterly revenue, and our profitability breakeven point is between $18 million to $20 million in quarterly revenue.

In Q4 2019, 227,000 shares of EMC were sold, and USD $869,000 cash-in. The average selling price of EMC in Q4 is around $3.84 per share with original cost of $0.53 per share.

We will continue to sell EMC shares in Q1. As of December 31, 2019, we owned around 800,000 shares of EMC, real estate in Taiwan sold in Q4 and the 500,000 gains booked in Q4 too. 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 status of the new coronavirus and the dynamic changes in macro environment, we are prepared to continue to manage the cost as needed. Although we believe we have aligned current cost based on current and the anticipated revenue levels. I would like to thank everyone for participating and turn the call over to Jim Keim to talk more about our business. Jim, please?

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James Elvin Keim, O2Micro International Limited - Head of Marketing & Sales and Director [4]

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Thank you, Perry. Good morning, everyone. We were very pleased with our Q4 revenue results that reflected another strong quarter for battery management as well as ongoing expansion of our high-end intelligent lighting product sales. We also experienced ongoing growth in our new smartphone and tablet products. We expect ongoing growth in all these product areas in 2020 but realized Q1 will have typically typical seasonality as well as turmoil from China-based customers and supply chains that faced some labor shortages due to the coronavirus. However, most customers have not changed their targeted revenue for 2020 and have indicated that they expect to make up any Q1 shipment shortfalls in Q2. We will closely monitor the situation and have lowered our revenue target in Q1 to reflect the situation while remaining optimistic about our revenue growth in 2020. Let's update our business in each of our product areas in more detail.

Revenues in our largest product line, intelligent lighting, continue to be driven upward in Q4 by our many design wins that include both 4K and 8k TV and expansion of HDR monitors into gaming, medical and industrial applications. While continuing to expand our product offering and position in high-end TVs and monitors, we are not ignoring our strong overall market share and continue to expand design activity and lower-end TV and monitor products using our new line of patented backlighting products with integrated MOSFETs. Our general lighting portion of our lighting products enjoyed good Q4 revenue as we added Feit Electric as a U.S.-based partner to accompany our already established partners in Greater Asia, that includes a new proprietary design for a major Japanese customer that is now going into production.

Finally, our R&D products in the industrial and automotive lighting have enabled excellent progress in design wins. This includes advanced products for robotics and autonomous driving applications, where we are seeing good acceptance of our new products. Our patented battery management product offering continued to experience excellent growth in Q4 as it has over the past 4 years. This Q4 growth continued to be driven by the rapid expansion of lithium-ion batteries into more and more product areas as lithium-ion batteries have become more cost-effective with greater energy capability. With our patented lithium-ion cell balancing methodology, we continue to see ongoing growth opportunities with major OEMs in power tool, e-bike, e-vehicle, vacuum cleaners, garden tools and energy storage systems. We believe each of these market areas will continue to expand for the foreseeable future.

As previously noted, our battery management products now include more complex ARM-based microcontrollers for market applications where our existing customers need more sophisticated battery management. This is enabling us to engage with additional [higher-end] customers, including those in the rapidly growing energy storage market. Customers have successfully evaluated our first ARM-based battery management products and are moving forward to design our products into the next-generation of 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 continues to grow and includes Bissell, Black & Decker, Dyson, Electrolux, Lexi, LG, Makita, Narada, Panasonic, Philips, Samsung, Sharp and TTI.

Our new power products continue to make progress with increasing revenues in smartphones and tablet markets. As stated last quarter, we are moving forward toward production with 8 key customers, including product that is going into smartphones for brand-name carriers. These design wins involve chargers for applications, including high-powered 2-cell charging, IoT product and express charging as well as gas gauges and complex, integrated custom product for key customers.

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

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Sterling Du, O2Micro International Limited - Chairman of the Board & CEO [5]

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Thank you, Jim. O2Micro reported fourth quarter 2019 revenue of $17.9 million, was up 11.4% from the previous quarter and up 7.7% from the same quarter prior year. The gross margin in fourth quarter of 2019 was 56.7%, that gross margin was up from 51.4% of previous quarter and up from the 50.3% in the same quarter prior year.

