O2Micro: Return To Profitability, Cheap Valuation And Hidden Treasure In The Balance Sheet
Summary
- O2Micro has benefited from the stay at home/work from home pandemic response.
- Cost cutting combined with improving sales has resulted in profitability.
- The company partners with the elite companies in the industries that it serves.
- The market has priced the stock at very low valuations.
- There is unrealized treasure with appreciated real estate and stock equity not factored into the balance sheet.
O2Micro International Limited (NASDAQ:OIIM) is a Cayman Island based fabless semiconductor company engaged in power management products, predominantly intelligent lighting for televisions and battery management for everything from power tools to electric bikes.
O2Micro has been attempting to undergo a turnaround for several years with cost cutting measures and a focus on higher margin products. The company's quest for profitability has been accelerated by the stay at home response to COVD-19. Company Chairman and CEO Sterling Du said:
Our growth in the first half of 2020 has benefited from successful development of next-Gen products for Top Tier and OEM customers and a market focus on technologies supporting mobile and remote workforces, extended learning and in-home entertainment. Stay at home policies helped drive sales of higher end TV, monitors, power tools and electric bikes. We are optimistic that our business fundamentals are leading O2Micro back to long term profitability.
O2Micro has returned to profitability, sells at low multiples and has hidden value via ownership of appreciated real estate and stock.
Strategy And Products
The business plan is focused on collaborating with premier companies to create products that will have mass appeal. The company uses foundries such as CSMC, VIS, and TPSC to manufacture products. Subcontracting manufacturing allows the company to concentrate on product development and sales in a wide area of industries. The company spends almost a quarter of its revenues on R&D and about the same amount on SG&A.
Direct and independent sales efforts target the largest vendors in consumer electronics, computers, communication and automotive markets. The in-house engineer design team works with customers such as Acer, Black & Decker, Dell, Dyson, General Electric, Hewlett-Packard, Samsung Electronics, Sharp, Sony, Toshiba and others to develop new products and solutions for these products.
The company has no long-term contracts with any foundry, testing service or customer. Below is a breakdown of revenue per product type.
| Years Ended December 31 | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Integrated Circuits: | ||||||||||||
| Mixed-signal | $ | 34,944 | $ | 39,603 | $ | 40,334 | ||||||
| Analog | 23,901 | 23,063 | 19,801 | |||||||||
| Digital | 3 | 48 | 50 | |||||||||
| Licensing revenue | 2,080 | - | 20 | |||||||||
| Total | $ | 60,928 | $ | 62,714 | $ | 60,205 | ||||||
Source: 2019 Annual Report
Return To Profitability
Revenue growth for the prior three years had been flat. Management reduced staffing by about 35% and took other cost reduction actions this year which we will see the full impact of in the next two quarterly reports. In tandem with cost reduction the company experienced a pickup in sales which has accelerated public consumption of new televisions and battery powered tools and vehicles and various other company products. Consumers are upgrading to smart TVs while improvements in battery strength, length of charge and cost have led to increased applications in cordless consumer goods which have also experienced a pickup in demand.
The company has reported double digit revenue growth for the first six months of this year with Q2 2020 revenue of $17.3 Million, a 21% increase from the same quarter in the previous year. Management guidance is for $17.6 to $19 million revenue for Q3 with $16 million per quarter being the breakeven mark.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)(In Thousand U.S. Dollars, Except Per Share Amounts)
| Three Months Ended | Six Months Ended | |||||||||||
| June 30, | June 30, | |||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||
| OPERATING REVENUES | $ | 17,284 | $ | 14,271 | $ | 32,865 | $ | 27,034 | ||||
| COST OF REVENUES | 8,431 | 7,125 | 15,921 | 13,441 | ||||||||
| GROSS PROFIT | 8,853 | 7,146 | 16,944 | 13,593 | ||||||||
Source: Press Release
Share Composition And Valuation
Insiders own 13% of the shares, while institutions own 37% and mutual funds own 21%. There are 27 million shares and the market cap is $82 million. The company reported $41 million in cash and no debt as of June 30th, resulting in an enterprise value of $41 million.
