O2Micro International Limited

Good morning and thank you for joining O2Micro's Financial Results Conference Call for the first quarter of 2020, ending March 31, 2020. This is Daniel Meiberg, Corporate Communications for O2Micro.

I'd like to remind listeners that the discussions 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 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. These 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, the floor will be opened to 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 2020 ending March 31, 2020.

Perry?

Thank you, Dan. We will now review our financial results for Q1 2020.

Please note that financial results will be presented on a GAAP basis unless we designate otherwise. The non-GAAP result excludes stock-based compensation expense, one-time charges, non-recurring gains and losses.

Our full year results are available in our press release that was issued earlier today. GAAP revenue in the first quarter of 2020 was $15.6 million.

GAAP net loss in the first quarter of 2020 was $1.5 million. If we exclude stock-based compensation of $397,000 and net loss recognized on long-term investment of $1.1 million, the non-GAAP net loss will be $43,000.

GAAP net loss per ADS in the first quarter of 2020 was $0.06. Non-GAAP net loss per ADS was $0.02.

Gross margin was 51.9% in Q1. The gross margin reflects the current revenue level and the product mix.

R&D expense was $4.1 million or 26.1% of revenue. This amount excludes stock-based compensation expense of $80,000.

SG&A expense was $4.2 million or 27% of revenue. This amount excludes stock-based compensation expense of $317,000.

The non-operating loss was $764 million. Income tax was $205,000 in the first quarter and it is mainly based on the estimated effective tax rate of each taxable location.

In Q1 2020, we repurchased 83,479 ADS unit at a cost of $100,000. Q1 2020, revenue by end market breaks down into the following percentages: consumer was 44% to 46% of revenue, computer was 5% to 7% of revenue, industrial was 48% to 50% of revenue, communications was almost 0%.

At this moment, I would like to provide some additional information. O2Micro finished the first quarter with $44.7 million in unrestricted cash and short-term investment.

This represents cash and cash equivalent of $1.67 per ADS. In addition, O2Micro has no debt.

Accounts receivable at the end of Q1 was $11 million. Our DSO is 62 days.

DSO is more than 60 days mainly from account mix. Inventory was $9.9 million at the end of the first quarter.

This represents 112 days of inventory, and the inventory turnover was 3.2x in Q1. Net cash using operating activities in the first quarter was about $1.3 million.

Capital expenditures were about $200,000 in the first quarter for R&D and IT equipment. Depreciation and amortization was $502,000 in Q1.

At the end of the first quarter of 2020, O2Micro had 370 employees, 64% of which are engineers. Based on current market situation and best update in managerial [indiscernible] forecast, the company has the following in guidance for Q2 of 2020.

Net revenues are expected to be increased from 6% to 12% compared to Q1 2020. Product gross margin expected to be in the range of 51% to 53%.

R&D expenses excluding stock based compensation are expected to be in the range of $4.3 million to $4.8 million. SG&A expenses, excluding stock-based compensation, are expected to be in the range of $4.3 million to $4.8 million.

Stock-based compensation should be in the range of $300,000 to $400,000 in the second quarter. Non-operating income, expected to be in the range of $200,000 to $300,000 in the second quarter, excluding foreign exchange gain or loss and the net gain or loss recognized on long-term investment.

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 the monetizing asset on the balance sheet. In regards to our share repurchase program, we have been active in this program historically, and we plan to continue going forward.

Since 2002, we have repurchased over 20.3 million ADS shares for $101.2 million. As of the end of Q1, we had a $7.7 million remaining in our share buyback authorization.

As reported in last quarter, we will focus on manage – to manage the operating expenses. O2 reach cash breakeven point in Q1 excluding unrealized loss from EMC shares and we will continue to manage OpEx.

[Indiscernible] market and the COVID-19 factors, we have reviewed internally and decided to streamline and reorganize our operation to focus at high margin and high performance business from Q2. There will be one-time severance payment around $1.1 million to $1.2 million in Q2.

