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Edited Transcript of OIIM earnings conference call or presentation 1-Nov-19 1:00pm GMT

Q3 2019 O2micro International Ltd Earnings Call

GEORGE TOWN Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of O2micro International Ltd earnings conference call or presentation Friday, November 1, 2019 at 1:00:00pm 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 Thompson

* 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 third 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 is also posted on the O2Micro website at www.o2micro.com under the heading Investors. There will be a replay available through November 10, 2019, at 9:00 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 questions and answers as time permits. Gentlemen, you may begin.

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

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Thank you, Emma. Good morning, everyone, and thank you for joining O2Micro's Financial Results Conference Call for the Third Quarter of 2019, ending September 30, 2019. This is Daniel Meiberg, Corporate Communications for O2Micro.

I'd like to remind 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 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 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 the discussion of the financial highlights of the third quarter of fiscal year 2019 ending September 30, 2019. Perry?

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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 Q3 2019. Please note that financial result 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 third quarter of 2019 was $16 million. GAAP net loss in the third quarter of 2019 was $200,000. If we exclude stock-based compensation of $337 -- $373,000 and net gain recognized on long-term investment of $715,000, the non-GAAP net loss will be $542,000.

GAAP net loss per ADS in the third quarter of 2019 was $0.01. Non-GAAP net loss per ADS was $0.02.

Gross margin was 51.4% in Q3. The gross margin reflects the current revenue level and the product mix.

R&D expense was $4.7 million or 29.1% of revenue. This amount excludes stock-based compensation expense of $68,000.

SG&A expense was $4.3 million or 26.9% of revenue. This amount excludes stock-based compensation expense of $305,000.

The nonoperating income was $1.2 million. Income tax was $332,000 in the third quarter and is mainly based on the estimated effective tax rate of each taxable location.

In Q3 2019, we repurchased 37,994 ADS unit at a cost of $52,000.

Q3 2019, revenue by end market breaks down into the following percentages: consumer was 44% to 46% of revenue, computer was 6% to 8% of revenue, industrial was 47% to 49% of revenue, communications was almost 0%.

At this moment, I would like to provide some additional information. O2Micro finished the third quarter with $38.5 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of $1.46 per ADS. In addition, O2Micro has no debt.

Accounts receivable at the end of Q3 was $12.4 million. Our DSO is 66 days. DSO is larger than the 60 days mainly from account mix.

Inventory was $9.8 million at the end of the third quarter. This represents 114 days of inventory, and the inventory turnover was 3.2x in Q3.

Net cash provided by operating activities was about $1.6 million.

Capital expenditures were about $156,000 in the third quarter for R&D, IT equipment and the Chengdu new office decoration. Depreciation and amortization was $432,000 in Q3.

At the end of the third quarter of 2019, O2Micro had 388 employees, 64% of which are engineers.

At this time, I would like to provide our financial guidance for the fourth quarter of fiscal year 2019. This guidance reflects our best estimate for the current environment and is subject to change. This is the only official guidance we will provide unless we update it with a public announcement in the future.

While we are experiencing cash profitability and the modest revenue growth in Q4, we will not give Q4 guidance at this time, as our accounting firm has advised that they need more time to analyze

and properly characterize financials from the recently announced agreement with Feit Electric. We will publish revenue guidance separate when their analysis is complete. Product gross margin for Q4 is expected from 49% to 51%. R&D expenses, excluding stock-based compensation, are expected to be in a range of $4.7 million to $5.2 million.

SG&A expenses, excluding stock-based compensation, are expected to be in a range of $4.3 million to $4.8 million. Stock-based compensation should be in the range of $350,000 to $400,000 in the fourth quarter. Nonoperating income are expected to be in the range of $700,000 to $800,000 in the fourth quarter, excluding foreign exchange gain or loss and the net gain or loss recognized on long-term investment. Based on the service income of our subsidiaries in different countries, we expect our tax amount to be in the range of $250,000 to $350,000. 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 the 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 million. As of the end of Q3, we had a $7.9 million remaining in our share buyback authorization.

