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Edited Transcript of OIIM earnings conference call or presentation 30-Jan-19 2:00pm GMT

Q4 2018 O2micro International Ltd Earnings Call

GEORGE TOWN Feb 4, 2019 (Thomson StreetEvents) -- Edited Transcript of O2micro International Ltd earnings conference call or presentation Wednesday, January 30, 2019 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 for today's -- to discuss O2Micro's financial results for fourth quarter of fiscal year 2018. 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 6, 2019, 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 now 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 2018 ending December 31, 2018. This is Daniel Meiberg, Corporate Communications for O2Micro.

I would like to remind listeners that the discussion of the business outlook for O2Micro contains forward-looking statements. Statements made in this release that are not historical fact 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 or 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 a discussion of the financial highlights of the fourth quarter of fiscal year 2018 ending December 31, 2018. 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 Q4 2018. Please note that financial results will be presented on a GAAP basis unless we designate otherwise. The non-GAAP results excludes stock-based compensation expense, onetime charges, nonrecurring gains and losses. Our full GAAP results are available in our press release that was issued earlier today.

GAAP revenue in the fourth quarter of 2018 was $16.6 million. GAAP net loss in the fourth quarter of 2018 was $3.1 million. If we exclude stock-based compensation of $353,000 and a net loss recognized on long-term investment of $1.4 million, the non-GAAP net loss will be $1.4 million.

GAAP net loss per ADS in the fourth quarter of 2018 was $0.12. Non-GAAP net loss per ADS was $0.05. Gross margin was 50.3% in Q4. The gross margin reflects the current revenue level and the product mix. R&D expense was $5 million or 29.9% of the revenue. This amount excludes stock-based compensation expense of $59,000. SG&A expense was $5.1 million or 30.7% of revenue. This amount excludes stock-based compensation expense of $290,000.

The nonoperating loss was $693,000. It includes interest income $71,000 and other net income. Our rental income $101,000, cash dividend income from long-term investment, $290,000 and some government-subsidized $138,000. The net loss recognized in long-term investment is mainly from unrealized fair value of EMC shares. In Q4 period, 360,000 shares of EMC were sold and USD 1.3 million cashed in. The average selling price of EMC in Q4 is around USD 3.56, with original cost of USD 0.54 per share. The remaining shares of EMC as of December 31, 2018 is around 2.8 million shares. Income tax was $330,000 in the fourth quarter and it is mainly based on the tax provision of each taxable location, which including the income tax of $105,000 from the EMC shares trading.

In Q4 2018, we repurchased 98,188 ADS units at a cost of $158,000. Q4 2018, the revenue by end-market raised volume to the following percentages: Consumer was 43% to 45% of revenue; computer was 6% to 8% of revenue; industrial was 47% to 49% of revenue; communication was almost 0.

At this time, I would like to provide some additional information.

O2Micro finished the fourth quarter with $38.6 million in unrestricted cash and short-term investments. This represents cash and cash equivalent of $1.49 per ADS.

In addition, O2Micro has no debt.

Accounts receivable at the end of Q4 was $11.4 million. Our DSO is 52 days. DSO is largely [sitting there mainly from] accounting mix. Inventory was $10.3 million at the end of the fourth quarter. This represents 111 days of inventory, and the inventory turnover was 3.3x in Q4.

Net cash using operating activities was $3,283,000. Capital expenditure were about $406,000 in the fourth quarter for R&D, IT and mainly for tester upgrade. Depreciation and amortization was $443,000 in Q4. At the end of the fourth quarter of 2018, O2Micro had a 400 employees, 64% of which are engineers.

At this time, I would like to provide our financial guidance for the first quarter of fiscal year 2019. The 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.

O2Micro expect Q1 2019 revenue to be down 12%, plus or minus 4% sequentially. The midpoint is up around 4% from the comparable quarter 2018. We are guiding the Q1 gross margin will be in the range of 49% to 51% and is mainly from the product mix.

R&D expense, excluding stock-based compensation, should be $4.7 million to $5.2 million in Q1. SG&A should be $4.5 million to $5 million in Q1, excluding stock-based compensation expense. Stock-based compensation should be in the range of $300,000 to $400,000 in the first quarter. Nonoperating income should be in the range of $150,000 to $250,000 in the first quarter, excluding the net GAAP 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 $200,000 to $300,000. The goal of our management team and Board of Directors is to maximize shareholders value. We have announced -- we have accomplished, sorry -- this by taking the necessary steps, which included managing operating expenses and demonetizing asset on the balance sheet. In regard 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 19.9 million ADS shares for $100,300,000 as the end of the Q4, we had 8.3 million remaining in our share buyback authorization. Returns to shareholders are very much on our mind, and will continue to be a focus in the future. We will provide update to the additional measures to enhance shareholders value throughout this year.

