O2Micro International Limited

Good morning, and thank you for joining us today to discuss O2 Micro's financial results for the third quarter of fiscal year 2020. If you would like a copy of the press release we issued this morning, please call Daniel Myberg at 408-987-5920, extension 8888, and we will email you a copy immediately. It is also posted on the O2 Micro website at www. There will be a replay available through November 13, 2020, 9 a.m. Pacific Time, or by visiting the O2 Micro website under the heading Investors. Following the presentation by management, the conference will be open for questions and answers as time permits. Gentlemen, you may begin.

Thank you. Good morning, everyone, and thank you for joining O2 Micro's Financial Results Conference Call for the third quarter of 2020, ending September 30, 2020. This is Daniel Myberg, Corporate Communications for O2 Micro. 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 20F annual filings, our annual reports, and other documents filed with the SEC from time to time. Listeners are referred to the O2 microearnings press release and the documents filed with the SEC to understand these forward-looking statements and the associated risk factors. These statements are herein our dated information. The company assumes no responsibility to provide updates to this information. With me today are Perry Kuo, CFO and Director, Tim Kime, 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 open for your questions. At this point, I would like to introduce Perry Kuo, CFO of O2 Micro, for a discussion of the financial highlights of the third quarter of fiscal year 2020, ending September 30, 2020. Terry?

Thank you, Dan. We will now review our financial results for Q3 2020. Please note that financial results will be presented on a GAAP basis unless we designate otherwise. The non-GAAP results include stock-based compensation expense, one-time charges Now, recurring gains and losses. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the third quarter of 2020 was $22.2 million. GAAP net income in the third quarter of 2020 was $2.9 million. If we exclude stock-based compensation of $326,000, and net loss recognized on long-term investment of $171,000. The non-GAAP net income will be $3.4 million. GAAP net income per fully diluted ADS in the third quarter of 2020 was $0.10. Non-GAAP net income per fully diluted ADS was $0.12. was 51.8% in Q3. The growth margin reflect the current revenue level and the product mix. R&D expense was 4 million or 18% of revenue. This amount is closed stock based compensation expense of 66,000. SE&A expense was 4.1 million or 18.3% of revenue. This amount is close to the base compensation expense of $260,000. The non-operating income was $68,000. Income tax was $255,000 in the third quarter and is mainly based on the estimated effective tax rate on each taxable location. In Q3 2020, we repurchased 14,993 ADS units at a cost of $44,000. Q3 2020, revenue by end market breaks down into the following percentages. Consumer was 42% to 44% of revenue. Computer was 5% to 7% of revenue. Industrial was 50% to 52% of revenue. Communications was almost zero. At this moment, I would like to provide some additional information. O2 Micro finished the third quarter with $40.8 million in unrestricted cash and short-term investment. This represents cash and the cash equivalent of $1.51 per ADS. In addition, O2 Micro has no debt. Accounts receivable at the end of Q3 was 16.8 million. Our DSO is 58 days. DSO is less than 60 days, mainly from account mix. Inventory was 12.9 million at the end of the third quarter. This represents 106 days of inventory and the inventory turnover was 3.4 times in Q3. Net cash using operating activities in the third quarter was about $1.1 million. Capital expenditure was about $733,000 in the third quarter for R&D and IT equipment. Depreciation and amortization was was $913,000 in Q3. At the end of third quarter of 2020, Ultramicro had 298 employees, 56% of which are engineers. Based on current market situation and the best updated managerial rolling forecast, the company has the following guidance for Q4 2020. Net revenue are expected to be up 2% to 8% from Q3 2020. Product growth margin is expected to be in the range of 50% to 52%. R&D expenses, excluding stock-based compensation, are expected to be in the range of $4 million to $4.5 million. SG&A expenses, excluding stock-based compensation, are expected to be in the range of $4 million to $4.5 million. Stock-based compensation should be in the range of $300,000 to $400,000. Non-operating income is expected to be in the range of $200,000 to $300,000, excluding foreign exchange gains or losses, and net gains or losses recognized on long-term investments. Income tax expense expected to be in the range of $200,000 to $300,000. The goal of our measurement 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 $101.3 million. As of the end of Q3, we have $7.6 million remaining in our share buyback authorization. We believe now our quarterly cash break-even point will be 14 to 16 million, and the profitability break-even point will be 16 to 18 million, excluding one-time charges, non-recurring gains and losses. We will continue to invest our R&D and high-performance testers in the current and the coming quarters. We also monitor the supply chains tightly and have added a working process to support the dynamic demand from multiple and market timelines. In Q3 2020, 165,000 shares of EMC was sold and about US $658,000 cashing. The average selling price of EMC in Q3 is around US $4 per share with a regular cost of US $0.53 per share. We will continue to sell EMC shares in Q4. As of September 30, 2020, We own around 424,000 shares of EMC. EMC share price was US $3.57 on September 30th and it was close at $3.64 on today, October 30th, 2020. Returns to shareholders are very much on our minds and will continue to be a focus in the future. we will provide updates to the additional measures to enhance shareholders' value throughout this year. Given the uncertain demand and macro environment, we are prepared to continue to match costs as needed. Although we believe we have a light current cost based on current and anticipated revenue levels, I would like to thank everyone for participating and turn the call over to Jim Kai to talk more about our business. Jim, please.

