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O2Micro International Limited (NASDAQ:OIIM)

Q1 2013 Earnings Conference Call

May 1, 2013 09:00 ET

Executives

Scott Anderson - Director of Investor Relations

Perry Kuo - Chief Financial Officer and Director

Jim Keim - Head of Marketing and Sales and Director

Sterling Du - Founder, Chief Executive Officer and Chairman

Analysts

Tore Svanberg - Stifel Nicolaus

Vernon Essi - Needham & Company

John Shen - Sterne Agee

Operator

Good day and thank you for joining us today to discuss O2Micro's financial results for the first quarter of fiscal year 2013. If you would like a copy of the press release we issued this morning, please call Pamela Campbell at 1-408-987-5920 extension 8095, and we will fax 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 May 8, 2013 at 9.00 AM Pacific time by calling [1-888-203-1112] or 1-719-457-0820 passcode 9442190. Following the presentation by management and conference will be opened for questions and answers as time permits. Gentlemen, you may begin.

Scott Anderson

Hi, good morning and thank you for dialling into O2Micro's financial results conference call for the first quarter of 2013 ending March 31, 2013. This is Scott Anderson, Director of Investor Relations.

I would like to remind listeners that the discussion of 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 20-F Annual Filings, our Annual Report 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 same that you may hear in are dated information. The company assumes no responsibility to provide update to this information.

With me today are Perry Kuo, our Chief Financial Officer, our Head of Marketing and Sales and Director, Jim Keim; and Sterling Du, O2Micro's Founder, CEO and Chairman. After the prepared remarks from these gentlemen, the floor will be opened to your questions.

Now I would like to introduce Perry Kuo, CFO of O2Micro for a discussion of the financial highlights of the first quarter ending March 31, 2013. Perry?

Perry Kuo

Thanks Scott. We will now review our financial results for Q1 2013. Please note that financial results will be presented on a non-GAAP basis unless we say to you otherwise and our GAAP result is gross stock-based compensation expense, one-time charges, non-recurring GAAP and losses from discontinued operations.

Our full GAAP results are (inaudible) our press release that was issued earlier today. GAAP revenue in the first quarter of 2013 was $17.3 million. GAAP net loss in the first quarter of 2013 was $5.1 million and we enclosed our base compensation on $682,000, the non-GAAP net loss will be $4.4 million. GAAP net loss per ADS in the first quarter of 2013 was $0.17, non-GAAP net loss per ADS was $0.15.

Gross margin was 50% in Q1. The gross margin reflects the current revenue level and the product mix. R&D expense was $6.4 million or 36.8% of revenue. This amount excludes stock-based compensation expense of $183,000 in the quarter. SG&A expense was $7.0 million or 40.5% of revenue. This amount excludes stock-based compensation expense of $499,000 in this quarter.

Income tax was $230,000 in the first quarter and it is mainly based on the effective tax rate of each taxable location of the prior year. In Q1 2013 we repurchased [$775,937] ADS units at a cost of $2.47 million. Q1 2013 revenue by end market breakdown into the following percentages; Consumer was 35% to 40% of revenue. Computer was 35% to 40% of revenue. Industrial was 20% to 35% of revenue. Communication was less than 5% of revenue.

At this time, I would like to provide some additional information. O2Micro finished the first quarter with more than $88.8 million in unrestricted cash and short term investment. This represents cash and cash equivalent of $3.01 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q1 was $9.3 million. Our DSO is 47 days each in our target range of 40 to 60 days.

Inventory was $7.1 million at the end of the first quarter. This represents 78 days of inventory and the inventory turnover was 4.6 times in Q1. From a cash flow perspective, we generated $5.9 million cash outflow from operating activities in Q1. Capital expenditure was about $101,000 in the first quarter for IT and R&D equipment. Depreciation and amortization was $1.2 million in Q1. At the end of the first quarter of 2013, O2Micro had 613 employees, 55% of which are engineers.

At this time, I would like to provide our financial guidance for the second quarter of fiscal year 2013. 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 its probable announcement in the future.

