O2Micro International's (OIIM) CEO Sterling Du on Q4 2015 Results - Earnings Call Transcript

| About: O2Micro International (OIIM)

O2Micro International Limited (NASDAQ:OIIM)

Q4 2015 Earnings Conference Call

January 27, 2016 09:00 AM ET

Executives

Scott Anderson - Director, IR

Sterling Du - Founder, Chairman and CEO

Perry Kuo - CFO, Director and Secretary

Jim Keim - Head, Marketing & Sales and Director

Analysts

Tore Svanberg - Stifel Nicolas

Lisa Thompson - Zacks Investment Research

Operator

Good morning. And thank you for joining us today to discuss the O2Micro's Financial Results for the Fourth Quarter of Fiscal Year 2015.

If you would like a copy of the Press Release we issued this morning, please call Scott Anderson at (408) 987-5920, extension 8888 and we will email you a copy immediately. It is also posted on the O2Micro Web site at www.o2micro.com under the heading Investors.

There will be a replay available through February 03, 2016 at 9:00 AM Pacific Time by calling the 1-888-203-1112 or the 1-719-457-0820, pass code will be 4400544. Following the presentation by management, the conference will be opened for questions-and-answers as time permits.

Mr. Anderson, you may begin.

Scott Anderson

Hi, good morning and thank you for dialing-in to O2Micro's financial results conference call for the fourth quarter of fiscal year 2015 ending December 31, 2015. This is Scott Anderson, Director of Investor Relations. I'd 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 facts 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's 20-F Annual Filings, our annual reports, and other documents filed with the SEC from time-to-time. Listeners are referred to the O2Micro's 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 updates 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, O2's Founder, Chairman and CEO. After the prepared remarks from these gentlemen, the floor will be opened for your questions.

Now, I would like to introduce Perry Kuo, CFO of O2Micro for a discussion of the financial highlights of the fourth quarter of fiscal year 2015 ending December 31, 2015. Perry?

Perry Kuo

Thanks Scott. We will now review our financial results for Q4 2015. Please note that financial results will be presented on a GAAP basis, unless we designate otherwise. The non-GAAP results exclude stock-based compensation expense, one-time charges, non-recurring gains 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 fourth quarter of 2015 was 13.4 million. GAAP net loss in the fourth quarter of 2015 was 12.8 million. If we exclude stock-based compensation of 464,000 and the one-time expense of 9.8 million the non-GAAP net loss will be 2.5 million. One-time expense includes headcount consolidation for 1.1 million. Impairment loss on long-term investment for 4.9 million and the income case accrual for the accumulated earnings distribution framed in 2016 for 3.8 million. GAAP net loss per ADS in the fourth quarter of 2015 was $0.50. Non-GAAP net loss per ADS was $0.10. Gross margin was 50.4% in Q4. The gross margin reflects the current revenue level and the product mix.

R&D expense was 5.4 million or 40.4% of revenue. This amount excludes stock-based compensation expense of 76,000. SG&A expense was 5.4 million or 40.6% of revenue. This amount excludes stock-based compensation expense of 388,000. The non-operating loss was 4.4 million. This amount includes following key items, impairment loss on long-term investment 4.9 million, interest income on bank deposit, 116,000, rental income, 132,000; capital income from investees 75,000.

Income tax was 3.8 million in the fourth quarter and is mainly for withholding taxes. Accrual from the accumulated undistributed earnings of China and the Taiwan subsidiary and it is one-time expense. In Q4, 2015 we repurchased 291,450 ADS units at a cost of 520,000. Q4 2015 revenue by end-market breaks down into the following percentages, consumer was 50% to 55% of revenue, computer was 10% to 15% of revenue, industrial was 35% to 40% of revenue, communications was less than 5% of revenue.

At this time, I would like to provide some additional information. O2Micro finished the fourth quarter with 52.4 million in unrestricted cash and short-term investments. This represents cash and cash equivalents of $2.05 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q4 was 5.2 million. Our DSO is 41 days. It is in our target range of 40 to 60 days.

Inventory was 9.7 million at the end of the fourth quarter. This represents 128 days of inventory, and the inventory turnover was 2.8 times in Q3. From a cash flow perspective, we generated 1.6 million cash outflow from operating activities in Q4. Capital expenditure was about 269,000 in the fourth quarter for R&D equipment and the leasehold improvement. Depreciation and amortization was 500,000 in Q4. At the end of the fourth quarter of 2015, O2Micro had 357 employees, 54% of which are engineers.

