OIIM (OIIM) 2022-05-06 Earnings Call Transcript

Good day, and welcome to the 2022 First Quarter Earnings Release Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Daniel Meyberg. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining O2Micro's financial results conference call for the first quarter of 2022, ending March 31, 2022. This is Daniel Meyberg, Corporate Communications for O2Micro. If you would like a copy of the press release we issued this morning, you can call me at 408-987-5920, extension 8888, and we will email you a copy. It is also posted on the O2Micro website at www.o2micro.com under the heading Investors. There will be a replay available for the next 14 days by visiting the O2Micro website under the heading Investors. Following the presentation by management, the conference will be opened for questions and answers. I'd like to remind listeners that the discussion of business outlook for O2 Micro contains forward-looking statements. Statements made in this release that are not historical fact are forward-looking statements within the meanings 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 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, CFO and Director, Jim Keim, Head of marketing and Sales and Director, and Sterling Du, O2's Founder, CEO, and Chairman. After the prepared remarks from these gentlemen, floor will be open for your questions. At this point, I would like to introduce Perry Kuo, CFO of O2Micro for a discussion of the financial highlights of the first quarter of fiscal year 2022 ending March 31, 2022, Perry?

Thank you, Dan. We will now review our financial results for Q1 2022. 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 losses. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the first quarter of 2022 was $21.6 million. GAAP net income in the first quarter of 2022 was $915,000, if we exclude stock-based compensation of $574,000 and one-time special project expense of $136,000, the non-GAAP net income will be $1.6 million. GAAP net income per fully diluted ADS in the first quarter of 2022 was $0.03. Non-GAAP net income per fully diluted ADS was $0.05. Gross margin was 52.6% in Q1. The gross margin reflects the current revenue level and the product mix. R&D expense was $4.8 million or 22% of revenue. This amount excludes stock-based compensation expense of $207,000. SG&A expense was $5.1 million or 23.4% of revenue. This amount is gross stock-based compensation expense of $367,000 and onetime special project expense of $136,000. The non-operating income was $285,000. Income tax was $203,000 in the first quarter is mainly based on the estimated effective tax rate of each taxable location. In Q1 2022, we repurchased 110924 ADS units at a cost of $463,000. Q1 2022 revenue by end-markets, braced now into the following percentage, industrial was 60% to 62% of revenue. Consumer was 36% to 38% of revenue. Computer was 2% to 4% of revenue. Communications was almost zero. At this moment, I would like to provide some additional information. O2Micro finished the first quarter with $48.2 million in unrestricted cash and short-term investments. This represents cash and cash equivalent of $1.65 per ADS. In addition, O2Micro has no debt. Accounts receivable at the end of Q1 was 16.2 million. Our DSO is 73 days. DSO is more than 60 days, mainly from account mix. Inventory was $21.8 million at the end of the first quarter. This represents 181 days of inventory, and inventory turnover was 2.0 times in Q1. The strategic increase in inventory is mainly for wafer, die paint [ph and battery ICs. Net cash using operating activities in the first quarter, was about 1.2 million. Capital expenditure was about 728,000 in the first quarter for [indiscernible] R&D, IT equipment. Depreciation and amortization was $1.3 million in Q1. At the end of the first quarter of 2022, O2Micro had 319 employees, 57% of which are engineers. Based on current markets to Asian and the best update in Nigeria loading forecast, the company has the following guidance for Q2 2022. Net revenues are expected to be $20.5 million to $22.7 million as compared to Q1 2022 of $21.6 million. Product gross margin expected to be in the range of 51% to 53%. R&D expenses, excluding stock-based compensation, I expect it to be in the range of $4.8 million to $5.3 million. SG&A expenses, excluding stock-based compensation and one-time expense for special project are expected to be in the range of $5 million to $5.5 million. Stock-based compensation expected to be in the range of $550,000 to 650,000. Non-operating income expected to be in the range of $200,000 to $300,000, excluding foreign exchange gain or loss. Income tax expense is expected to be in the range of $200,000 to $300,000. The goal of our management team and the Board of Directors is to maximize shareholder value. We have accomplished this by taking the necessary steps, which included managing operating expenses and monetizing asset on the balance sheet. In regards to our share repurchase program, we have been active in this program historically, since 2002, we have repurchased over 2.5 million ADS shares for $102.2 million. As of the year of Q1, we had $6.7 million remaining in our share buyback authorization. There are still many dynamic factors associated in the business development. We will carefully plan and manage the inventory through our 2022 and maintain at a strong cash level in the balance sheet. Given the uncertain demand and the macro environment, we are continuously investing in R&D, pattern filing, expanding our supply chain resection sourcing suppliers and capabilities in testing completed product and capacity. We always watch the expenses carefully and continue to manage costs as estimated. Although, we believe we have a light current cost based on current anticipated revenue levels. 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' value throughout this year. I would like to thank everyone for participating and turn the call over to Jim to talk more about our business.

