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O2Micro International Limited (NASDAQ:OIIM)

Q2 2013 Earnings Call

July 31, 2013 09:00 AM ET

Executives

Scott Anderson - Director of IR

Perry Kuo - CFO and Director

Jim Keim - Head of Marketing and Sales and Director

Sterling Du - CEO and Chairman

Analysts

Tore Svanberg - Stifel Nicolaus

Andrew Huang - Sterne Agee

Vernon Essi - Needham & Company

Operator

Good day and thank you for joining us today to discuss O2Micro's financial results for the second quarter of fiscal year 2013. If you would like a copy of the press release we issued this morning, please call Pamela Campbell at 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 August 7, 2013 at 9.00 AM Pacific time by calling 1-888-203-1112 or 1-719-457-0820 passcode 1291083. Following the presentation by management, the conference will be opened for questions and answers as time permits. Gentlemen, you may begin.

Scott Anderson

Hi, good morning and thank you for dialing into O2Micro's financial results conference call for the second quarter of 2013 ending June 30, 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 statements made herein are dated information. The company assumes no responsibility to provide update to this information.

With me today are Perry Kuo, our CFO and Director; 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 open to your questions.

Now, I would like to introduce Perry Kuo, CFO of O2Micro for a discussion of the financial highlights of the second quarter ending June 30, 2013. Perry?

Perry Kuo

Thank you. We will now review our financial results for Q2 2013. Please note that financial results will be presented on GAAP basis unless we state otherwise. The non-GAAP result is gross stock-based compensation expense, one-time charges, non-recurring GAAP and the losses from discontinued operations.

Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the second quarter of 2013 was $18.7 million. GAAP net loss in the second quarter of 2013 was $4.4 million and we enclosed our base compensation on $640,000, the non-GAAP net loss will be $3.8 million. GAAP net loss per ADS in the second quarter of 2013 was $0.15, non-GAAP net loss per ADS was $0.13.

Gross margin was 51.2% in Q2. The gross margin reflects the current revenue level and the product mix. R&D expense was $6.6 million or 35.1% of revenue. This amount excludes stock-based compensation expense of $174,000 in the quarter. SG&A expense was $7.4 million or 39.5% of revenue. This amount excludes stock-based compensation expense of $466,000 in this quarter.

Income tax was $224,000 in the second quarter and it is mainly based on the estimated effective tax rate of each taxable location. In Q2 2013, we repurchased $132,442 ADS units at a cost of $3.55 million. Q2 2013 revenue by end market breakdown into the following percentages; consumer was 40% to 50% of revenue. Computer was 30% to 40% of revenue. Industrial was 15% to 20% of revenue. Communication was less than 5% of revenue.

At this time, I would like to provide some additional information. O2Micro finished the second quarter with more than $82 million in unrestricted cash and short term investment. This represents cash and cash equivalent of $2.88 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q2 was 11.3 million. Our DSO is 50 days, is in our target range of 40 to 60 days. Inventory was 7.5 million at the end of the second quarter. This represents 24 days of inventory and inventory turnover was 4.9 times in Q2.

From a cash flow perspective, we generated 3.3 million cash outflow from operating activities in Q2. Capital expenditure was about 271,000 in the second quarter for IT and R&D equivalent. Depreciation and amortization was 1.2 million in Q2. At the end of the second quarter of 2013, O2Micro had 600 employees, 56% of which are engineers.

At this time, I would like to provide our financial guidance for the third 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 it with the profit announcement in the future.

O2Micro expects Q3 revenues to be straight plus or minus 5% sequentially. We are guiding the Q3 gross margin to be in the range of 50% to 52%. R&D expense excluding stock-based compensation should be 6 million to 7 million in Q3. 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 600,000 to 700,000 in the third 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 third quarter.

In closing, our sequential growth in the second quarter is a direct result of a combination of the investment we have made in our carefully chosen growth drivers; General lighting, Intelligent Battery, Intelligent Power and Backlighting, and significant market share gains.

We are confident that our renewed focus on our core competency, high performance in integrated circuit will drive continued growth and meet to profitability in the future. We are in the process of completing our supply chain management review and we expect to realize additional improvement to our gross margin profile in future quarters.