We will continue to invent in R&D on RIE for the new products. In power and the battery projects we'll be the momentum for the future growth. Logistics in Q4 was higher due to in-time delivery for short-time notice for trading needs.

Q1, we expect the logistics will be normal, and we will get the SG&A in the normal range. We believe our cash breakeven point is between $17 million to $19 million in quarterly revenue, and our profitability breakeven point is between $19 million to $21 million in quarterly revenues. Given the uncertain demand in the macro environment, we are prepared to continue to manage cost as needed. Although we believe we have aligned current cost based on current and anticipated revenue levels.

I would like to thank you 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. Our yearly revenues for 2018 continued our steady growth since revenues bottomed out in 2015. We are projecting an ongoing growth for 2019 as well. The 2019 growth is expected to be modest in Q1 2019 versus Q1 of 2018 due to slow Q1 TV sales coupled with some excess inventory correction by customers. We project reasonable growth in Q2 2019 versus Q2 2018 followed by accelerating growth in the second half of this year that will be driven by 3 factors. These 3 factors are: Backlighting design wins in high-end 4k and 8k Ultrahigh Definition TVs as well as high-end HDR monitors; secondly, we'll see ongoing growth in battery management; third, we'll see expanding revenues in new power products that continue to gain wider acceptance in the smartphone and tablet market including higher-end customers.

Let's now review more specific market activity on our product lines. In our largest product line, intelligent lighting, our new product design wins have continued to accelerate in several areas. Our industry-leading area backlighting product is capturing a growing number of design wins in the high-end TV market, including the rapidly expanding 4k market followed by the 8k market. We also see the high-definition HDR monitor market growing steadily as more OEMs are offering HDR monitors using our backlighting product.

We are also pleased that customers continue to expand design activity in lower MTV and monitor products using our new line of backlighting products with integrated MOSFET. As stated previously, we also continue to focus significant backlighting R&D effort in the industrial and automotive markets, this includes advanced products for robotics and automotive driving applications.

Our General Lighting business remains focused at the high end of this market, specifically our proprietary and patented Free Dimming and high-powered general lighting products where we can enjoy reasonable profits. We expect this business to remain stable with modest growth. Our patented battery management product offering had good growth in 2018, and is projected to continue this growth in 2019.

This growth is being driven by the rapid expansion of lithium-ion batteries into more and more product areas as lithium-ion batteries become more cost-effective and have greater energy capability. With our patented lithium-ion cell-balancing methodology, we've been able to gauge with major OEMs in key markets including power tool, e-bike, e-vehicle, vacuum cleaners, garden tools and uninterrupted power supplies.

As stated previously, our product plans and battery management have included expansion into more complex microcontroller-based products for market applications where more sophisticated battery management is needed. We are pleased to report that customers have now successfully evaluated our first arm-based battery management products, and are moving forward to design our IC products into their next-generation high-performance products. Due to the complexity of these designs, including firm order development. Major revenue is not expected until 2020 from our arm-based products.

We continue to file our key patent claims for our new products to protect both our company and customers' market positions. Our major customer list includes: Black & Decker, Bissell, Dyson, Electrolux, LG, Makita, Murata, Panasonic, Philips, Samsung, Sharp and TTI.

Finally, I'd like to discuss power products. Our new power products continue to ramp into production at [multiple] customers who enjoy ongoing quarterly revenue. The effect of this growth has been muted, however, by lower-than-expected revenues in the legacy power products, primarily due to serious shortages of processors at several [key] customers. Nevertheless, we expect this issue to soon be behind us as our new product revenue base continues to grow more customers, including well-known higher-end brand name customers that are completing designs and going into their prototype production with our products. These design wins for our smartphone and tablet products include our new charger ICs, on-the-go charger booster and accurate gas gauge. Sterling will go into greater detail regarding these and other products.

I will now turn the call over to our CEO, Sterling Du 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 fourth quarter of 2018 revenue of $16.6 million. The revenue was down 1.4% from the previous quarter and up 9% from the same quarter prior year. The gross margin in the fourth quarter of 2018 was 50.3%. The gross margin was down from 50.5% of previous quarter and down from 50.5% the same quarter prior year. Our revenue and our gross margin was in a guided range as a result of product mix, which included that we have strong growth in the consumer product and many new product ramping up.

In 2018, our TV achieved our objective to grow despite component shortage and the market shifting, we won one important customer as a result of our technology merits. In addition to Sharp, which was merged by Hon Hai. We see the LCD TV mainstream moved up to the 4k HDR, high end and solid 8-K. Furthermore, LCD TV evolved to the areas of state-of-art technologies such as laser LED impact lighting, super low-coating impact lighting, mini LED impact lighting and et cetera. We foresee the potential of a high-end LCD TV growth to the different format trying to parallel the OLED LED performance.