O2Micro expects Q2 revenue to be up 6% to 12% sequentially. I would like to remind you that Q1 revenue included revenue related to our former eCommerce business of approximately $1.3 million. Product revenue from eCommerce is naturally above in our Q2 guidance. We are guiding that Q2 gross margin to be 50% plus or minus two percentage points. R&D expense excluding stock-based compensation should be $6 million to $7 million in Q2. SG&A should be $7 million to $8 million in Q2, excluding stock-based compensation expense.

Stock-based compensation should be in the range of $650,000 to $750,000 in the second quarter. 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 in the second quarter, including our sequential growth in the first quarter and our outlook for continued growth in the second quarter is a direct result of the investment we have made in our carefully chose growth drivers; General lighting, Intelligent Battery, Intelligent Power and Backlighting.

As a whole, this Power Management Product segment grew nicely in the first quarter and we expect to continue solid growth from all these areas in the second quarter. We are confident that our renewed focus, our core competency, high performance and our integrated project will drive continued growth and will lead to profitability in the near future.

Given the uncertain demand and the macro environment, we continue to aggressively manage cost. Our previously announced cost and expense reduction initiatives are tracking at or ahead of plan and we are actually resizing our organization to match anticipated revenue level.

We are also very confident in our ability to control cost further if may be required. And lastly, regarding our share repurchase program, we have been active in this program historically and we plan to be active going forward. At the end of Q1, we had $24.1 million remaining in our share buyback authorization. Returns to shareholders are very much on our mind and it will continue to be a focus in the future.

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

Jim Keim

Thank you, Perry. Good morning, everyone. Last quarter we stated that we see significant growth for our securities in 2013 and onwards as a result of our 2012 design win momentum from our array of new analogue power management products. In fact our new power management products enabled our growth in Q1 from the prior quarter and we are projecting a second quarter growth of 15% to 21% in our power management products.

This growth is a direct result of our spending approximately 50% of our R&D on new innovative products in 2011 and 2012. We expect to continue to see ongoing growth from new products, directly resulting from these major R&D investments in general lighting, backlighting, intelligent battery and intelligent power products.

Let’s quickly review highlights of each of these areas. First let’s discuss general lighting. In our last update, we announced that we had cumulatively shipped over 10 million general lighting units. Our rapid growth continues as does our industry leading patent portfolio are expanding. We work with most with most of the world's largest lighting companies as well as many new technology-based companies [those compliment] that O2Micro is rapidly emerging as a major supplier in the high growth LED based general lighting market.

These achievements in general lighting are accomplished by dedicated team of engineers and support staff that their innovative R&D activity is backed by intellectual property with our lighting group having been granted 52 patents with 967 clients in 2012 and an additional 15 patents with 279 clients in Q1 2013.

Our Free Dimming technology is now recognized worldwide and is already growing into volume production with industry-leading suppliers. As announced in our press releases, our Free Dimming product line now includes three step dimming as well as continuous dimming products. The product line features include integrated [mass] fit, 110, 224 universal lines input power factor correction circuitry for both isolated and non-isolated designs involving customers worldwide.

As a result new general lighting products are continuing to ramp in the higher production levels for LED lighting applications including AC to DC products for LED bulbs and T5 and T8 tubes, DC to DC for MR16 bulbs and street lighting products.

Besides general lighting, our other intelligent lighting product lines has positioned our LED products for TVs and monitors to low and single strength LED applications to high end multi strength 3D TV and high contrast ratio TV. We continue to be the industry leader in TV backlight applications with a legacy CCFL business being a minor part of our business.

We remain confident that we will continue to grow revenue in LED based products in our traditional markets as these markets continue to expand. Our intellectual property in both Asian and Western countries continues to strengthen our market leadership position and all lighting areas. We are continuing to file additional patents to extend the fleet.

Intelligent battery design activity continues to gain momentum based on our creative design methodology. Our growing revenue base is the result of our increasing design wins in tablets as well as industrial applications for power tools, robotic vacuum cleaners, UPS systems and light electric vehicles.