We believe our quarterly cash breakeven point now is – is $15 million to $17 million and the profitability breakeven point now is $17 million to $19 million in Q2, excluding one-time charges, non-recurring gains and losses. After the streamline projects executed fully, we believe our quarterly cash breakeven point will be $14 million to $16 million and the profitability breakeven point will be $16 million to $18 million arriving in Q4 excluding one-time charges non-recurring gains and losses.

We will continue to invest on R&D and the higher performance sectors. We also monitor the supply chains tightly and have added or in process to support the dynamic demand from multiple end market timely.

In Q1 2020, 14,000 shares of EMC were sold and US$50,000 cash-in. The average selling price of EMC in Q1 is around US$3.58 per share, with original cost of US$0.53 per share.

We will continue to sell EMC shares in Q2. As of March 31, 2020, we own around 780,000 shares of EMC.

EMC shares prices was $2.59 on March 31 and was closed today at US$3.98 today here. 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. Given the uncertain demand and the macro environment, we are prepared to continue to manage costs as needed.

Although, we believe we have aligned current cost based on current and anticipated revenue levels. I would like to thank everyone for participating and I turn the call over to Jim Keim to talk more about our business.

Jim?

Thank you, Perry. Good morning, everyone.

We were pleased with our Q1 revenue results as well as our Q2 forecast projections that reflects ongoing growth of both our battery management and intelligent lighting product revenues being driven by our design win activity. In Q1, both our company and customers faced many challenges in working around supply issues may difficult by Chinese New Year holidays followed by many COVID-19 factories shutdowns.

Despite these supply chain issues, most of our customers have not changed their targeted revenue for the first half of 2020. In fact, we saw upside demand in key areas due to heavy customer demand for monitors, TVs, notebooks and garden tools in response to government stay at home orders.

We have also seen business activity increase for medical monitors due to the COVID-19 situation as well as e-bikes as people return to work in China. While we remain cautious about the ongoing effects of the COVID-19 situation on the world economy in the second half of the year, we remain optimistic about increasing our market position in key areas based on our strong design win activity.

Let's update business in each of our product areas in more detail. Q1 revenue in our largest product line, intelligent lighting, enjoyed good growth over Q1 of the prior year.

This was the result of our many design wins that include both 4K and 8K TV and expansion of HDR monitors into gaming, medical and industrial applications. While we have expanded our position in higher-end products for TVs and monitors, we have not ignored our strong overall market share and continue to expand design activity in lower-end TV and monitor products, using our new line of patented backlighting products with integrated MOSFETs.

This marketing position is expected to enable our ongoing growth in Q2. Additionally, our R&D efforts in the industrial and automotive lighting have enabled excellent progress and design wins.

This includes advanced products for robotics and autonomous driving applications where we are seeing good acceptance of our new products. While these design wins take longer to generate revenue, we believe this will help enable ongoing long-term growth of our intelligent lighting group.

Our patented battery management product offering continued to experience excellent year-over-year growth as we have seen for the past four years. Our Q1 revenue continued to be driven upward by the ongoing expansion of lithium-ion batteries into more and more product areas as lithium-ion batteries continue to become more cost effective with greater energy capability.

With our patented lithium-ion cell-balancing methodology, we continue to see ongoing growth opportunities with major OEMs in power tool, e-bike, e-vehicle, vacuum cleaners, garden tools and energy storage systems. While we believe each of these market areas will continue to expand long-term, we’re seeing the e-bike market now show significant expansion in countries recovering from COVID-19 as people turn more to bikes for travel and recreation.

As previously noted, our battery management products now include more complex ARM-based microcontroller products for market applications, where our existing customers need more sophisticated battery management. This is enabling us to engage with additional higher end customers including those in the rapidly growing energy storage market.

Customers have successfully evaluated our first ARM-based battery management products and are moving forward to design our products into their next generation of high performance systems. We continue to file battery management patent claims for our new products to protect both our company and our customers’ market positions.