As reported in last quarter, we will continue to manage the operating expenses in Q4, but we'll continue to invest in new product development with full support on NRE expenses and the related tours, as these new projects are important growth driver 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 Q3 2019, 630,000 shares of EMC were sold and USD 2.4 million cash-in. The average selling price of EMC in Q3 is around USD 3.80 per share, with original cost of USD 0.53 per share. We will continue to sell EMC shares in Q4. As of September 30, 2019, we own around 1 million shares of EMC.

The sales of 2 units of real estate in Taiwan has been completed in October and has contributed profit of USD 495,000 in Q4.

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 costs as needed. Although, we believe we have aligned current cost based on current and anticipated revenue levels.

I would like to take -- I would like to thank everyone for participating and turn the call over to Jim Keim to talk more about our business. Jim?

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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 are pleased to report that our Q3 revenue continue to expand in all key market areas, resulting in our revenues reaching the high end of our guidance. We also expect to see expanded revenue in key areas in Q4, followed by some normal seasonality effects in Q1. Let's review each of these product areas in more detail.

Revenues in our largest product line, intelligent lighting, continue to be driven upward in Q3 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 in lower-end TV and monitor products, using our new line of backlighting products with integrated MOSFETs.

As mentioned previously, we also continue to focus significant backlighting R&D effort in the industrial and automotive markets, where we are introducing key new products. This includes advanced products for robotics and autonomous driving applications, where we are seeing good acceptance of these new products. Our general lighting business has been a small portion of our total lighting revenue and is comprised of both Free Dimming and other specialized products. We have had partners using our general lighting products, including our patented Free Dimming technology in Greater Asia, where virtually all of our Free Dimming revenues come from.

What has been lacking for us in Free Dimming has been a good U.S.-based partner. This void has been filled as indicated in our recent press release through an agreement with Feit Electric. Feit Electric is a privately held company that has a growing footprint in the lighting business as evidenced by their increasing precedent -- presence on home depot lighting shelves. Through this agreement with Feit Electric, we are hopeful of expanding our general lighting sales revenues, not only in Greater Asia, but in North America and Europe as well. Our patented battery management product offering has had excellent growth over the past 3 years with ongoing growth in 2019. This growth continued to be driven in Q3 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.

Our battery management products now include more complex ARM-based microcontroller products for market applications, where our existing customers need more sophisticated battery management. This is enabling us to engage with additional higher end customers. In fact, customers have successfully evaluated our first ARM-based battery management products and are moving forward to design our products into their next-generation high-performance systems.

Due to the complexity of these designs, including firmware development, major revenue is not expected until 2020 from our ARM-based battery management products.

We continue to file key patent claims for our new products to protect both our company and customers' market position. 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 power product revenue did expand in Q3 with our new power products continuing to make progress toward achieving long-awaited significant revenue growth in smartphones and tablets as well as other products. While these efforts have been hampered by major shifts in this market, including recent trade war issues, significant progress is continuing to be made. As stated last quarter, we're moving forward toward production with 8 key customers, including product that is going into smartphones for brand-name customers. Although production volumes are not yet great, we expect these customers to contribute to our ongoing revenue growth.

We will give more detail on these design wins going forward, but will indicate that they involve chargers for applications, including high-power 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 report the third quarter 2019 revenue of $16 million. The revenue was up 12.3% from the previous quarter and down 4.7% from the same quarter prior year. The gross margin in the third quarter of 2019 was 51.4%. The gross margin was up from 50.1% of the previous quarter and up from 15.5% of the same quarter prior year.

Our revenue and gross margin were in the high side of the guided range as a result of product mix which include the strong growth in the consumer product and in many new product ramping up.

The global lithium-ion battery market, with compound growth rate annually 10% plus and will reach $100-plus billion in 2025, which is not far from today. Among the lithium battery applications, the global power tools market, which is we're targeting, expect to generate around $30 billion by 2025. The power tool market is likely to grow rapidly over the estimated time frame due to the furnishing, construction industry sector, mainly in emerging countries.

So our battery product line offer the solution for all the type lithium batteries, a product including the Digital Front End, Analog Front End, Battery Management Unit, step machine (inaudible) , the Battery Management Unit; second, labor protection, or we have Digital Front End integrate with the MCU gas gauge, or we have MCU-based gas gauge. Those BMS product line reliability has been very critical.

Our years of experience made most of BMS products support key advanced features such as the true (inaudible) battery cell connections, the battery cell placed reversely, (inaudible) current compensation from the plug and play operation, 10K ohm, a resistor which is a very strong resistor with a maximum battery voltage control and, et cetera.