We also continue to see growing opportunities in communication devices with our patented [cooling] counter technology. Although the automotive market will be slow to ramp in the high volume, smaller e-vehicles continue to gain market momentum and our technology leadership is enjoying revenue growth.

Intelligent power products are also continuing to show increasing design wins and revenue growth opportunities despite the decreasing market for notebooks. Our platform design win momentum remains intact as the market shifts towards ultrabooks and tablets where we are investing heavily in new power management chipsets.

At the same time, we are continuing to expand our market position in power for traditional notebooks as design activity on next generation notebooks and ultrabook platforms remain strong. Our intelligent power products also continue to enjoy broadening market acceptance in both Intel and AMD based platform that includes our Highly Integrated SMBus Programmable, Multi-Chemistry Battery Charger controller providing complete battery charging control for single battery portable computer systems. It also features the hybrid power boost features to support the turbo boost mode of Intel CPUs.

To summarize our overall market activity, we continue to see a rapid expansion of design activity into new markets that includes all product areas [like] the Intelligent Battery, Intelligent Lighting and Intelligent Power. O2Micro is executing on the growth and diversification strategy both on product and technology leadership to the world's leading manufacturers.

At this time, I will turn the call over to Sterling Du for some additional remarks.

Sterling Du

Thanks Jim. Today we are pleased to report improved revenue levels have led to the sequential growth in our first quarter of 2013. We generated revenue of $13.3 million in the first quarter of 2013 an increase of approximately 3% from $16.8 million in the fourth quarter of last year. We reported a net loss of $5.1 million in the first quarter of 2013 compared to the net loss of $10.6 million in the last quarter of 2012.

We are encouraged that this condition has stabilized and has begun to improve since the beginning of 2013. We saw a meaningful number of recent [developments] used on our brands and the market share gains of which we believe will support our topline guidance growth for the second quarter.

I am very pleased with the growth in all our core intelligent product lines in Q1 and we will continue to innovate and carefully investing [orders] to further adopting of our advanced power management product in a market we serve through the clear competitive advantages.

One of our greater strength as a company is start with a few strong Indonesian presence in the echo structure system to support our large and growing customer base. O2Micro is a global leader in a market we serve. We have a strong presence in Asia, which is the heart of the global electronics manufacturing industries. Due to the close proximity of our customer base we were able to provide timely and a comprehensive engineering and customer support.

We invest heavily to emerge as an international supplier to many of the world's largest consumer computer electronic companies. Our management team is diversified and experienced and we believe we have one of the strong international infrastructure support structure in the industry today to force our future growth. We are very proud of our dedicated international sales and support teams and we believe our strong presence in China and Asia will help foster our growth in the near future.

In 2013, we want to focus the majority of our development resources on priority chosen growth drivers including the LED general lighting, street lighting, management and power management by implementing our strategies. We are confident in our ability to drive significant growth in the future. We remain focused on using new product innovation to drive our growth to significant design win activity and market share gains.

As we move into second half of 2013, we will continue to develop new innovations to drive adoption for LED, general lighting applications, address the market for increased power consumption in tablet, notebook and ultra notebook and lastly continue to penetrate into large addressable battery management market for power tool, [technical] and hybrid vehicle among others.

Our company is well positioned with capital efficiencies as modelled, strong secular growth drivers and improved earnings strategy in place to return to profitability in the near future. We are also in process of conducting detailed review of our entire supply chain with a particular focus on vendor consolidation the use of enhanced testing methods in order to streamline our entire design and test process. We believe these measures will lead to further cost reduction going forward.

We believe that all our core power management product lines especially the driving market for TV will improve in 2013, revenue from previous year technology now represent a minimal portion of our overall business and revenue from our new products and exceeding the decline from the previous generation technology in 2012.

As we aim that our June quarter, our expectations are playing out. All the activities and the momentum has been strong. However, we will continue to remain cautious due to slow visibility in customer resurgence to hold our inventory.