Given the uncertain demand and the macro environment, we will continue to aggressively manage cost. We are also very confident in our ability to control cost further as may be required. 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 Q2, we had 20.5 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.

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 noted that our new power management products enabled our growth in Q1 from the prior quarter and projected a second quarter growth of 15% to 21% in our power management products. In fact, we were able to achieve the mid-range of this growth in our power management products in Q2.

As we face difficult market conditions entering Q3 in notebook, monitor and TV, we expect to see an increasing proportion of our revenues from new products, directly resulting from our major R&D investments in general lighting, intelligent lighting, intelligent battery and intelligent power products.

Let’s quickly review highlights of each of these areas. In our last update, we announced that we accumulatively shipped over 10 million general lighting units. This growth continues in Q2 as does our industry leading patent portfolio. Our expanding work with most of the world’s largest lighting companies as well as many new technology based companies makes us confident that O2Micro is rapidly emerging as a major supplier in the high growth LED based general lighting market.

These achievements in general lighting were accomplished by a dedicated team of engineers and support staff. Their innovative R&D activity is backed by intellectual property with our lighting group having been granted 52 patents with 967 claims in 2012 and an additional 22 patents with 408 clients in the first half of 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 now includes three step dimming as well as continuous dimming products. The product line features include integrated mosfet, 110V - 220V, universal line input power factor correction circuitry for both isolated and non-isolated designs involving customers worldwide.

Applications include AC to DC product for LED bulbs and T5 and T8 tubes, DC to DC for MR16 bulbs and street lighting. Besides general lighting, our other intelligent lighting product lines has positioned our LED products for TVs and monitors from low end single string LED applications to high end multistring 3D TV and high contrast ratio TV. We continue to be the industry leader in TV backlight applications with the 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 market 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 and 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 increasing design wins in tablets as well as industrial applications for power tools, vacuum cleaners, UPS systems, Ebike, and other light electric vehicles.

We also continue to see growing opportunities in communication devices with our patented (inaudible) counter technology. While the automotive market is 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 win 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 and 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. This 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, notably intelligent battery, intelligent lighting and intelligent power. O2Micro is executing on the growth and diversification strategy built on product and technology leadership, deliver one 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 I am pleased report improved revenue levels that led to our second consecutive quarter of sequential growth in 2013. We generated revenue of $18.7 million in the second quarter of 2013, an increase of approximately 8% from $17.3 million in prior quarter. We report a GAAP loss of $4.4 million in the second quarter of 2013 compared to the GAAP net loss of $5.1 million in the first quarter of 2013.

We saw a meaningful number of recent design win, new startup ramps and significant market share gains in the quarter. I am very pleased with the growth in all our core power management product lines in Q2 and we will continue to innovate and carefully invest in order to spur the adoption of advanced power management products in the market we serve. Specifically I am pleased to announce that we realize significant design win in our battery business of power tool with major manufacturers and several key charger design wins for ultrabook market recently.

We expect this design win to translate into meaningful revenue in future quarters. Additionally we believe that we have improved our market share in our backlighting business due to the strength of Chinese TV manufacturers versus Korea manufacturers as our attach rate are higher with Chinese manufacturers. O2Micro has also gained market share in our battery (inaudible) power tools and power management business in ultrabook and tablets market. Share gains in this market and the increased customer adopting our product are based on power technologies, high power performance efficiency, ease of design and our local customer support.

Moving to the second half of 2013, we plan to focus the majority of development resources on our priority chosen growth driver which include LED general lightings, backlightings, battery management and power management. By implementing this strategy, we are confident in our ability to judge significant growth in the future. We remain focused for using new product innovation to drive our growth through significant design win activities in the market share gains.

We have very experienced employees; we have participated in a high performance analogue market for many years. There are a lot and (inaudible) opportunity where we can leverage our solid analogue design expertise with our competence in providing our customer with a far major solution to meet specific requirements.