Thank you, Perry. Good morning, everyone. Both our Q1 2022 revenue of $21.6 million and projected revenue of Q2 reflect ongoing supply chain issues that affect all phases of our business, including wafer supply, assembly and test as well as customer demand for our products. Previously existing supply chain issues were further complicated by the well-publicized lockdowns in China, which not only impact our deliveries from key China suppliers but also impact our customers' ability to project their business needs for building end products. Additionally, the lockdown reduced customer demand in the internal China market. The slowdown in China demand, coupled with historically low demand in power tools, garden tools and e-bikes in the winter months has enabled us to greatly reduce delinquencies to customer requests and rebuild some strategic inventories in key product areas in battery management. We also believe some battery management customers have built strategic inventories that could reduce their Q2 demand for product. Regardless of any temporary inventory situation, our fundamental battery management business remains strong as we continue to see expanding customer base and design win activity. While our market position in garden tools, power tools, backing cleaners and e-bikes remain strong, we see expanding design wins for our battery management business in e-scooter, household energy storage and industrial energy storage systems. In Intelligent Lighting, we remain very constrained in the supply of our products as customer product demand remains at a high level and exceeds our ability to supply. We are working diligently to expand wafer supply in the Intelligent Lighting product area. This includes expansion into new wafer suppliers as well as expansion into additional processes at existing suppliers that can enhance our existing wafer supply. Both activities are well underway and are expected to contribute to expanded product supply in Q3. In parallel, we are expanding our assembly capability into additional suppliers and continue to expand our testing capability. Our design win activity during the quarter remained strong in Intelligent Lighting as well as battery management as we continue to aggressively develop new products focused on serving rapidly expanding applications for lithium-ion battery applications as well as advanced lighting systems using many LEDs. As Sterling Du, our CEO will explain later in more detail, our new products are targeted at more complex consumer, industrial and automotive market applications that will broaden our market focus and expand our customer base, while generating higher ASPs. These new products are based on our unique technology, backed by a large intellectual property patent portfolio that is significantly larger than most companies our size. We strongly believe that these new products will continue to drive revenue expansion as we proceed forward. The major customers, we've already penetrated can carry our company to much higher revenues as we increase our product footprint with that. Major OEMs that already use our product in battery management; include Bissell, Black & Decker, Bosch, Dyson, Electrolux, Hitachi, Lexi, LG, Makita, Murata, Panasonic, Philips, Samsung, Shark, TTI and Toshiba. Major OEMs that use our lighting products; include BOE, Dell, HP, Hisense, Honda, Hon Hai, Foxconn, Lenovo, Panasonic, Samsung, Sharp, Sony, Skyworth, TCL, and Toyota. Given our excellent technology in key growth areas and excellent customer positioning, we are confident of our ability to continue to grow long-term revenues within this customer base, while also expanding to additional major customers. I will now pass the call over to Sterling Du, our CEO, for closing remarks.