Thank you, Perry. Good morning, everyone. We were very pleased with our Q3 results and expect ongoing revenue growth in Q4. This reflects a strengthened market position and revenue growth of both our intelligent lighting and battery management being driven by our ongoing DesignWin activity. Since we have many new investors joining our call, let me reiterate three key factors driving our revenue growth and profitability. First, a disciplined and dedicated operations team that worked tirelessly to overcome many COVID-19 obstacles to keep product flowing from wafer fabs to assembly to test with shipment onward to our customers with a remarkable on-time delivery performance. Second, our product groups have successfully developed next-generation products that appeal to top-tier and brand-name OEMs that we can now proudly call customers. Third is our company and market focus. Our company logo, seen under our name and on our website, and the press release announcing this call reads, Breathing Life into Mobility. Mobility was thrust into the limelight with the COVID-19 pandemic. It immediately increased demand for mobility-based products and helped drive our company revenues upward. Let me briefly mention these. Work from home meant employees being equipped with computers and monitors. Educate from home increased sales of tablets, notebooks, and monitors. Staying at home increased sales of high-end TVs. high-end monitors for gaming, battery managed garden equipment, power tools, and vacuum cleaners. Hospitalizations from COVID-19 resulted in sales of advanced monitors for diagnosis. Travel restraints and social distancing led to a rapid upsurge in the sales of e-bikes. Although a vaccine may return some things to normal, Much of that new normal will continue to include the ability to work from home, educate from home, and enjoy more sophisticated entertainment at home. The pandemic will have a lasting impact on the way we live, and increased mobility is here to stay. Finally, I will make some abbreviated comments about our product lines. Our intelligent lighting product line enjoyed excellent growth over Q3 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, along with expanded home usage. While we have a leading position in higher-end products for TVs and monitors, we've not ignored our overall market share and continue to expand design activity in lower-end TV and monitor products using our patented backlighting products with integrated MOSFETs. This market positioning is expected to enable our ongoing growth. Additionally, our intelligent lighting R&D efforts in the industrial and automotive lighting have enabled ongoing progress and design wins. This includes advanced products for robotics and autonomous driving applications where we are seeing good product acceptance. While these design wins take longer to generate revenue, we believe this will help enable long-term growth of our intelligent lighting group. Our battery management product line also continues to see excellent year-over-year growth. Our Q3 revenue growth continued to be driven by the expansion of our designs with major OEMs in power tools, e-bikes, e-vehicles, vacuum cleaners, garden tools, and energy storage systems. As previously noted, our battery management product line includes arm-based microcontroller products for market applications where our existing customers need more sophisticated battery management. This enables us to engage with higher-end customers, including those in the rapidly growing energy storage market. Customers are moving forward to design our arm-based battery management products into their next-generation high-performance systems. We continue to file key 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, Murata, Panasonic, Philips, Samsung, Shark, and TTI. I will now turn the call over to our CEO, Sterling, for closing remarks.

Thank you.