O2Micro has had a long history of innovation by bringing patent technologies to the marketplace including DC/DC converter, featuring Constant-Ripple-Current technologies. LED controller IC for general lighting featuring our patent free dimming technology and a highly integrate mixed signal IC design with Cool Charge also referred to narrow BD Charger technology. This differentiation makes O2 stands out on comparative and one which we believe will allow us to carve our meaningful market share in a high performance analogue mix signal segment going forward.

Our LED general lighting business is going significantly and we expect this business to increase throughout 2013 and into next year. We will continue our strategy to optimize the core structure including review, our entire supply chain, combined purchase power and a vendor consolidation in general lighting in order to meet the requirement of customers, especially in Chinese market, in addition to the active design win of business (inaudible) Korea, Japan and U.S. marketplaces.

In closing I am excited about our demonstrated growth across all our core power management and product lines, including general lighting, backlighting, intelligent power, intelligent battery and our new financial model based on high performance analogue. We look forward to providing you update on our progress throughout the second half of the year. At this time I’d like to thank you for listening to our conference call and I turn back to Scott. Scott, please.

Scott Anderson

Thank you, Sterling. 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

First question, I was hoping if you could talk a little bit more about the outlook for Q3, what are some of the puts and takes and especially how do you see each of your end-markets performing in the September quarter, thank you.

Sterling Du

The key issue for Q3 is really lack of visibility, we are seeing a great hesitancy from customers to place backlog. At this point, we will need backlog filled for September, we do expect that but nevertheless our customers are very hesitant to place backlogs. We do see weakness in notebook as we mentioned, there is certainly softness in monitor as well as TV, some have projected that they expect the TV market to recover but we have really not seeing this as of this point. So the real key issue is just having customers come forward and put backlog in place but it’s very poor visibility at this point, Tore.

Tore Svanberg - Stifel Nicolaus

Very good and if we look at the notebook market, Intel is coming out with a new architecture, and we'll see some unit growth there potential in second half of the year, should we think of O2Micro as being a beneficiary of the Haswell architecture or is your share fairly constant between the previous and the new generation?

Perry Kuo

Yes, the Haswell, the new architecture is going to have more suitable content for O2 compared to the previous generation and we also happy to see the future of CPU architect, we also have increasing exposure to the playphone (ph) developing for the future beyond on Haswell. So in addition to Intel, we also like to mention, we also have quite a partnership with AMD and AMD also have quite meaningful exposure to the low end commodity and consumer-centric computing play which is we are also pleased to work with AMD. So we providing both solutions for the Intel and AMD and we are happy to see our certain content continues not only sustain but increased.

Tore Svanberg - Stifel Nicolaus

Very good and you mentioned the LED general lighting business continues to grow, could you give us a sense of how big that business has become at this point and could you also elaborate on where your penetration has been so far regionally? My understanding it’s primarily Japan but if you could talk a little bit more about the dynamics there that would be great. Thank you.

Sterling Du

Well fundamentally it is more than Japan we in fact feel we have done worldwide penetration at this point we are engaged with many of the world majors beyond just prototype stage we are moving into production nicely. We do see many of the majors using a number of what we would call ODM. Most of those are China-based ODMs and we feel that we are very well positioned with those. The business does continue to grow and expand and I think as we move towards the end of the year here we can give you a better flavor of the first tonnage. At this point we would prefer to keep that proprietary.

Tore Svanberg - Stifel Nicolaus

The last question for Perry, Perry I think you mentioned at the beginning that you are looking into your supply chain seeing if you can find some cost savings. Does this mean you are now giving up for new higher gross margin targets going forward?

Perry Kuo

I see we will continue to improve the gross margin by the new vendor system cost improvements here so I would like to mention, I just mentioned earlier that we expect the gross in the gross margin so that cost now progressed. Another key factor to the improvement of the gross margin is to outgrow our yield improvements to the total reps.

Operator

And we will now go to Andrew Huang from Sterne Agee.

Andrew Huang - Sterne Agee

Just another question on LED lighting I am curious if you have seen kind of any trends towards maybe a strategic shift from the larger lighting companies or is it still very, very fragmented?

Sterling Du

Could you repeat that Andrew there was a little bit of noise on the line right during a part of your question?