Thanks, Jim. Our revenue is with the guidance publicly released on January 26, 2022, and our design activity and the growth opportunity remains very strong. Our high-end analog technology support advanced cloud management product in both Intelligent Lighting and Battery Management markets. New products are targeted at more complex, industrial, consumer and automotive markets as well as top-tier customers that will not only expand our customer base, but engaged with the next-generation product development. On the other hand, while supply chain continue to be high demand mode, the trend to integrate market producer enable higher ASP and larger die size in the road map. Therefore, a new product, which are based on our proprietary technology baked by a large IT current portfolio will not only grow a unit number, but higher ASP. We strongly believe that the new product will continue to drive our revenue expansion in 2022 and beyond. While our major customer can carry our product to higher revenue, we also increased our penetration of their product family. Our Intelligent Lighting Group business continued to grow as a global 4K TV market size is expected to reach $380 billion by 2025 and a compound annual growth rate of 21.2% according to the report by the -- great new research. We foresee today 8K high end will become mainstream product line in 2025 and beyond. For the full array local technology dominant TV and the data monitor today, our IC, we rollout process the ability to consult dealing through either analog function or PWM part with function, two in one mode consider further simplify the TV system design architect if our customer designed to support a different type channel timing solution with one IC. The next-generation IC following the full array local teaming is mini-LED. mini-LED solved the issue by multiplying the number of LED chips and mounting LED die on substrate, therefore, reducing the spacing between each live shots and the thickness of the backlit. More importantly, they also can significantly increase the number of zones, which should be reduced blooming and halo effect by the bright object of the highlight much smaller and individual dimming zones are displayed against a very dark background. Also, mini-LED enhanced LCD contract performance to the level close to the organic LED, while maintain an LCD high-brightness characteristics and a long lifetime. They can also reduce power consumption as the more zone will be off in the dark image or the brightness will be dimmed. This mini-LED technology of a much smaller size compared to the conventional package LEDs, it enabled the system design and more ability to design the Dimi-layout by over the multi-scan technology. With the multi-scan, the mini-LED could easily to compose many redefine smaller local area due to its smaller size. This technology represents crystal-clear picture even with fast-moving objects in our display. We are expected by our new mini-LED technology, and we have a total of nine different solution to address this market. Each solution meet different customers' need. We believe our mini-LED business will ramping up step-by-step in the coming years. Our battery design win activity grew strongly at all the sector despite the dynamic market and the supply chain situation. We observed a higher number of sales application took more market share. It was partly from the cost curve, sharply as well as badly quality improved, which enhanced the year rate of high sales number battery pack. We believe the strong growth coming from both consumer and industry sectors. On the other hand, we see the new battery-powered devices produced for the light transportation, innovative household energy storage and the industrial grading and intra power supply. October 1st, 2021 last year, USB 4, our delivery Type C announced the standard expand to the new 240-watts from the existing 60-watt standard. These news expand the USB type to power to a market size and fuel the future growth of power tool to the next level. Meanwhile, the higher energy density means higher resolution and faster AD converter are needed. Our analog front end and our business management -- our battery management unit were designed with a 14-bit high accurate AD converter could meet customer needs, our high-accuracy AD converter reached 15-bit volt minimum resolution. This performance is well beyond customer expectations. Our un-based all in one, a battery management system enable power tool to be connected as IoT devices and the 5G deployment will further enrich the power to connectivity. We expect to grow the business, despite a dynamic market situation and the tight supply chain. We are optimistic for the fundamental of our business and focus on high-margin, high-performance in the sector. We start several expansion projects a few quarters ago, to address automotive market, second source reengineering and recruiting more engineers outside China. We always watch the experience carefully will build the base to drive future momentum. We always keep the shareholder base interest in mind, especially in the current situation. At the moment, I'd like to thank you for listening to our conference call and turn back to the Dan. Dan, please?

Thank you, Sterling. We will shortly be opening up the lines for questions. We will not be addressing any fabrication-related questions on this call. As disclosed in the O2Micro International Limited, press release, as of March 18th, 2022, O2Micro's Board has received preliminary nonbinding proposal letter, dated March 14th, 2022, from FNOF Precious Honor Limited to acquire all of the outstanding shares of the company for a purchase price of US$5.50 per ADS or US$0.11 per ordinary share in cash. Following receipt of the proposal, O2Micro International Limited -- sorry, O2Micro International has formed a special committee, consisting solely of independent directors to evaluate and consider the proposal and proposed transaction and has engaged its own financial and legal advisers. The special committee is continuing its review and evaluation of the proposal and proposed transaction and has not made any decisions with respect to the proposal and proposed transaction. The proposal constitutes only a preliminary indication of interest, and does not constitute any binding commitment. The O2Micro International Limited has been making SEC filings and issuing press releases in connection with the proposal. And we'll continue to do so, pursuant to the requirements of the SEC and rules and regulations. We encourage you to periodically check, the company's SEC filings for more information regarding the proposal or proposed transactions. Thank you. Operator, at this time, we'd like to open the call to questions.