Our major customer list continues to grow and includes Bissell, Black & Decker, Dyson, Electrolux, Lexi, LG, Makita, Narada, Panasonic, Philips, Samsung, Sharp and TTI. I will now turn the call over to our CEO, Sterling, for closing remarks.

Thank you, Jim. O2Micro report the first quarter 2020 revenue of $15.6 million, revenue was down 12.8% from the previous quarter and up 22.1% from the same quarter prior year.

The gross margin in the first quarter of 2020 was 51.9%. The gross margin was down from 56.7% of the previous quarter and up from 50.5% of the same quarter prior year.

Our revenue was in line of the guided range, publicly released in February 6, 2020. Our strong gross margin is as a result of product mix, strategic alliance program, strong growth in the consumer product and many new products ramping up in battery market.

Our major growth driver, intelligent lighting groups local dimming for 8k HRD TV in the multi-scale local dimming for monitor, both take off even during the COVID-19 period. For TV, the latest Sony MASTER series, 85-inch Z9G, 8k HDR has 64 chips of ours.

This Backlight Master Drive is made of full-array LED with local dimming brings more realistic peaks of brightness, more accurate shadow detail and deeper, inkier blacks than standard LED TV. On a full array LED TV with local dimming, the picture is crisp brightness and authentically dark background, while the multiple LED zoning, a local dimming control allow full array TV model to adjust and create contrast depend on the scene residing more light where the brightness is necessary and a less light where darkness is dependent.

For 4k/8k HDR monitor, the now multi-scale local dimming uses and area control [ph] backlighting system, which adjust the brightness in section of the screen depending on the content displayed. However, when the object on the screen falls outside the area of the backlight that is adjusted, a halo effect appears making it impossible to achieve full color accuracy in smaller details.

We start to sample new multi-scale LED backlighting for LCD display monitor. It reduce motion per pulse by eye tricking and movements during the fast motion as well as so called a halo effect with a multi-scale local area dimming technology, the experience of a content production professional or video game player would further enhance.

We see a quite strong demand for the TV and the high end monitor with a work from home policies in place. As Jim indicates, we are at the first stage of the dynamic and difficult to assess the long-term.

Our battery product offers the digital front end, analog front end, battery management unit, step machine driven, batter management unit, second level protection and digital front end MCU integrate gas gauge and MCU-based gas gauge applications. As Jim indicated, Q1 2020 battery business was in high demand.

Work from home and stay at home policies drove the demand for the many types of power tool, garden tool market. The [indiscernible] electrical bike applications grew very strong as a personal transportation is a favorite choice of keeping social distance in many countries.

We have a multiple silicon opportunity for the electrical bike. Previous quarter, battery product revenue grew strongly from the older sectors such as floor care, vacuum cleaners, the hair care application, uninterrupted power system, battery storage system and so long.

As more battery devices require high resolution voltage current and a temperature measurement, our analog front end and BMU were designed with a 14-bit delta sigma A/D converter, which meet customer needs [indiscernible] reach 15 medieval resolution performance where it’s well beyond customer expectation. Our charger product line, we focus on the Japanese high-end market than China full market and open market.

As Perry indicated, we're strategically focused, we’re in a reorganization have expense reduced while minimal top line impact as a full and in open market investment cycle, prolonged and uncertain due to many factors including COVID-19. We currently ship to high-end camera charger, automotive USB charger and floor care vacuum cleaner charger in Japan with a good result of previous quarter during the COVID-19.

We are optimistic for the fundamentals of our business, while the dynamic risk factor of COVID-19 remains uncertain and need more time to assess the impact. We streamlined and reorganized our operation into focus and high margin, the high performance business in order to generate positive cash flow to create a best return for our shareholders.

We always keep the shareholders’ best interests in mind, especially at a current dynamic situation. At this time, I’d like to thank you for listening to our conference call and I’ll turn it back to the Dan.