In a mainstream market, the larger size continue to be favored. 4K HDR, 4K UHD TV and a Smart TV place their footprint in the center of a Smart home, Gaming, ATV store or the connectivity base for the whole IoT. The dryness of LG TV clearly has advantage over OLED LED in which our local dimming technology function has a critical role. Regarding the view angle and the contrast ratio OLED LED does better. And yet using the new high sense, new laser TV as an example, in which stand out acquired light by adding a third laser to existing 2 counter laser LED for the impact lighting, while enhancing the brightness contrast. In 2018, the component shortage slowed down our TV growth rate to address the passive component shortage in the general market or IC-integrated multiple MOSFET to specific set of MOSFET and enable for the first time to market for customers.

With 2019, the slowdown and the low visibility, we are holding -- hopeful that this shortage could be lessened and favor us. The 4K monitor market remained relatively stable at major industrial market. The mainstream monitor market slowed down due to a geopolitical concerns in the supply chain and reorganize. To cope with the state of the market, we increase the (inaudible) content into the same customer base, which are our new AC/DC conversion IC and high-current MOSFET. And we can reach (inaudible) the standby current and meet the energy star standard. As per the design win or preproduction with the customer in both LCD TV and the monitor. Our battery product achieved double-digit growth in 2018. While we secure top-tier customer in Japan, Europe, North America, we anticipate some headwind ahead in 2019 due to external factors. It is too early to tell the global impact to our battery market. Our growth strategy will be: number one, as I said, a diversification; second, IP protection. For diversification, we introduced 3 new product series. One, we have a new digital frontman to support the battery cell number 5, 10, 14, 20 for the various applications. Second, we have a smart (inaudible) based on the arm core. And also integrated the DFE, Digital Front-end and multiple MOSFET had a very fast responding time sigma, delta A/V converter and an e-flash. Number 3, we also combined a BMU, which is based on step machine with a DMV as well, which support the cell number 5, 8, 10, 14 and 17 to meet the verification of customer needs. This new battery (inaudible) IC is equipped with a high-performance analog-to-digital conversion will help 5-cell to 20-cell power tool customer, better monitor the temperature voltage in fast responding and accurate way. Along with the ongoing design win of 3 potential batteries group products, we see revenue growing due to these increasing customer base and the same customer design win and the revenue growth.

Our new generation product [helps the group] address the needs for high integration, mix in the design, semi programmable ability and a fast time -- the responding time, connectivity ready as new smart gas gauge adopt the popular arm-base core combining 2 IC box into one. And the [switches] at the MCU microcontroller base case end of the DME. We also plan to purchase and already install some of the new tester to handle this company IC testing. This time, management should be important. We continue to create the IP and enhance the IP portfolio for battery applications. Though the smartphone market is stagnant, our product are at a very early stage penetration. There are plenty of room to grow for us, especially with our target at high-end, high battery power and high computer powers smartphone system. Our solution address the high performance analog charger for smartphone with the current product line including but not limited to number one, we have 2 parallel charger can charge up to 6 amp and the second we have a direct fast charging, we call O2 extra charge, also can charge to 6 amp. And then we also have 1 amp to 6-amp in-battery standard charger. We believe the smartphone charger current will continue to rise due to more new function to pack in. Our charger solution can help both efficiency and heat dissipation.

So looking forward to year 2019 our growth driver product are the TV, declining market for monitor, battery management for power tool, various application and a combination for the new product such as a smartphone. We also tracked our expense regularly, monitor with our business operation to optimize the operations several times. Our cost of operation and monetize the asset of company. We hired some new engineer, purchased new tester, which has allowed us to have the newest technology in product but keeping in line with the revenue growth. At this time, I'd like to thank you for listening to our conference call. And I'll turn it back to the -- Dan. Dan, please?

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

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our 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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It sounds like you have confidence that Q2 will sort of be back to year-over-year growth. Could you just elaborate a little bit on that, is that coming from new products or are you expecting inventories to be low enough in Q1, so that things are kind of going to go back on track in Q2?

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

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Yes, Tori this is Jim. In fact we know where the excess inventories are. These were actually the few customers and that's not unusual because some of these customers have been on allocation for various types of products for some time, so it build up some inventory. That problem will be cured in Q1, that's about half the issue. The other half of the issue for Q1 comes from the weak sales in TV, which is not untypical for this time of year. And also we have fairly weak China market and part of that is driven by Chinese New Year. So this is pretty typical for the TV monitor market. We do see the design wins. We do see good forecasting out of our customers that resumes that group -- that growth as we move through Q2. And that's really driven primarily by some high-end TV designs that we have secured as well as some additional battery management design wins with very high-end customers. So we're quite confident moving back up in Q2.