Yes. It comes with the new technology, how would enjoy higher gross margin, yeah, it is.

Okay. Very good. Thank you very much.

Yes

There are no further questions at this time. Berg, I'll turn the call back to you for...

Great. Great. Thank you. Thank you, everyone, for your time and attention this morning. Please feel free to contact me at (408) 987-5920 extension 8888 or at [email protected] with any follow-up questions. I'd like to thank everyone, and have a great day for your time and attention. Goodbye.

This -- today's call. Thank you for your participation. You may now disconnect.

Thank you. [Operator Instructions] We'll take our first question from Theodore O'Neill with Litchfield Hills.

Good morning. Thank you very much. So my question is about your guidance for Q2, the midpoint of the range of the guidance is also the same number of revenue you reported in Q1. So it's flat. And the question is, if I look at sort of electronic distributors, and I know, this is probably not a fair comparison. But if I look at Aero Electronics is the electronics distributor, they're guiding for a healthy increase from this quarter into the next quarter, and yours is flat. And so it just sort of begs the question, if you could give us some more detail on why you're not seeing the - your revenue rise in Q2.

Yeah. So I'd be happy to address that. First of all, you are right. We can't be compared to a distributor, because demand is still out there for the broad base of products that they have and they can basically ship everything they can get their hands on basically. There are several fundamental reasons for us being flat. Intelligent lighting is pretty simple. We're wafer limited. And we expect to be wafer constrained until we get into Q3. So very simply put, we can't ship additional lighting product until we get additional wafer supply. On the battery management side, the issues are several. First of all, you're in a seasonality situation going into Q2 for some of the power tool, garden tool type products, as we mentioned on the call. Secondly, we do have some - and we know we have with some of our major customers, some inventory that is in place. They've built some strategic inventories during the shortage, which we were able to deliver to them last year even. And so at this point, they are going to work through some inventory issues. So we do expect Q2 to be flat as well in the battery management area. That's my comments on.

That's great. Thanks very much...

Our next question is from Tore Svanberg with Stifel.

Yes. Thank you. My first question is on the inventory. So obviously, it's higher now. I assume that's mainly going to be on the battery management products, thinking about the mix. So yeah, either Perry or Jim, if you can confirm that, that's where the inventory increase happened?

Yeah. Sorry, yes, conference, yes.

Go on Perry. I have just one word answer to confirm. Go in Perry.

Oh, yeah. Let's - I think the inventory increase is our strategic inventory. I think this is a range to meet the future upside from the key accounts after they consume some inventory, as Jim just indicated. And the demand from the key customers in China and also in other areas, actually, for some battery products, the upside orders, it comes actually in a very short lead time as we experienced in the Q2 last year. So that's why we have done some strategic inventory. Also, we also experience some longer testing type for the battery product. So let's also we increased some area to support our customers. Yes.

Very good. And just sticking with battery management, so if it's seasonally weak right now, it sounds like they have some strategic inventory going into Q2. So I mean, Q3 is usually seasonally strong. But by then, would you also expect your customers to have digested their inventory?

Yes. I think - I think that the - starting from Q2 -- the end of the Q2 inventory will be down in terms of the inventory turns are up. So, this is quite a similar currently. So Jim, you'd like to add your comments?

Yes. So, I'll simply add Perry, that we do see forecasts from customers indicating a reasonable Q3 in terms of growth for us.

Very good. And your DSO remained elevated compared to historical and you mentioned that's because of mix. So, could you maybe elaborate a little bit on that? Is this again sort of the dynamics in Lighting being very different from the dynamics that you're currently seeing in battery management?

Yes. I think the account mix, there is due to we are shipping more to the key customers and always the global key customers, they are asking for the longer terms of the credit line, and this is why manless replaces kind of the account mix. So we are, in general, we like to keep it in the area of the 60 days.

Very good. Last question for Sterling. Sterling, you talked about several R&D initiatives for new products, including more integrated solutions and so on and so forth with higher ASPs. Should we assume that those will eventually drive higher gross margins as well?