Thank you, Jim. AutoMicro report, third quarter, 2020 revenue of $22.2 million. Revenue was up 28.6% from the previous quarter, and up 38.7% from the same quarter prior year. The gross margin in the third quarter of 2020 was 51.8%. The gross margin was up from 51.2% of previous quarter and up from the 50.4% of the same quarter prior year. Our revenue was in line with the updated guidance publicly released on October 2, 2020. The power tool market is projected to grow from the the $30 billion in 2020 to the $36.9 billion by 2025. The key factor fueling the growth of the market and the growing adoption of the cordless power tools, rising demand for the fastened tools in industrial environments, and the growing construction industry emerging economies. The European Union has already banned the use of NICAD which is a nickel cadmium for power tool batteries due to the toxic material of cadmium. As a result, the demand for the Colex electrical power tool with lithium ion battery is likely to increase. On the other hand, the lithium ion battery cost is $1,183 in 83 kilowatt in 2010. And nine years later, the price has dropped 86% to the $156 kilowatt-hour in 2019. Lithium-ion battery production base also grew from 19 gigawatt-hour in 2010 to the capacity of this year, 2020, 285 gigawatt-hour. Furthermore, the industry expert forecast the global lithium-ion cell manufacturer capacity could quadruple to reach 1,400 gigawatt hour by 2030. A full-scale battery management subsystem is made of the battery monitoring, battery gas gauge, charger battery balance, and multiple level safety management. We provide full service, the digital front end, analog front end, with a different number of the battery cell applications for the monitoring solutions. Within our monitoring ICs, we design state-of-the-art, the fast-speed AD converter, which enables quick cycle in whole array of battery data sensing. We also over-highly integrate the battery management unit, which contains state machine-driven BMU or CPU-based BMU. Depends customer requirement. And the second level protection, DFE, MCU gas gauge. And in between the single monitor ICs and these highly integrated ICs, we offer various solutions for the most optimized monitoring IC and highly integrated IC for customers. As a gym indicator, we have very successful Q3. We see not only the business growth in each sector, but a growing sale number and higher performance customer demand that fuel our business. For example, we see our battery product revenue growth was driven strongly from the older sector, such as cordless, flow care product, and household health care device, interrupt power system, battery storage system, and so on. With the lithium-ion battery price going down and the energy density improved, the battery management I see require higher resolution voltage, current sensing, and accurate temperature measurements. Our AV and the BMU were designed with a 14-bit high-accuracy AD converter as mentioned, and that could meet customer needs. In some example, we could reach 15 million, a million volt resolution performance. Well, this is a while beyond a customer expectation. Our O2's second major growth driver is intelligent lighting groups. Our high-end 4K and 8K monitor local dimming backlight product has grown strong growth rate driven by the general TV market demands and the 4K HDR TV popularity. And customers spend more time at home, work from home, education from home, or virtual meeting, conference, concert from home. The high demand comes from not only growing number of the TV or monitor, but higher quality of the graphic fuel the high-end big lighting solution growth. The global 4K TV market size is expected to reach $380 billion by 2025, which is at compound annual growth rate of 21.2% according to the report. For new multi-scan LED big lighting, IC for the LCD display is made of a group product line, including we have two scans, four scans, and all the way up to the 16th scan. It reduces the motion burden, so-called halo effect at optimized rate. With the multi-scan local area dimming technology, the experience of monitor display improves the crystal ability when the object moves fast. And on the other hand, our local dimming backlight IC continue to win the market share in the high-end TV market. The backlight subsystem is made of thousands of full-array LED with our local dimming create higher contrast ratio, depending on the scene, resulting to more light when the brightness is necessary and darker when darkness is demanded. We continue to grow the business despite the COVID-19. We are optimistic for the fundamental of our business. While the dynamic risk factor of market, COVID-19, and the international trade issue remains uncertain, we continue to focus on high margin, high performance business in order to generate the positive cash flow to create the best return for shareholder. We always keep the shareholder base entry in mind, especially at this current dynamic situation. At this moment, I'd like to thank you for listening to our conference call. And I turn back to the den. Den, please.

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

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Tori Stamberg with Stifle.

Yes, thank you and congratulations for the results. First question is on the Q4. Could you talk a little bit about your relative visibility going into the December quarter? And can you also perhaps talk a little bit about, you know, which of the segments that's going to be driving the sequential growth in Q4?

Yes, Tory, this is Jim speaking. We have very good visibility into Q4. The vast majority of the backlog is already in place at this point. We also see growth, very good growth, in the battery management product line. as well as growth in the intelligent lighting product area. Typically, in intelligent lighting, we see the TV market softening in Q4. This year, the TV market is holding up very well, and we expect it to basically be flat to Q3, but we see ongoing growth. The monitor business is very strong at this point. So we expect to see growth in both product lines in Q4.

Very good. And congratulations on getting industrial to more than half of your revenues. That was very exciting to see. But you also mentioned some design wins in automotive industry. Could you perhaps a little bit elaborate on that, and what types of products should we expect AutoMicro to sell to the automotive market?

We have worked with some automotive partners for a while. As we all know, the future vehicle, no matter if it's electrical or not, they will equip many of multiple so-called sensors, probably the image, probably it's the objective obstacle sensing. Those sensors will be equipped, more than 2,000 all kinds of sensors. And each sensor, they need the power IC to provide a power supply. And the common requirement for those is in a very short timeframe, you need to providing the high DC current without any energy drawback or compromised. Accuracy to providing those current to array of the sensor is also very critical. We have a multiple opportunity to power the multiple different sensor for the vehicle. This is a As Jim indicated, this is a long-term project, but we do have prototyping to providing for the people to supplement at this moment.