Dan, please.

Thank you, Sterling. Operator, at this point, I would like to open the call to questions.

Hi everyone.

Good morning.

So this is a great quarter and I think that even more exciting is that Q2 looks like a great quarter too. So firstly, it seems like your expenses came in a lot lower than expected.

Was there anything strange going on or is there something to do with shutdowns that made spending less?

Perry, do you want to take that one?

Yes. We think that's given the factors and also as Sterling indicated the COVID-19 so we decided to streamline the products, which actually take some a much longer expected time for the design to rendering process.

And also the local market China is more complex now. So we decided to do this kind of a streamline to generate the cash flow for the company and also to contribute a positive return to shareholders.

Okay. And since you guys are my only insight into what's really going on in China, could you tell us like where the country is now as far as things being open and things being closed and returning to normal activity.

Perry, why don’t you try this one too.

So Lisa, can you – can you ask the China operation, you mentioned?

The operation and just exactly in consumer business like other stores open with people buying, like what's going on in the process?

For our supply chains, I think that most of our supply chains are back to the normal to the 90 to 100 or even some vendors in China. They can generate output of 100% or 110% of last year that's from the reports of the Q1.

And for the activities, most of the obvious, now we – our associates, now they are going back to our offices and also they are under kind of the social distance and the social discipline in China area. In Taiwan, I think most of the activities are getting regular and normalized in Taiwan.

However, the logistics within our process, it may probably take a longer time to do the flight arrangement due to a limited air flight and also a limited contract per patient. So let's look in my earlier reports, the logistics – because of the prolonged logistical type, so we are aiding the work in process to support our customers demand.

Okay. That's good to know.

And just for talking about demanding, obviously you're doing great selling television sets and the garden tools and the e-bikes, I didn't even think of, people like not taking buses and subways, right. So they're buying a bike.

Right.

That makes a lot of sense. Now does that – is that behavior flowing through the rest of the world?

I know like China started first, but is there now more demand for those things elsewhere?

Yes, as a matter of fact – yes, this is Jim. As a matter of fact, interestingly enough, BBC here had a short message on that last night.

They're seeing some of the same trend now in Europe, more bikes, both for recreational purposes as well as just transportation to and from work. And they really see that as a trend.

And one of our people mentioned they wanted to get a specific type bike, who lives here in the U.S. and indicated he had trouble actually getting that because delivery times are going out on bikes even in the U.S.

at this point.

Interesting. So, I think, the only fear that I would have is that if everybody bought all their garden tools and their TV sets and all that stuff in Q1, do you think that there might be a slackening of demand later in the year?

We – well Q2 looks quite strong as we've indicated. We are obviously looking cautiously at Q3 that is forecasted by some major TV producers to be down some from Q2, but knocked down a horrendous amount at this point.

There seems to be still some pent up demand for people, who wanted to buy things, but stores have not been open, but it remains to be seen. We'll monitor that very, very carefully.

And we do that, try to get weekly inputs from all of our major customers.

Okay. And I guess my last question is about laptops.

Has that resurged? I've seen heard a lot of people saying they ordered – companies have been ordering them to send people to work at home.

Has that resurged and do you think that might keep up a little while?

Yes. Several things are driving that indeed work from home caused quite a spike in notebooks as a matter of fact, many type of notebooks became difficult to procure.

Some of the lead times obviously went out. We've also seen with that a trend for companies now to also move all their employees up to Windows 10.

There has been a lot of older notebooks still on Windows 7. So we think that upgrades will continue to move forward through the year.

Great. Thank you.

That's all my questions.

Thank you, Lisa.

Thank you for your time and attention this morning. Please feel free to contact me at (408) 987-5920 at extension 8888 or at [email protected] with any follow-up questions.

I would like to thank everyone for the call, for joining us today, have a great day, and thank you again for your time and attention. Goodbye.