At this time, I would like to provide our financial guidance for the first quarter of fiscal year 2016. This guidance reflects our best estimates for the current environment and is subject to change. This is the only official guidance we will provide, unless we update it with a public announcement in the future.

O2Micro expects Q1 revenue to be up 2% to down 5%. We are guiding the Q1 gross margin will be in the range of 47% to 49% and is mainly from the product mix. R&D expense excluding stock-based compensation should be 4 million to 4.5 million in Q1. SG&A should be 4.5 million to 5 million in Q1, excluding stock-based compensation expense. Stock-based compensation should be in the range of 350,000 to 450,000 in the first quarter. Based on the service income of our subsidiaries in different countries and earnings distribution, we expect our tax amount to be in the range of 200,000 to 300,000 in the first quarter.

While we wait for our anticipated next significant product cycle to materialize, the goal of this management team and the Board of Directors is to maximize shareholders’ value, and we are taking the necessary steps to do this. Regarding our share repurchase program, we have been active in this program historically and we plan to be active going forward. Since 2002, we have repurchased approximately 18.8 million ADS shares for approximately $100 million. At the end of the Q4, we had 10.1 million remaining in our share buyback authorization. Returns to shareholders are very much on our minds and will continue to be a focus in the future. We will provide update to the additional measures to enhance shareholders’ values throughout this year.

We believe our cash breakeven point is between 16.5 million to 17.5 million in quarterly revenue and our profitability breakeven point is between 18.5 million to 19.5 million in quarterly revenue. Given the uncertain demand and macro environment, we are prepared to continue to manage cost as needed. Although, we believe we have aligned current cost base on current and anticipated revenue levels.

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. Although we continue to see weak economies in key areas of the world that impacts our revenue, we remain pleased with ongoing design wins including Battery Management, LED Lighting and General Lighting. We will review progress in each of these areas.

Battery Management products have enjoyed excellent year-over-year growth in 2015. Our Battery Management products not only exceeded our previously stated goal of reaching 15% of second half 2015 revenues, but are now expected to reach 20% to 25% of our projected 2016 revenues. This will make Battery Management the second largest product line for O2Micro in 2016. Ongoing design wins and revenue expansion is expected in all key areas of the Battery Management market in which we participate. This includes power tool, e-bike, e-vehicle and vacuum cleaners as lithium ion battery technology continues to become more reliable and cost effective with the use of our Battery Management products. Major OEM’s using our products continues to expand and includes Black & Decker, Electrolux, LG, Mekita, Panasonic, Samsung and TTI. Additionally, there is increasing design activity for our products in uninterrupted power supply applications, as we continue to see usage of our Battery Management products expand at major OEMs.

Intelligent Lighting revenues met expectations in Q4 and are projected to show revenue growth in 2016, despite the TV and monitor business continuing to be significantly impacted by general economic weakness in worldwide economies, including China, Europe and South America. Although the TV market remains soft for our customers, we see ongoing product expansion and revenue growth in TV from our engineering efforts. Our new area of Backlighting products have achieved key design wins at leading industry OEM’s for high-end TV models that are now going into production. Based on these product design wins in TV and gains in other market areas, we expect to enjoy revenue growth in 2016 for our LED Backlighting products, despite the economic headwinds.

Similarly, despite a general slowdown in the expansion of LED-based General Lighting, we expect our patented free dimming products to continue their revenue expansion in 2016. In General Lighting, we remain focused on the higher-end of this market where we continue to gain new design wins worldwide and expand in more application with our patented products. Our customer list includes GE, IKEA, Iris Ohyama, Lights of America, Osram, Panasonic, Samsung, TCP and Toshiba as we continue to see a broader-based acceptance of our proprietary free dimming and two color dimming products in more and more applications and a widening international customer base, including a growing number of Asian countries. We have successfully introduced our TRIAC controller lighting products for legacy dimmable fixtures and see these products gaining revenue momentum in 2016.

While we have previously expected that revenues of our first power management product for the tablet and smartphone would become more significant by early 2016 as these new products launch, the difficult economic trends have resulted in slower revenue growth than anticipated. Key smartphone and tablet customers fail to meet their projected product sales where we have design wins. Nevertheless, we expect that our design wins should enable reasonable revenue growth as we continue to move forward in 2016.