In closing, I am excited about our demonstrated growth across all our core power management power lines, including general lighting, backlighting, intelligent power and intelligent battery and our new financial model based on the high performance analogue. We look forward to provide you update for our progress throughout the remainder of the year.

At this time, I would like to thank you for listening our conference call and turn it back to Scott. Scott please.

Scott Anderson

Thank you, Sterling and operator at this point, we would like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Tore Svanberg with Stifel.

Tore Svanberg - Stifel Nicolaus

Yes. Thank you very much. Few questions. First of all it sounds like you are having a pretty solid momentum in LED lighting, can you tell us approximately how big this business is at this point or how big as a percentage of revenue it could be this year?

Perry Kuo

We are really not disclosing that figure at this point in time, but it is beginning to continue while there it is continuing to grow quickly and I think as we move out the end of this year and end of next year, it will become a growing factor in our growth going forward.

Tore Svanberg - Stifel Nicolaus

Very good and it also sounds that you are seeing some design win tractions especially in the ultrabook market. Could you may be comment a little bit on the timing of those design wins. I mean is this going to be served at the second half ramp given the market ramping there or is this something that may even come earlier.

Jim Keim

The ultrabook, the previous year's ultrabook we only have several positioning in DC to DC and charger and the new ultrabook, going to be released and we continue to secure one DC to DC second charger and number three we also have LED lighting position in the new ultrabook.

Tore Svanberg - Stifel Nicolaus

Very good and a question for Perry, Perry do you have an estimate of what the cash outflow is going to be in Q2? Is it going to be above the same as Q1 or slightly lower?

Perry Kuo

Yes, you are right. Cash outflow in Q2 could be lower and could be in the area of $3 million to $3.5 million in April.

Tore Svanberg - Stifel Nicolaus

Very good and as far as the linearity of bookings that you have seen lately, can you talk a little bit about that and may be how you feel about your backlog going into the June quarter?

Perry Kuo

We've seen good linearity of bookings coming out of the tail end of Q1. We are in a very reasonable backlog position and that's one of the reasons we feel comfortable with the guidance that we have given.

Tore Svanberg - Stifel Nicolaus

Very good and last question on gross margin. As far as gross margin coming back to your long term model, is that going to be a revenue level dependent meaning you have to get to a certain revenue level to get back there or could you even get back there on mix?

Perry Kuo

Yes, I think it is important sector to our gross margin. One is revenue label and the second to the consolidation of the vendors improvement in our sectors and also some testing means as Sterling just mentioned. We believe that in the second half of this year we will continue to improve our cost structure, so that also we improve our product mix through the cost improvement.

Also for these two we are still increasing the revenue and also our product mix a constant reduction improvement. I can anticipate that the gross margin will continue to improve 50% and may go up to certain midpoint to between 50% to 55% area.

Tore Svanberg - Stifel Nicolaus

Very good. Thank you very much.

Operator

We will take our next question from Vernon Essi with Needham & Company.

Vernon Essi - Needham & Company

Thank you very much for taking my questions. I was wondering Perry and I think that you had some of this commentary in your prepared remarks. I don’t see anything in the release specifically, but could you go over the details again of the share repurchases you made in the first quarter and how much of this outstanding are remaining in the buyback?0

Perry Kuo

In Q1 2013, we repurchased [775,937] ADS.

Vernon Essi - Needham & Company

Okay.

Perry Kuo

And our remaining authorization is $24.1 million.

Vernon Essi - Needham & Company

That is helpful and just as a follow-on to Tore's questions and in terms of the LED side it sounds like you are not going to give us too much granularity on the numbers there, but where are you outlining this in your revenue segmentations, so we know what to look for in terms of growth? Is that in your industrial or is that in the consumer segment?

Perry Kuo

In our lighting as currently one fourth is in industrial area and three fourth is in consumer area.

Vernon Essi - Needham & Company

Okay. And then one other thing and I know you may have discussed this, but there is a lot of information on the prepared comments, but the computing area grew sequentially and we are sort of in the midpoint of which you usually give us your range and you saw some strength in the first quarter, could you dive into that a little bit more and I apologize if you had mentioned that early. What was the reasoning for why there was strength there? It assumes like a lot of your peers have not been performing well in that segment.