Our revenue was in line with the guided range publicly released on December 2, 2019. Our strong gross margin is a result of product mix, strategic alliance program, strong growth in consumer products and the many new products ramping up in battery market. While our local area dimming backlight solution expanded to HDTV and HDR TV monitor, we start to sample new technology product of multiple skin LED backlighting, which was essentially the flashing backlight for the LCD display. The technology reduces motion blur caused by eye-tracking and the movement during a fast motion. With a local area dimming and a multiple skin technology, enjoying more TV experience will further enhance.

I'd like to recap the number of the ICs used in a high-end HDR TV monitor for local area dimming backlighting grows at higher performance needed. The latest Sony MASTER Series 85 inch, HDR, 8K, and 64 ICs of ours is an example. This particular high-precision timing control driver IC controls the 5,000 LED per stream. Our special IC synchronize each LED in a very precise timing control and could be used as many as 1,000 tiny local area LED. Our patent parallel drive architecture with multiple SPI channel support fast frame refresh rate, also called VSYNC, versus the conventional daisy chain technology topology, only support 30 megahertz that restrict the frame's refresh rate and at a number of LED stream could be deployed.

The China TV monitor market in Q4 last year has been improved, recover, as we mentioned previous quarter, but the new coronavirus spread impacted the supply chain from normal operation. As Jim indicated, we are at early stage to assess this dynamic situation.

Our battery product line offer solution for all types of lithium-ion battery including variety of functions are DFE, which is Digital Front End; and AFE, Analog Front End; and now we have battery management unit. The battery management unit either are [state] machine-driven with a second level protection or MCU-based gas gauge BMS. Those BMS product reliability has been high standard. Our BMS product support key advanced features including the (inaudible) cell connection, battery cell placed reversely protection, [sync] current compensation from plug and play and also the special 10 ohm for the RF resistor with a maximized battery voltage control.

The previous quarter battery product revenue came with a very strong growth from all the market sectors. We see outdoor power tool was getting its momentum and the indoor power tool grew even stronger as indoor power tool look for flexible and performance solutions. Many of our customers' safety protection using our ICs is because our new MCU-based BMS provide high-level performance, reliability and are flexible enough to meet variety customer request. As each customer has own architect when address their safety issues.

Our charging product for phone, tablet continue to show the good design wins. This -- there are opportunities for the new phone replacement cycle in the coming years, which is 5G, which needs high current charger and a high accuracy gas gauge. We expect more complicated and sophisticated solution for 5G will be the trend, which benefit our product and the technology. With a good result of previous quarter, we are optimistic for the fundamental of our business, while the risk factor of the new coronavirus remains a top concern, we need more time to assess the impact. We continue to monitor with our business expense, biz operation to optimize operating cycle because of the operations expense and monetizing the asset of company.

At this time, I'd like to thank you for listening to our conference call, and I'll turn it back to Dan. Dan, please?

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Daniel Meiberg, O2Micro International Limited - Corporate Communications Officer [6]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Tore Svanberg with Stifel Nicolaus.

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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Congratulations on the year-over-year growth. First question on the gross margin for Q4, could you elaborate a little bit more on what happened there? You did mention the element of mix, but were there any onetime benefits as well?

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Daniel Meiberg, O2Micro International Limited - Corporate Communications Officer [3]

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Jim, would you like to...

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Chuan Chiung Kuo, O2Micro International Limited - CFO, Secretary & Director [4]

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Tore, this is Perry. Yes, there is some factor from the onetime, but it's kind of the mix -- sorry, there is some onetime. That's why I also -- I just guided the Q1 gross margin will be 50% to 52%.

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [5]

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Very good. Got it. Second question is, obviously, there could be some supply chain issues in Q1. Could you perhaps elaborate a little bit in which segments of your business this is happening? I assume it's primarily TV, but if you could share any other information there, that would be great.

