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OIIM: Q3 As Expected; Q4 Should Show Slight Improvement

By Lisa Thompson

NASDAQ:OIIM

READ THE FULL OIIM RESEARCH REPORT

O2Micro (OIIM) reported Q3 2018 revenues of $16.8 million, up 10.6% sequentially, and 8.3% year over year and within the range of guidance of up 6-14% sequentially. Guidance for revenue for the fourth quarter of 2018 is sequentially flat plus or minus 5% from Q3 2018. The midpoint in revenue guidance would result in revenues being up 11% from a year ago. Management believes that its business is no longer seasonal as it has diversified its product line away from TV dependence. If Q1 2019 is then sequentially flat with Q4 2018, that would show year over year growth of 19%, or four quarters in a row of accelerating revenue growth. The nine months of 2018 showed 2.5% revenue growth over the first nine months of 2017.

Gross margin was 50.4%, down sequentially from 52.1%, and year over year from 50.3%, due to product mix. As expected, the company had a higher level of spending for R&D in the quarter due to a push to complete new battery management products. It spent $5.2 million in the quarter versus $4.7 million last quarter and in the year ago quarter. In Q4 the company expects R&D costs to go back down to previous levels. Operating expenses in the quarter were $10.2 million versus $9.5 million last year, and $9.7 million in Q2 2018. SG&A spending was virtually flat with last year and last quarter. Operating losses in Q3 were the same as last year at $1.7 million despite higher revenues and higher gross margin due entirely to increased spending.

In the quarter the company had an unrealized loss of $1.7 million on a long-term investment. This unrealized loss was from ownership of the stock of Excelliance MOS Corp. (5299.TWO). From June 30 2018 to September 30, 2018, the stock declined 7.6% or ten points. Since September 30, 2018 the stock has declined another 40 points. If the stock stays at that price we expect the unrealized loss to be much more than that in Q4.

The company reported GAAP net loss of $3.5 million versus a loss of $1.4 million last year. This yielded fully diluted GAAP loss per share of $0.13 versus a loss of $0.05 a year ago. Non-GAAP net loss was a loss of $1.3 million, versus a loss of $1.1 million last year. The company reported a non-GAAP EPS loss of $0.05, versus a loss of $0.04 last year.

On September 30, 2018, the company had $41.2 million in cash and equivalents (or $1.58 per ADS), up $375,000 sequentially. During the quarter EBITDA was a negative $965,000. We expect that loss to go down based on reduced spending on R&D matched with similar revenues as in the Q3 quarter.

The company believes it can be EBITDA positive between $17 million to $19 million in quarterly revenues, and profitable between $19 million to $21 million in revenues.

Business Units

Intelligent lighting saw a significant increase of backlighting orders in Q3 and increasing business projections for 2019. The shortage of MOFSET has spurred the adoption of its line of backlighting products with integrated MOSFET. Also higher-end TVs and monitors are adding more highly integrated application-specific devices, including O2Micro’s local dimming products. The market for televisions continues to improve, especially at the high end. According to Futuresource Consulting, 2018 will be the year 4K UHD moves mainstream and will account for nearly 50% of all TVs shipped worldwide by year-end. It believes that by 2022, the installed base of 4K UHD TVs will be three times larger than today, achieving 37% global household penetration. Overall, the company expects the Intelligent Lighting segment to remain stable with modest growth.

Battery management is the company’s second largest sector and fastest growing as the industry continues to move to lithium ion batteries. Customers selling products such as e-bikes, e-vehicles, and vacuums and UPS power supplies are making the business less cyclical than when most of the product went to power tools. The company is providing the industry with more cost effective products, as well as more complex patent protected products for high-end solutions. More customers are being attracted to its proprietary cell balancing methodology.

Power Products continue to expand its product line, increase its design wins, and serve a broader array of customers. O2Micro’s new power products have begun to ramp into production through Q3 and Q4, however legacy products suffered a shortfall as there were serious shortages to process the products at several of its customers. The company had further design wins in smartphones and tablets for its new charger IC, on-the-go charger booster, and accurate gas gauge. The company expects opportunities for new business to increase after Apple announced a deal with Dialog Semiconductor as its customers seek and alternative to an Apple controlled supplier.

Company Has Significant Upside If It Can End Cash Burn

The company trades at an enterprise value of $2 million. 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. Now it looks like these shortages have ended and business has been mostly normalized. At the end of Q3 2018, the company had $41.2 million (or $1.58 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 3.4 million shares of stock in Excelliance MOS. 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.

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