We have won the trust from customer by sustaining high-quality product delivery and a very low defect PPM, way below industry 100 defect PPM standard and that we reach 5 defect PPM range.

Today, the consumer electronics dominate the lithium battery market import, while automotive is the fastest-growing sector, which is our next available market. The cordless vacuum cleaner and a robot-type vacuum cleaner powered by lithium battery continue to change the way the most of the household do the floor cleaning.

We are seeing the 3 major cordless vacuum cleaner; Bissell, Dyson and Phillips continue to rely on our technology in their advanced machines

Previous quarter, battery product revenue came with a strong growth indicating the market has been upward and further stabilized by the relocation of manufacture sites continues in order to handle the trade war issue. It result into a low visibility and a dynamic market.

For the higher applications, our 10-cell, ARM core-based MCU, DSE integrated gas gauge has many design win activities. It provides high performance, high reliability and easy for value-added development solution to enable customers high-performance, high-precision products.

We're also providing the 6 cells ARM core-based solution to serve high-performance vacuum cleaner customers. We secure many active design win for this product line.

Overall our battery BMS products have been designing preproduction, mixed production with top-tier customers over the Japan, Europe, North America and China.

As Jim mentioned that our local area backlighting solutions expand to the HDTV and HDR monitor strongly, we are pleased to see not only the number of the ICUs for each TV monitor increase by the HDR and the 4K, 8K HDTV becomes more affordable and it will be standard feature in the coming years.

The latest Sony MASTER Series 85 Inch, the HDR has 64 chips of ours is an example. Our customer prefer to utilize our precision timing control driver IC for their each LED screen, which is made of more than 5,000 LEDs.

Our IC could synchronize each LED in very precise timing control, which is made of total more than 1,000 tiny local area LED per one TV.

Meanwhile, our patent parallel driving architecture with a multiple HDR parts, which is synchronized serial interface channel, support fast frame refresh rate, where conventional daisy chain architecture fail short to support beyond the 30 megahertz frequency, which limit the conventional, the frame refresh rate and the number of ED strings to be deployed.

So theoretically, both the frame refresh rate in a number of the strings are essential to the HDR.

The China TV market has been improved as we've mentioned in previous quarter that there are signs of China market recovery. We expect a positive market momentum through the year-end. On the other hand, our high-performance aerial local TV technology continue to expand through China and the Korea market from Japan.

For the better support of variety LED topology as well as customer requirements, we are also developing a linear mode solution for those customers who care more for cost structure while maintaining performance with our successful story in high-end switching mode. We believe we could add value and produce higher-than-conventional performance for this medium mode to this market.

The monitor market also grow nicely as many monitor applications go for industrial, gaming, medical device, bulletin board and, et cetera.

Our new mini LED backlighting driver offer high-performance brightness. Monitor market like TV markets will drive the growth momentum through the year-end.

Our charger product for the phone and the tablet are at good growth pace in design wins. Yet the revenue arriving remains longer than original anticipation. The phone customer try to do first few projects before escalating to the mainstream.

But meanwhile, we have the charger product mixed production in accessory devices, such as the power bank, smart speakers, [post device] and share bike and, et cetera. With the good result previous quarter, we are optimistic to continue the growth to the year-end. We'll continue to monitor our business expense, business operation to optimize the operating cycle time, cost of operation expense and monetizing the asset of the 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. Emma, at this time, I'd like to open the call up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Tore Svanberg with Stifel.

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

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First of all, could you elaborate a little bit on the arrangement with the Feit Electric. Just trying to understand, is this an exclusive arrangement, can you still be selling your technology to other U.S.-based companies yet? And anything you could share on that, that would be great.

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James Elvin Keim, O2Micro International Limited - Head of Marketing & Sales and Director [3]

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Well, basically, Tore, as you may be aware, they are a private company. They are sensitive about information -- too much information going out relative to this. What I can say is, this does not interfere in any way with any of our major current customers that we do have. Basically, there is some licensing involved in the agreement, and we do anticipate being able to continue to expand our business with other entities.

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4]

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That's very helpful. And just so I get some clarity on the -- so obviously, you can't give official guidance, but you did say that you expect some growth in Q4. Do you have a timing of when you can update us on the actual revenue guidance?