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Daniel Meiberg, O2Micro International Limited - Corporate Communications Officer [6]

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Jim?

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James Elvin Keim, O2Micro International Limited - Head of Marketing & Sales and Director [7]

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Tore, this is Jim. You are correct that TV is the #1 area because, certainly, a major portion of the TV manufacturing is done in China, but also, as you are aware, we do sell a lot of product to all of the major TV manufacturers that are Chinese and also ship heavily into China. So we do expect some supply chain situations there. The customers are indicating that, at this point, they're maintaining their forecasts. And as we mentioned, they will plan on catching up with any production in Q2. Nevertheless, we have reduced the forecast for Q1 because we do believe there will be some sales impact, particularly in China as a result of this.

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [8]

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Sounds good. So I mean does that mean Q2 is going to be -- I mean, the sequential growth there is going to be above what you typically see? Or is it still too early to make that call?

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James Elvin Keim, O2Micro International Limited - Head of Marketing & Sales and Director [9]

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I think it's too early to make that call. But if they do get the situation under control quickly, we would hope to see a more robust Q2, but it's really too early for us to make that call.

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [10]

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Very good. Just last question for Sterling. Sterling, you talked about continuous progress on the smartphone side. And obviously, the 5G upgrade cycle is starting to happen. Should we assume that O2Micro starts to get some material smartphone revenue here at some point in 2020? Or is this more of a 2021 contribution?

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Sterling Du, O2Micro International Limited - Chairman of the Board & CEO [11]

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That is a mix for the really the high-end 5G, that will be 2021. And then the mix with some of the current 4G, high-performance phone and that will be realized as some revenue for the second half of this year.

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Operator [12]

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(Operator Instructions) The next question will come from Lisa Thompson with Zacks Investment Research.

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Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [13]

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Great to see this. When was the last time you had a profitable quarter? I couldn't find it. Back in...

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Chuan Chiung Kuo, O2Micro International Limited - CFO, Secretary & Director [14]

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That's probably 2018, yes.

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Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [15]

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2018? Oh right, it's the onetime. Okay. So looking at Q4, I know you had the onetime license revenue in there, would you have reached breakeven without that? I know you won't tell us how much it was.

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Chuan Chiung Kuo, O2Micro International Limited - CFO, Secretary & Director [16]

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We are close to the cash breakeven. Yes, we don't let.

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Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [17]

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And you usually tell us what your revenue breakeven numbers are and cash breakevens? Did I miss that? Or is it...

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Chuan Chiung Kuo, O2Micro International Limited - CFO, Secretary & Director [18]

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It's $16 million to $18 million.

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Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [19]

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For cash breakeven or profit breakeven?

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Chuan Chiung Kuo, O2Micro International Limited - CFO, Secretary & Director [20]

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For cash breakeven, yes.

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Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [21]

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Okay. Sounds good. So could you elaborate a little bit about what happened with Feit as far as what products they're going to be distributing for you or using you for?

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James Elvin Keim, O2Micro International Limited - Head of Marketing & Sales and Director [22]

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All what we can say there, Lisa, is it will be Free Dimming-based product. That does not prohibit some from using other products, but this involves the Free Dimming.

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Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [23]

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Okay. And has that -- where are they on that? Like are they just evaluating? Or do they have products in stores already? Where are we?

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James Elvin Keim, O2Micro International Limited - Head of Marketing & Sales and Director [24]

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They have Free Dimming product in the market already.

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Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [25]

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Okay. And then you said you added a major Japanese customer in lighting? For what products?

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James Elvin Keim, O2Micro International Limited - Head of Marketing & Sales and Director [26]

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Not added. We actually have been working with this customer for some time. So we added a new product for them that is specific to their specification requirements for an additional application with them. So this will expand our general lighting business with them.

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Operator [27]

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

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Daniel Meiberg, O2Micro International Limited - Corporate Communications Officer [28]

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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. Everyone, have a great day, and thank you again for your time and attention. Goodbye.

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Operator [29]

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Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect your lines.