Andrew Huang - Sterne Agee

Sorry yes my question was when you look at your business are you seeing any trend towards larger lighting companies or is it still very diversified?

Sterling Du

Well it remains very diversified in the market and we really have seen some signs of some consolidation in the market and I think as it goes forward we will continue to see that because there are so many companies trying to participate in the business. But I think we will get a better feel of that as we move through the end of the year and on into 2014.

Andrew Huang - Sterne Agee

And I think you mentioned earlier that when you do get this with these lighting companies that you are working primarily with the ODMs in China. So is it the ODMs that are typically specifying the drivers or is it the end customers or the manufacturer or the OEM that’s satisfying the driver?

Sterling Du

Well basically the production is done in China but most of the upfront work is really done with the OEMs we spend a lot of time with OEMs and they in most cases are closely controlling the manufacturer certainly watching the quality issues that's very, very critical to them. So at this point I'd really say that the bulk of the work it’s done at the OEM level.

Andrew Huang - Sterne Agee

Okay and then just one last question on lighting if you don’t mind. I cover a couple other companies your competitors that also participate in lighting and some of them pushed energy efficiency and then some of them pushed dimmer compatibility. So I am just curious what you see in the marketplace as being more important?

Sterling Du

It varies from OEM to OEM and the area of the market in which they are taking their product for some efficiency is very important and I would say that efficiency as well as quality are two of the most critical areas. But as we move forward we also see many looking at how they differentiate their products in the marketplace.

Operator

We will now go to Vernon Essi from Needham & Company.

Vernon Essi - Needham & Company

Thank you for taking my questions. Perry a lot of financial questions here and I apologize I needed to just revisit the data points on your share repurchase. could you run through that again and it sounds like you have about 21 million remaining if I am correct?

Perry Kuo

20.5.

Vernon Essi - Needham & Company

Okay.

Perry Kuo

20.5 million remaining.

Vernon Essi - Needham & Company

And how many shares did you repurchase in the quarter?

Perry Kuo

1,320,454 ADS.

Vernon Essi - Needham & Company

That’s an accurate number that’s okay thank you. I guess going forward, looks like you had about $3 million cash burn on the operation side. Your next quarter looks to be somewhat flattish on a profitability basis or loss basis. Do you anticipate sort of a similar cash burn level?

Perry Kuo

Yes, similar. Yes, go ahead…

Vernon Essi - Needham & Company

I was going to also ask if you could also expand on the free cash flow, if you have any CapEx movements or anything that might offset that.

Perry Kuo

CapEx, probably 100,000-200,000 to renew IT R&D and this is the major, while others are minor.

Vernon Essi - Needham & Company

So there is no, there is going to be no capital investments that you see in the second half of the year. And also just wondering I know you went through sort of a right sizing exercise. I think the thought process behind that which you’re going to have a little bit revenue expansion going into the back half of this year and it seems like we’re sort of getting in to kind of a flattish sort of pattern here. And I am noticing, for instance, that the SG&A line hasn’t really kicked down as much as R&D obviously it’s where you’re pulling most of the customers on the engineering side.

But, I’m just sort of curious. Should we anticipate on an ongoing basis SG&A to sort of be in the same frequency? And then if you just expand upon that also why hasn’t it gone down more, I mean, on a relative basis to the top line, it seems to be operating relatively higher and I would think there would be some level of commission content what not that’s more tied on a variable basis to the revenue line.

Perry Kuo

Actually, in Q3-Q4 time frame, we continue to manage the cost and i.e. spend less so we will continue to reduce the OpEx by 300,000 to 500,000 down from Q2. For the structurally change there is more but we still thing that we are in a very good design wins and we need to provide infrastructure China country wise and also region wise to support (inaudible) customer and also China customers in different sites to support different application from LED lighting, general lighting, big lighting and also battery. These are all different customers in notebook. And this actually offers more wider (inaudible) to grow we are not one IC company. So that we have different teams dedicated. As Jim mentioned, we have different dedicated team to support our customers. So we win a lot of target by providing better support to our customers in this high performance area. At this moment, we are okay with this label. However, as I mentioned, if the macro economy however some happen, we need to the cost reduction, cost management and we will do.