Thank you.

We'll take our next question from Lisa Thompson with Zacks.

Good morning. So, going back to your capacity constraints in backlighting, I know you spent a lot of money last year trying to increase capacity. When that comes online, how much more will you have, and can that you translate that into like revenue per quarter?

It's difficult for us to give a specific answer to that, because there's a number of factors in the wafer supply area. What we can tell you is that we have successfully produced first products that can be high-volume products coming out of a new wafer supplier based upon our constraints at other wafer supply areas. And those products now have been through qualification process with customers, and we are prepared now to begin to move that into production. We are working with that wafer supplier to discuss long-term wafer supply commitments. So, it's a little bit early to describe that, but we certainly will be getting wafers out of them even this quarter that will enable us to grow our revenues in Q3. So we can't give you a lot of specifics going forward on the amount of wafers at this time. That's still under discussion and negotiation.

So ultimately, what's the plan now? As far as your capacity, what are your goals for increasing what you can produce?

Well, our goal is pretty simple, not to be wafer constrained. So basically, we're not only bringing up product in one new wafer supply, but we're also working with another potential wafer supply. We do have opportunities that we feel are very significant, including what Sterling mentioned in the many LED area, and we're looking at those opportunities, and we will want to negotiate wafer supply that can fully enable us to fulfill the potential requirements in those areas. So it could be very significant growth for us, Lisa.

All right. And given the strange start to the year and the constraints, do you expect that Q4 is going to be significantly larger than Q3 just because of production issues?

Well, we certainly believe that once we're through the wafer constraints in the Q3 time frame on lighting, the lighting revenues will increase. And once we're through the inventory issues this quarter in battery management, battery management will increase. So our current projections are for good increases in revenue in both product areas as we move into the second half of next year. Obviously, we'll continue to watch market situations as everyone is well aware, there's a lot of concern over some of the market situation. But right now, we are forecasting growth in both areas as we move into the second half of the year.

And could you talk a little bit about what's going on in China as far as lockdowns and those things? Are things getting worse or better, or what the heck is going on over there? Because I don't understand anything.

Well, I think the Shanghai area in the neighborhood is experienced locked down, and that is quite limit the transportation. The factory manufacturer probably is still ongoing because they are kind of isolated quarantine by use that, cannot ship out or when they use all the raw materials they cannot ship in. So that basically, that's the issue that the transportation issue. So, for example, when we don't have wafer manufacturer in Shanghai area, but we do have assembly and testing near by the Shanghai area. And so what we do is waiting for some break and then ship out test IC out or we ship a package IC for the tester. And then that takes some maritime for transportation because you go to the different provinces, you probably need a different path. And -- or you have some tracing once the people all come out to transport or the truck was line up. So that's dynamic we are seeing. But fortunately, we are not using Shanghai City or Shanghai areas foundry or foundries outside of Shanghai. But however, our foundry still have a limited supply, so that's the issue that Jim just talked about. And that is under the so-called that we expect that will be solved by our second source engineering and that's probably going to happen in the near future, but that is a different issue other than lockdown in Shanghai.

Okay. Sounds like a challenge. Just one question about, you have the one-time charge for a special project. Can you say how that -- I don't remember that ever happening before? And is that something you expect in Q2 also?

Yes. This is a special project for the privatization. So it may probably go through several quarters, but this is -- we account this as the onetime expense

Okay. And then I'll give it a shot on the takeover bid. Do you have a -- do you have some idea of what the timing might be as to how long it takes to look at it and make a decision?

No, no. I have no comment on this.

Okay. Just trying. Thank you That's all my questions.

Well take another question from Tore Svanberg with Stifel.

Yes, I just had a follow-up for Sterling. Sterling, the 14-bit analog for NAND on the battery management side is that a product that's currently shipping? And when I think about that from a competitive landscape perspective, is it fair to say that there's probably only one or two other competitors that possibly can deliver such a high-precision analytic front end?

Yes. Our major competitor is TI. And yes, we were told that TI is doing some new IC release trying to catch up. But in the meantime, we're also ongoing, right? So this kind of competition area Yes. -- major...

But is the 14 bit analog for NAND solution shipping at this point or exemting [ph].

Is it shipping right now?

Great. Thank you very much.