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OIIM: O2Micro Cuts Expenses After a Weak Q1

Zacks Small Cap Research

By Lisa Thompson



O2Micro (OIIM) revenues for Q1 came in at $12.8 million inline with its downwardly revised guidance of $12.5 million to $13 million. This is a decrease of 10% compared with last year, and 23% sequentially. Weakness in TV sales in China continues, but demand has been picking up as the inventory correction from the wafer shortages has been mostly resolved. O2Micro still expects revenues to improve in the latter half as design wins convert to ramping production, particularly in smartphones, and TV demand stabilizes.

Guidance for revenue for the second quarter of 2019 was sequentially flat to up 8% from Q1 2019, the midpoint of which is $13.3 million, which would be down 13% over last year. O2Micro still expects to see improvement in latter half of 2019. The second half usually accounts for 60% of TV sales and this year the company will see a production ramp for 8 cell phone designs with hopefully many more to follow if successful. As management said it is such a small fish in the large smartphone pond, even small penetration can produce large revenues for the company. Sales into the smartphone market will initially have gross margins below the corporate average of 50% but will improve with volume.

The company reported a GAAP net loss of $3.8 million versus last year’s gain of $7.2 million last year. This yielded a GAAP loss per share of $0.15 versus a gain of $0.28 a year ago. Non-GAAP net loss was a loss of $3.5 million, versus a loss of $2.2 million last year. The company reported a non-GAAP EPS loss of $0.13, versus a loss of $0.08 last year. In Q1 2019, the company repurchased 119,769 ADS units at a cost of $194,000.

On March 31, 2019, the company had $35.2 million in cash and equivalents (or $1.33 per ADS), down $3.3 million sequentially. During the quarter EBITDA was a negative $3.1 million. Net cash used in operating activity was $4,524,000. Capital expenditures was about $738,000 in the first quarter for R&D,
information technology equipment, and tester upgrades.

The company has lowered its breakeven point. It believes it can be EBITDA positive between $16 million to $18 million in quarterly revenues (a reduction of $1 million), and profitable between $18 million to $20 million in revenues.

O2Micro continues its extensive R&D efforts and in Q1 it was awarded three new patents in battery management: US patent number 8,922,218 Detection circuits for batteries, US patent number 9,291,680 Circuits and methods for measuring a cell voltage in a battery, and US patent number 9,368,981 System and methods for current balancing.

The company is depending on a better second half due to higher sales of TV components as well as an increase in smartphones sales as previous design wins ramp into production volumes. If smartphone customers like the results, we expect more usage in future products and revenues from these large customers that could be very meaningful to tiny O2Micro. It currently has four design wins in initial production involving three key customers and four more design wins in prototype production that includes two additional customers. This includes products that are going into phones for brand name carriers. By Q3, the company expects to have at least eight design wins in production, with as many as eight key customers actively using or designing its products into their systems. These design wins involve chargers for applications including: high powered 2-cell charging, IoT product, wearables, and express charging as well as gas gauges and complex integrated custom product. So far they have been taking market share from Texas Instruments in high-end smartphones, MediaTek and Qualcomm for charging, and Dialog for DC/DC product. If all goes well, we should begin to see indications by year-end that these major customers will begin to use product in more of their devices.

The company trades at an enterprise value of $4 million. At the end of Q1 2019, the company had $35.2 million (or $1.33 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 we believe it is now worth at least $7 million. Plus it also owns other real estate in China and Taiwan. Also on the balance sheet are long-term investments in other companies, including approximately 2.2 million shares of stock in Excelliance MOS (worth $6.9 million.) The company has a very high liquidation, as well as acquisition, value. Activists have 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.

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