Sterling Du, our Chairman and CEO, will more fully discuss our position in smartphone and tablet.

I will now turn the call over to our CEO Sterling for closing remarks. Thank you.

Sterling Du

Thanks Jim. Q4 revenue was in the range of the guidance that we provided in last November. We generated revenue of 13.4 million in the fourth quarter of 2015, a decrease of 2% sequentially and decrease of 7% from the same quarter the year before last.

The year-over-year revenue decline was mainly due to the overall weak macro environment just in energy and the weakness in our target markets. And low revenue from our noble product group of which is the head batching back in January 2015. While we are disappointed in a slower than anticipated adoption of growth driver, we remain optimistic that the growth we are projecting in our new product line where we gain a further momentum in 2016, including the product for the Smartphone, General Lighting and the Battery Management for the power tool and household appliance markets.

To the combination of operating expense reductions and the implementation of certain initiatives to monetize asset of company, we believe we have transitioned the company to benefit from our next growth phase. They come to us difficult, but necessary expense and headcount reductions in the fourth quarter and lower the expense operation by 7.4 million on year-over-year basis. We believe that company will achieve the cash flow breakeven point in the near future. We are making significant progress with a smartphone manufacturer since 18 months ago. Although, due to the weak market and the channel inventory buildup the adoption rate of this product is slower than we had anticipated. We have lowered our internal projection for smartphone products.

While we are engaged with design win several Tier 2 smartphone manufacturers and have commenced product shipping to a global Tier 2 smartphone manufacturer, we expect to grow this business throughout 2016. Our strong engineering and customer service present in Chinese market enable the company to expand our customer base in the region.

In our Backlighting business, we are projecting renewed growth this year based on increasing these activities in TV and monitor. Although the TV market remains dynamic, we believe our Backlighting business for the TV market will continue to grow as our dollar content expands from the adoption of higher-end 4K TV where we have opportunity to design multiple LED driver ICs for the higher-end TVs. We continue to be a worldwide leader in LED Backlighting for TV and monitor and are expanding customer base in our Backlighting business, including such market leaders as Sony, Toshiba, HP, Dell, Lenovo, Sky Walk, TCL, Hisense and among others.

O2Micro’s proprietary analog Power Management technology in Battery Management sector supports a variety of end-market continues to grow with our expanding customer base. Now we have in Japanese battery market have renewed for our battery products, several products in this battery group has been launched and which increased in content with same customer base.

Finally our LED General Lighting business continues to grow in this competitive market. Our strategy to provide growth spectrum product lines from the high-end MR-8, MR-12 sealers, possible dimming, free dimming to save power cost effective commoditized solution, targeting leading LED manufacturers in the U.S., Japan and their OEM/ODM partner in China. The great customer interest in both high-end and low-end solution we offer. Although, we are disappointed in the weak global markets in the fourth quarter, we remain optimistic about our core power management product lines including General Lighting, Backlighting, Power IC's for the Smartphone, Battery Management where we get momentum in 2016.

At this time I’d like to thank you for listening to our conference call. I'll turn it back to Scott, Scott please.

Scott Anderson

Thank you, Sterling. Operator at this point, we'd like to open the call to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Okay, we will now take our first question from Tore Svanberg. Please go ahead.

Tore Svanberg

Yes thank you. I was hoping we could start on Battery Management, sounds like things are really moving there and you mentioned 20% to 25% of 2016 revenues. What are the applications that would drive most of that growth, I mean you mentioned where you already have exposure, but perhaps you have a few wins here and there that will be the main driver for that revenue growth?

Jim Keim

Well we see Tory rapid expansion in the power tool area, we're also seeing now rapid expansion in the e-bike activity as more and more e-bikes are utilizing the lithium ion other than lead-acid batteries and their designs. We're also seeing the vacuum cleaner market now move very quickly toward lithium ion. So that market has a lot of growth to go, but there's a lot of models out there from a number of OEMs and they're capturing very good market recognition and so we that area moving forward rapidly. So, those three are really helping drive our revenue growth.

Tore Svanberg

And Sterling you mentioned some dollar content growth with 4K TVs. Could you maybe help us understand what type of a ratio we're talking about as from a regular TV to a 4K TV for your content?