Very good. Congratulations again.

And again, to ask a question, please press star 1. We'll take our next question from Lisa Thompson with Zacks Research.

Hi, everyone, and nice to see another excellent quarter. So could you give a little big picture of what you think might be happening next year? I know one big concern this year is that last year was so bad and then everybody was home and they bought all their TV sets and all their power tools and that next year, there might be less demand because people bought it all this year. Could you kind of talk about what you're seeing out there?

Lisa, right now we see the customer base, and of course we deal with major OEMs in both the lighting and battery management area, we see them growingly optimistic about the 2021 timeframe. And part of the reason for that is they are seeing expanded sales, particularly into the Asian market at this point. And the other thing we see is this ongoing tendency toward higher-end products, both in the TV and monitor area, also in the battery management area. Let me explain that a little bit. The monitors and the TVs are getting larger with higher quality displays. And that not only is growing very nicely at the high end, but in many cases now, we have multiple products into those systems. So that really helps our revenue. The other area, battery management, we see more and more cells getting stacked together in many markets, from e-bikes to vacuum cleaners, for instance. In the garden tool area, you're beginning to see the beginning of more and more lawnmowers and garden tractors, and these require quite sophisticated battery management. And we don't see those markets at this point slowing down, and neither do our customers. They see the battery management area continuing to grow, and we see the monitor business in particular growing. growing well. The TV market, while it tends to be somewhat flat with minor growth, nevertheless, we have more and more products going into that market. So we remain very optimistic at this point. I would say more optimistic than we were on the last call even about what is going to happen in 2021.

Wow, that's great. Let me just go back to, I think you said, what was it, the 4K TV market was $380 billion. growing at 21.2%. What was that?

Yes, according to the report, because amount of TV, the 4K is the growing faster sector, as Jim just mentioned, that tendency to the high end. So yes, $380 billion by 2020 at the compound annual growth rate, 21%.

Okay, so what's your feeling? So given that you are now putting multiple chips in those kinds of TVs and more things. Do you have a feeling of what your potential growth rate is if those are the numbers for the market as a whole?

It is difficult to estimate as a product mix. Let me put it this way. For the high-end customer in Japan, They would like to have the most higher contrast ratio and the motion blur free TV design. They intend to using more IC for their local area, which is they may be using 2,000 zones or 1,000 zones. It depends on the contents of the scene to adjust the backlighting locally. The same local deeming go to mid-range, mainstream 4K TV design, for example, in China or other Asian countries. For those design, they intend to using the less IC to saving the cost and providing the so-called comfort enjoyment of the screen. That is going to the entry to see how much of the product mix and the custom mix between the high-end and so-called mid-range 4K HDR. As a whole, we're going to grow at least for currently we see that we will grow slightly up because you also combine with the so-called the price, the cost down. for each time, but the number of ICs is going to be applicable, and so all done together is a product mix. It's going to be a flight to sliding up, as Jim just mentioned.

Okay, so that would mean that you think you'll grow a little faster. That's how I'm interpreting that.

Yeah, we are faster than a general TV, yes.

Okay. All right, great. Sounds good. So anything we should know about any upcoming new products you're built into or anything you're seeing that's special out there that's changing in your product mix?

I think there's something emerging technology for trying to improve the tablet and the notebook. Because tablet and notebook ideally for so-called mini-LED. Now, go to the mini-LED, the same technology we designed for the current panel will be repeated again, and even more sophisticated. For example, the multi-scan, for example, the many different zones, and that will be repeated again. But because it's mini-LED, it also depends on the LED the manufacturer, which is also a customer. And they will require more high-accurate power supply, IC, to providing the current for those small, tiny LED and a larger number. So for those, they are design-challenging and also intend to provide a so-called new generation of display experience. for the future, for what we see is coming out from tablet and a notebook, maybe also, it depends, because it's a pricing issue, so they go to the smaller size of screen, and then gradually will maybe go to the gaming monitor, yeah.

Okay, so that was, Mark, it was dead for a long time, so it looks like there's some more interest in it now.

Right.

Okay, I think that's all the questions I have. Thank you.

Thank you, Lisa.

Thank you. And there are no further questions in the queue. I'd like to turn the call back over to Dan for any closing remarks.

Thank you all for your time and attention this morning. Please feel free to contact me at 408-987-5920, extension 8888, or at ir2micro.com with any follow-up questions you may have. I'd like to wish everyone a wonderful day, and thank you again for your time and attention. Goodbye.

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