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Chuan Chiung Kuo, O2Micro International Limited - CFO, Secretary & Director [5]

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Yes, Tore. This is Perry. I think we try to get this updated by the end of November or early as December time frame.

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [6]

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Very good. Last question, if indeed you are expecting revenues to be upped in the quarter, could you elaborate a little bit on which segments do you expect to be up or down in the December quarter?

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

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Tore, as I think you know TV can be rather dynamic in the fourth quarter. So we'll wait and see where the TV and monitor business ends up. We do see, however, the battery management business continuing to be very strong. Our design win activity there continues to be very good across the broader mix of systems. So we do anticipate certainly, the battery management activity continue to expand. We're also remaining very optimistic about our products in the smartphone tablet area.

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Operator [8]

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

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Lisa Thompson, [9]

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So I just want to clarify a little bit more of what Tore was asking. So for when -- when you used the term, you expected revenue growth in the fourth quarter, do you mean sequentially or year-over-year?

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James Elvin Keim, O2Micro International Limited - Head of Marketing & Sales and Director [10]

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Sequentially.

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Lisa Thompson, [11]

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Okay. I was Just afraid of that. Okay, and then on the Feit agreement you've specifically called it a strategic agreement, which is not the same as a licensing deal. So here I'm assuming that they've been infringing on your patents because you seem to have them all in Free Dimming. Is there some sort of retroactive amount you charge them for licensing based on infringing in the past? Are you going to be paid a licensing fee? Is it a onetime? Would it be like ongoing based on their sales? And also, does this mean that you're going to sit down with them and work together to develop new products?

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James Elvin Keim, O2Micro International Limited - Head of Marketing & Sales and Director [12]

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Again, I hate to say this, Lisa, but it's a private agreement, and it's a private company. We do really look forward to what I mentioned the word partner, partnering with them as we do move forward. There are licensing aspects of this, covering some of the items you mentioned. We can't go into specifics. But basically, as Perry indicated, we will probably be giving some update later this quarter in terms of Q4 that could result from the agreement.

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Lisa Thompson, [13]

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Okay. So there could be like a lump-sum payment involved in this licensing?

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James Elvin Keim, O2Micro International Limited - Head of Marketing & Sales and Director [14]

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We won't comment...

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Lisa Thompson, [15]

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In this case you have to give us -- you have to give us 8-K, right?

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James Elvin Keim, O2Micro International Limited - Head of Marketing & Sales and Director [16]

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Yes. Basically, this is more up to the accounting firm that we have to, I will say, characterize the agreement. It is, Lisa, not just a very simple, straightforward agreement, it's really quite a complex agreement that we have with them. As you may be aware, they -- if you go look at a home depot, for instance, I looked at one in Silicon Valley this past week on my way over here. Looked to me like they have as much self -- shelf space as Philips, GE, CRE all combined. They are taking significant market share at this point. And they're also moving into other fixture-type areas, industrial areas. They're not public, so they don't put out a lot of information, but if you go take a look, I think you'll be quite impressed with what they are doing. And this fits well with our product line. I'll simply put it that way.

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Lisa Thompson, [17]

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Oh, yes. They're huge. I mean, I probably have some of them in the house. So (inaudible) right away, when you made the announcement, that's not a small company. Okay, so that's pretty exciting. Now I noticed that I look back and you haven't had this small an operating loss since 2016. So -- and I guess it's -- you've done a very good job on cost control. Do you think that you're going to keep narrowing the operating loss until you get to profitability like going forward now?

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

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Yes, we do monitor the operating expenses very carefully. But however, we will continue to invest in the necessary detector to support new IC in the testing -- in the new assisting capacity. And also, we will embrace the NRE for the new project to continue to give the momentum of the growth of the different IC in the different sectors. Quite apart from these 2, and we will monitor and manage the operating expense very tightly. So I do think that our R&D and SG&A will be controlled in a good way. And the portion of the SG&A will be related to the revenue, which are the sales (inaudible) people to support the expanding account and also some logistic expenses to be part of the function of the revenue.

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Operator [19]

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

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Daniel Meiberg, O2Micro International Limited - Corporate Communications Officer [20]

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So, my last page. One moment. There you go. 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 [21]

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