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

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That's helpful, Jim. And for Sterling, Sterling you talked about some new products in battery management with the -- with some new digital front-ends. Could you elaborate a little bit on what that means for some of the market opportunity because if you have the ability now to manage cells, I think, you said all the way up to 24 cells, I'm not sure if I quote that correctly. But how does this sort of change the addressable market in battery management for you?

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

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We had -- we have a BMU driven by [step] machine early 2018. We move push to the market and gather quite popular acceptance. Now we have the new one, which is arm-based, which is in -- both Jim and I mentioned that. And that is arm-based because we see the opportunity, the power tool is part of the -- one of the IoT. They like to be connectivity. So major power tool company like to redesign their CPU. And we take this opportunity, we introduce our arm-based not a previous step-machine based. Of course, the arm based, the MCU base, the new DSE plus BMU plus the AD converter in [a e-flashing] side can support our customer to upgrade to a connectivity rating. So these are the opportunities we see. So back to your question, yes, we increased our certain content and that we convert ourselves or we upgrade ourselves for an original partially BMU function to the better management unit, BMU to the more complicated and again providing the state-of-art industry standard arm base and that enjoyed all the power tool -- the software tool and the ATV tool and to connect to WiFi and the Bluetooth that opened the door to enable our customer power tool that can because come out as a smart power tool. So this is the opportunity.

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

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That's very helpful. Last question for Perry. Perry, you -- Perry, is the cash flow breakeven still $18 million?

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Chuan Chiung Kuo, O2Micro International Limited - CFO, Secretary & Director [7]

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Yes. Still can be, originally -- well, yes. $18 million.

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Operator [8]

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Our next question will be from Lisa Thompson with Zacks Investment Research.

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Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [9]

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My first question is just to clarify what you said about SG&A in the fourth quarter, why it was exceptionally high and going back down?

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Chuan Chiung Kuo, O2Micro International Limited - CFO, Secretary & Director [10]

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Okay, yes, Lisa, this is Perry. In Q4, we did receive a lot of requests -- being placed up for a very short time demand and ship to other destinations. So we are -- actually, we spend around $200,000 to $250,000 more in logistics. And I expect that Q1 will be down to a regular area, and that we cannot manage it, at least our current vendors for the Q1. So the Q1, the SG&A as I guided, this will be -- SG&A will be back to the regular level.

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Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [11]

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Okay. I didn't quite get that. And going back to your breakdown of sales, what portion of your TV sales is the 4K to 8K? And as that increases, could that accelerate growth in TV as that becomes a bigger piece of the business?

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

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The answer to that is, yes. That will become a bigger piece of the business, particularly this year with the 4K. There is not enough content out in the 8K yet for that to be in a major growth mode. But the 4K market is now growing quite quickly. We have some very good design wins in both that and the HDR monitors that I mentioned. So we do see that driving revenue growth as we move toward the back end of Q2 and then mainstream in Q3. So we do see very good growth in the Q3, Q4 time frame, particularly out of the 4K TV.

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

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And so does -- by math does that then accelerate your growth? Is it big enough?

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

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Yes, it does. That along with we do have some additional battery management design wins that also come on strength as we moved into the Q3, Q4 time frame. And then Sterling and I both mentioned a little bit about the smartphone, tablet business. We also expect that to contribute in Q3, Q4.

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

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All right. And then just quickly on the arm-based products. So that goes into the Internet of Things stuff where you have devices that are connected to the Internet, right? So what industries are you targeting that for? Like who has interest in that right now? I know that -- I know you do the power tools, right, where you want to have to be able to locate them, if somebody steals them or where does that all go?

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

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Yes, that's correct and that will be one of the first applications we expect to go into production as a matter of fact. We may see some production in power tool right at the tail end of this year. But certainly next year, we are engaging with that business, in particular traceability of tools is a critical part of that activity.

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

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Okay, and what other things is out there? Or is that pretty much the first folks to come in?

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Sterling Du, O2Micro International Limited - Chairman of the Board & CEO [18]

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The potential could be extend to some solar -- or some even a [UPS sort out] there -- but connect. People can [collect the condition of] the device without really get into wireless connect, just like the power tool. But as Jim indicated, the power tool will be the first application and very critical for the -- for our customer.

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James Elvin Keim, O2Micro International Limited - Head of Marketing & Sales and Director [19]

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Right. Another one that we are seeing, 1 customer we expect also come up is in robotic vacuum cleaner.

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Lisa R. Thompson, Zacks Investment Research, Inc. - Senior Technology Analyst [20]

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Okay, that's kind of cool.

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James Elvin Keim, O2Micro International Limited - Head of Marketing & Sales and Director [21]

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Yes, we like it.

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Operator [22]

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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 [23]

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Thank you, everyone for your time and attention this morning. Please feel free to contact me at (408) 987-5920, at 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.

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Operator [24]

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