Vernon Essi - Needham & Company

Okay, and then finally Jim you had some commentary and I apologize, I missed. I think, you gave statistic out of our power management in terms of maybe a percent of revenue or something along those lines. But could you just discuss a little bit more in depth, what are sort of your, if you were to say, your two top programs in power management outside of LED. And although I know it feeds into pretty much everything you’re doing. But, what would those two be?

Jim Keim

Basically to clarify the first part Vernon, we had indicated that in Q2 we hoped to grow our power management by 15% to 21%. In fact, we hit the mid-range of that. So our power management business was actually up very significantly in Q2. And remember that growth was offsetting some of the loss of the eCommerce revenue from us taking that product line out.

So, basically, we did have very good growth in power management in Q2. Now, what drove that, what drove that was pretty simple. First of all, in the LED general lighting area, we did see substantial growth. As we mentioned, we continue to expand that area rapidly. We have also seen good traction with our power product line, particularly we’re very pleased with our charger position as it continues to expand into more and more applications. Also, our batter management area continues to expand in power tool, vacuum cleaners and some other areas. So those area were prominent in our upside in the power management in Q2.

Vernon Essi - Needham & Company

And I assume going forward, I mean, and I’m trying to… and I appreciate you’re lumping LED into this so I’m trying to delineate the LED side of your story. But, if you were to look at the portfolio of products you would say the charger and battery management would be the two areas that you’re going to be focused on those (inaudible). Years ago you had a lot of other power spots within the PC and notebook area. I assume that’s less focus now going forward.

Jim Keim

Well, in terms of the growth but let’s not leave out general lighting.

Vernon Essi - Needham & Company

No I appreciate that, I am trying to figure out there is a lot of moving pieces to your story, so I am just trying to figure out.

Perry Kuo

There was good growth in battery, power and particularly the charger areas we mentioned and then also general light, those three product areas really helped drive the growth of the power management in Q2. The charger is for the noble, so the notebook and the (inaudible) are still our much major activity.

Vernon Essi - Needham & Company

Just one follow on in the battery management side, what would you say is kind of your sweet spot in terms of the voltage range that you are getting the traction. I mean remember you were sort of more in the 18 volt kind of frequency, but is that curve continuing to climb, are you now going downstream as well?

Perry Kuo

Our DC/DC is major is fit into the Intel new architecture and AMD new architecture. So the 18 volt is more like the voltage input to our charger which it would still have major wire charger. But I also mentioned that we have a so called narrow VDC and that charger is going to be less than the 18 volt, is like 9 volt to 12 volt. So this is the power when Jim mentioned to target.

Vernon Essi - Needham & Company

My apologies, maybe I didn't make my point clear. I was talking more about the battery management, so I guess more into like power tools and some of these other consumer oriented applications outside of PC. You had a couple of interesting wins that have been around for couple of years now in the higher voltage area. I am just wondering how that business has being going and I assume you are continuing to ship into that as you mentioned. But where are you finding it most success?

Perry Kuo

Yes, we reported by how many sales, our (inaudible) right now is seven cells to 10 cells. And then we also have the other the 10 cells, we are the only ones providing 13 cells battery management for the power tool. Yes you are right. And we just extend that as of the previous quarter, we have the (inaudible) which is the only one in the marketplace can manage a 13 cell. And we're happy to see we do have a lot of interest for this particular cell, because when you have 13 cells battery management I see then your cost of the majority you could simplify the combination of the cost of the battery.

Vernon Essi - Needham & Company

And I assume to you obviously you garner a much higher than your corporate gross margin on a part like that?

Perry Kuo

Yes, those in high side of corporate gross margin.

Operator

And we'll now go to Tore Svanberg from Stifel.

Tore Svanberg - Stifel Nicolaus

I just had a quick follow up on the TV market. This market has been quite weak enough for the last three years. I was just wondering from your perspective are you seeing any catalyst there at all, either in the second half, or are there any trends at all that can get that business going for you again? Thank you.

