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OIIM: Company Lower Guidance as Inventory Correction at Customers Continues

By Lisa Thompson



O2Micro (OIIM) announced that it would miss its revenue guidance for Q1 2019, which had been a range of down 12%, plus or minus 4% sequentially, with a midpoint for revenues of $14.7 million, which would have been be up 4% over last year. It now has lowered and tightened that guidance to approximately $12.5 million to $13 million in revenues, while keeping gross margin guidance at 50.0% to 50.5%. As a result we are lowering estimates. Weakness is mainly in TVs but all products, such as power tools, that experienced wafer shortages last year have been affected. Due to the shortages, customers over ordered as they were on allocation and once supply caught up to demand, they were left with too much inventory. O2Micro claims that customers are now maintaining lower than average inventories. O2Micro still expects revenues to accelerate in the latter half as design wins convert to ramping production.

The company trades at an enterprise value of $688,690. Last year the company looked as if it had turned the corner and was approaching profitability but panel shortages for TVs nixed that progress and the valuation of the company slipped. Panel shortages ended but now the company is suffering from an inventory correction in the industry due to the end of shortages of wafers. At the end of 2018, the company had $38.6 million (or $1.49 per ADS) in cash and equivalents, no debt, and valuable real estate in China and California. In California it owns a 37,180 square foot building where it has its USA operations, which was bought for $4.6 million in May 2004 and believe it is now worth at least $7 million. Plus it also owns other real estate in China. Also on the balance sheet are long-term investments in other companies, including approximately 2.8 million shares of stock in Excelliance MOS (worth $3.9 million.) The company has a very high liquidation as well as acquisition value. Activists had tried to encourage a transaction with an acquirer, but the company has no interest in a sale and due to restrictions, it is difficult to force one.

Were we to use the average enterprise value to trailing twelve-month sales of its peers of 5.4 times and apply it to OIIM’s trailing 12-month $62.7 million revenues, we would calculate an enterprise value of $341 million. Adding to it $38.6 million in cash gives us a market cap of $380 million or $14.28 per share. We believe that once the company shows sustainable revenue growth and cash breakeven, the market should afford it a valuation closer to this price.

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