Perry Kuo

Well I think there are several factors in that Vern. First of all as we mentioned in the past, we've had more complete product portfolio to sell into the notebook tablet area. We've been diligently working very hard with both AMD and INTEL to basically better position ourselves into new designs. So we have captured more designs and we have growth market share there.

Vernon Essi - Needham & Company

Okay. So this is the result obviously, just simple share gains so to speak.

Perry Kuo

That is correct and we feel we are much better positioned as well going into the tablet market which is growing and we think we should have growing revenue base there.

Vernon Essi - Needham & Company

Okay. And then lastly Perry, sort of more of a strategic question, I know you've made for about I guess what 18 months now commentary about your flexibility on the cost front. You've started to dial cost down to speak and right size the company for sort of a different revenue footprint. How should we look about -- look at that sort of going forward and the extent that you can give us any comfort level if you aren’t seeing much revenue growth or say you wind up having kind of a flattish situation going forward, what might the expense structure look like and sort of what are you prepared to do I guess and I know it's not an easy question to answer, but any color on that would be appreciated.

Perry Kuo

Okay, I -- first of all thank you. We like to focus on the growth first and we like to continue to support our growth driver. As I mentioned, we have several different growth drivers. We are not only seeing growth products coming, we have several products in different areas, different working globally with different key brains. So we need a different supportive team to support global companies from the headquarter to the OEM change that would all be changed.

So at least we made a lot of the infrastructure to support. So we would like to focus on the growth -- on the growth in the future. So at this moment, for the short term, we would like to keep our OpEx in the area of $14 million plus minus and we will focus on the priority of the project to support the customer demand -- key customer demands and also we like to monitor and then to adjust ourselves to the right way and insight based on the future macro environment, which we cannot control.

But however, we like to control -- we like to maintain, keep this level to achieve the breakeven point as soon we enter market coming back, so to at least answer your question and add some color to it.

Vernon Essi - Needham & Company

So I guess if I were to kind of revisit and restate sort of some of the things you said there, obviously you are looking to achieve a breakeven at some point, but I guess if I look at your guidance and you are still looking for a negative cash flow next quarter you are obviously anticipating some level of market lift if you will in the back half of 2013 aside from your share gains. I assume that presumption what you are working on right now.

Perry Kuo

Right, right.

Vernon Essi - Needham & Company

Okay. Okay. All right. Thank you. That is helpful.

Sterling Du

Thanks Vern.

Operator

We will take our next question from Andrew Huang with Sterne Agee.

John Shen - Sterne Agee

Hi, this is John Shen in for Andrew. Thanks for taking the question. I was wondering how many weeks of inventory are currently in the channel?

Perry Kuo

Seeing our different application, I would probably estimate this in the area of the four to six to being lower.

John Shen - Sterne Agee

And for the breakeven point, is it still in the $23 million range for revenue.

Perry Kuo

No, in the cash breakeven -- cash breakeven based on current Q2 status, the cash breakeven point will be in the area of $25 million to $26 million and the breakeven point will be in the area of $28 million to $29 million, similar -- same as I reported last quarter.

John Shen - Sterne Agee

Got it. So there was -- was there a change from the cash breakeven point from as per the divestiture?

Perry Kuo

Yes we have lowered now from the Q4 from the $30 million level down to $25 million level.

John Shen - Sterne Agee

Got it. Thank you very much.

Operator

(Operator Instructions) And there are no further questions in the queue. I would like to turn the call back over to Scott Anderson for any closing remarks at this time.

Scott Anderson

Thank you all for your attention this morning. Please feel free to contact me at area code 408-987-5920 extension 8888 with any follow-up questions. So have a good day and thank you again for your attention. Good bye.

Operator

That does conclude today's conference. There will be a replay available until 9.00 AM Pacific time on May 8, 2013 by calling 1-888-203-1112 or 1-719-457-0820, passcode 9442190. Thank you for your participation.

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