Perry Kuo

Well there are certainly rumblings that there may be ignoring something that's coming out of China, certainly that would help along with the market being quite sensitive to building starts because wherever there is additional building starts that helps the market. So we certainly are hopeful in Q3 and Q4 and some of our customers would give us reason to be helpful, but we're hesitant to put that into projections at this point.

Operator

(Operator Instructions). We'll now go to Scott Preston from (inaudible).

Unidentified Analyst

Can you talk about what is going to be growing, which segments of your business will be growing in Q3 between the battery power and general lighting? And then can you give us a little bit of insight into Q4 and beyond where you expect the growth? When you expect that to come back and when you expect sequential increase in revenue?

Perry Kuo

Yes I will try to answer that. First of all the drivers for the growth in Q3 will not be different than what we have indicated in Q2, where we are continuing to see power in charger for battery management as well as the general lighting, certainly will take a bigger percentage of our overall business in Q3. We do remain optimistic for the second half of the year, we have just indicated we're certainly hopeful to see some TV upsides; we do have good ongoing design win positions. And basically I think I will be disappointed if we didn't see growth in the second half, but again where it has been with the economic conditions to give any more projections at this point.

Unidentified Analyst

But given all the design wins that you are talking about and three growth driven markets, can you give us some insight beyond Q3, what the growth rates of those business, what we should expect as investors, what are some of the hurdles we can hold management to.

Perry Kuo

Yes, we’re really not prepared to give a projection for Q4 at this time.

Unidentified Analyst

I’m not asking for projections, I’m asking for growth rates so we can expect from those markets, do we expect those to be up double digits next year? What kind of numbers can we look for given the design activity and given the strength of in the patents and products you guys have coming up.

Perry Kuo

So some of business given by now the low visibility is difficult to give out rough prediction of the rate but we do believe that our proper technology should be always on the top 10 of the growth. although right now it's difficult for us to give you the rate because the Q4 is really Q2 right now already is going to be (inaudible) in Q4 it’s very difficult right now to give the right insight right now.

Unidentified Analyst

Going back on Q3, you talked a lot about the uncertainty is that people aren’t building inventory and if they could come back in September, can you quantify what that number means to the company, I mean are we talking, would that be a 10% sequential increase, what kind of inventory build would that mean for revenues.

Perry Kuo

For Q3 for September we think the dynamic would be in the area of the 1 million compared to our 18 million produce above 5% plus minus.

Unidentified Analyst

Okay. So if you come back and build backlog that amount would be something in the order in $1 million.

Perry Kuo

Yes.

Unidentified Analyst

Okay. Kind of shifting over the balance sheet, you guys talk about some of the assets the company has, I guess it kind of wasting assets these last couple of years got roughly $0.50 plus a share and long term investments that don’t seem to adding much value and the real estate the company owns in both Santa Claire and Taiwan, can you talk about how the company maybe can take some of these assets it has on the balance sheet to help create shareholder value given the lack of shareholder value being create on the operational side right now.

Perry Kuo

Let me try to answer this. A long term investment most of the investment the suppliers to us, these suppliers make sure we’re offering us a very wide basis to get the support, if the market need to do a cost reduction and also some further development. So this is from way wafer and to the testing company. So, we have four to five companies in this area.

So, for some of the company actually on the listing over the counter, so our liquidity is not too long. So, it's necessary that we can do at this moment, we think it’s still very important for us to guess the forefront of our supply chain.

For the property in Santa Claire, Shanghai and the type A, these are actually are not so difficult to get down liquidity we would like to do. All these are property, it’s above our 19 million, agreement that 3.5 million, R&D 1 million. So most of the property and agreement are 19 million out of 24 million are the offices.

So, this are we may probably consider to do some portion of the type one area but we keep U.S. and Shanghai. So, try to give you some talent of the property.

Operator

Thank you. And there are no further questions in the queue. I’d like to turn the call back over to Scott for any closing remarks at this time.

Scott Anderson

Thank you all for your attention this morning. Feel free to contact to me at 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

This does conclude our conference for day. Again there is a replay available until 9:00 AM pacific time on August 7th, 2013 by calling 18882031112 or 17194570820, pass code 1291083. Thank you for your attendance today.

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