Sterling Du

Some of the high-end 4K has adopted so called the area of backlighting as Jim mentioned that, local area of backlighting it means that there will be immediate console the different area for backlighting and not just one side silicon. So, by using that depends on the architecture of the backlighting topology, some could be using 4x, I'm using 2x of original silicon content. So, our technology right now already goes through the quality and the line of production, and we can see the market for the first available TV set and then the same technology also attract more China-based TV set, looking for their high-end 4K or even go the 8K in this kind of local area of backlighting technology. So, this is the serial content increase we've mentioned, we referred to yes.

Tore Svanberg

And Perry looks like gross margin is going to come down a little bit in Q1, I guess that's due to mix, could you maybe elaborate a little bit on that and as we progress throughout the year, should we expect gross margin to go back up, especially as battery management becomes an even higher percentage of revenue?

Perry Kuo

Yes Tore this is a very good question and the Q1 the gross margin is kind of the, a function of more new product ramping as we have more product to the general lighting and also for the smartphone. This displays the -- this kind of run probably would impact our gross margin for the Q1 and the Q2 timeframe and up till it we have more battery management as also you've mentioned a high gross margin and also the higher gross margin of our backlight to the higher resolution 4K TV set, I expect that gross margin will go back to 50% level.

Tore Svanberg

And the last question, I don't know who wants to take this, but if you look at your 13.4 million in Q4, what type of percentage would you classify as new revenue I mean a new revenue category applications of products introduced over the last couple of years. The reason I'm asking the question is just trying to get a sense for how much percentage of revenue is actually growing with new applications versus those that are actually declining?

Sterling Du

I'm try and doing some calculation that I would suspect that that number in Q4 is in the 30% plus area.

Tore Svanberg

For new products?

Sterling Du

For new products, that would include strong drivers and that include our battery management product, our general lighting product and some of our new LED backlighting products.

Operator

Okay. We'll now take the following question from Lisa Thompson. Please go ahead.

Lisa Thompson

I was wondering, if you go through a little bit more on the one-time write-off, I don't think I got it all and what was the impairment for exactly?

Sterling Du

One-time expense for the Q4, we had 9.8 million. Of the 9.8 million we have done the -- a cost saving, headcount consolidation, 1.1 million for which we are pleased the OpEx count 1 million a quarter in 2016. So also we will help our lower paced breakeven and also profitability breakeven point. We also have the one-time expense impairment loss, which is for one of our -- which is for our investee. This investee it is actually liquidated, it is Wuxi factory in the end of the 2015, as it stopped the production. So, according to our rule we need to review its book value and then impair the loss.

Although it's also starting to meet -- to find the new site to reproduce the -- a testing and assembly but according to our rule we do the impairment loss for now and after its reproduced and we will review, I mean we are going to change the accounting way, but I think that we will continue to kick the lower investment value which is actually a percentage of the book value of our shares in the investee.

And another one-time expense is tax accrual for the accumulated earnings. We plan to water-back our undistributed earnings of the subsidiaries of O2Micro in Taiwan and China to the O2 global, O2 Cayman Island for the global cash management in 2016, so wish list are changing, so we need to do some tax calculation policy from this quarter according to our external auditor. So we do the tax accrual, accrual for the distribution of the retail earnings of our subsidiaries. We plan to do for Taiwan subsidiary and also China subsidiaries in 2016. So this amounts up to a 3.8 million, so all these key items amounted to one-time expense 9.8 million in Q4.

Lisa Thompson

Okay. And so you gave guidance for taxes in Q1, what are they going to look like for the rest of the year?

Sterling Du

I believe that in Q1, as we have done the change in the rate distribution of our retail earnings of subsidiaries in Taiwan and China, so starting from Q1 2016, so we have two major tax one is service income tax and the other one is the tax accrual for the redistribution of the earnings. So it will be 20,000 to 300,000 per quarter in 2016.

Lisa Thompson

Between 20,000 and 200,000 per quarter?

Sterling Du

200,000, between 200,000 and the 300,000.

Lisa Thompson

Okay, for all four quarters then?

Sterling Du

Yes, four quarters, four quarters in 2016.

Operator

Okay. There are no further questions, please continue.

Sterling Du

Well, 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.

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