Revenues for fiscal 2019 were $60 million and are expected to be in the $70 million area for this year, which results in an EV/Sales ratio of below 1X. Competitors such as Texas Instruments (TXN), Xilinx (XLNX) and Maxim (MXIM) trade at ratios between 8X and 9X. I don't expect that OIIM will rerate at the same valuation that its competitors are valued at because investors have been frustrated by a history of management guidance that has not been met. A more reasonable EV/S of 4X results in a stock price of $20 per share.
Highly rated Stifel Nicolaus analyst Tore Svanberg has a $10/share price target which seems a safe bet as the company's profitability continues to improve.
I came across this stock while doing some searching using SA's quant ratings where this stock is highly rated and improving. I expect that the growth and profitability ratings will both improve as the company is scaling revenues and becoming more profitable.
| Now | 3M ago | 6M ago | |
|---|---|---|---|
| Value | A- | A | A+ |
| Growth | C- | C- | C |
| Profitability | C- | D+ | D- |
| Momentum | A+ | C | B- |
| Revisions | A |
Source: SEEKING ALPHA
Buried Treasure
The balance sheet does not include appreciation from the company's real estate holdings. From the 2019 annual report:
In May 2004, we purchased a 37,180 square foot building in California, housing our USA operations. The purchase price was approximately $4.6 million. In October 2005, we purchased a 30,448 square foot facility in Shanghai, China for approximately $7.1 million. In April 2006, we purchased 29,935 square foot of undeveloped land in Hsinchu, Taiwan for approximately $8.8 million. In August 2009, we sold the land in Hsinchu, Taiwan, to a developer in exchange for a pre-sale of a portion of the real estate after it is developed, which will include a portion of an office building and a portion of a parking lot, with a carrying value of approximately $8.9 million.
The latest numbers I could find indicate California Commercial property was selling at $2.81 to $3.21 per square foot. Applying the lower number values the company's California office building at over $10 million, double the purchase price. The property in Shanghai was valued at three times the purchase price according to data from this site. Everyone is likely aware that commercial property has declined in price due to the COVD-19 pandemic but not nearly as much as the company's properties have appreciated in price.
The company has other real estate in Korea and Taiwan, also mentioned in the annual report. All of these real estate holdings have most likely escalated in value.
Enhancing Shareholder Value
The board of directors has authorized share buyback programs since 2002 and have repurchased over 20 million shares at a cost of $101.2 million. $7.7 million remains in the share buyback authorization as of the end of June.
The company also has been selling EMC shares. From the 2020 2Q earnings call:
In Q2 2020, 195,000 shares of EMC were sold at a $724,000 cash-in. The average selling price of EMC in Q2 is around $3.73 per share with original cost of US$0.53 per share. We'll continue to sell EMC shares in Q3. As of June 30, 2020, we owned around 589,000 shares of EMC. EMC shares price was $3.97 on June 30 and it was closed at $4.08 today July 31, 2020.
Risks
The company has a reliance on its patents to protect from other companies copying O2Micro technology. OIIM competes with much larger companies such as Texas Instruments, Xilinx and Maxim. The products are made by third party companies that are not controlled by O2Micro and the company is dependent upon continued demand for products sold by other companies. The majority of the company's operations and revenues are in China and Taiwan. About one quarter of total revenue for the prior two years has come from just two customers.
Conclusion
O2Micro has a business plan that allows the company to concentrate on developing and marketing top of the line products in partnership with elite companies in various industries. The stay at home/work at home trends brought about by the pandemic have resulted in strong revenue pickup and a return to profitability. The company is undervalued relative to its peer group. A return to profitability should see the stock price rerate.
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Disclosure: I am/we are long OIIM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.