O2Micro International Limited

Good morning and thank you for joining us today to discuss O2 Micro's financial results for the first quarter of fiscal year 2021. If you would like a copy of the press release with the issue this morning, please call Daniel Myberg at 408-987-5920 extension 8888. We'll email you a copy immediately. It is also posted on the O2 Micro website at www. o2micro.com under heading investors. There'll be a replay available through May 14th, 2021, 9 a.m. Pacific time or by visiting the o2micro 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 us. O2 Micro's financial results conference call for the first quarter of 2021, ending March 31st, 2021. This is Daniel Myberg, Corporate Communications for O2 Micro. I would like to remind listeners that the discussions 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. 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 Kine, 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 first quarter of fiscal year 2021 ending March 31st, 2021. Gary?

Thank you, Dan. We will now review our financial results for Q1 2021. 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 GAAP results are available in our press release that was issued earlier today. GAAP revenue in the first quarter of 2021 was $23.2 million. GAAP net income in the first quarter of 2021 was $2.5 million. If we exclude stock-based compensation of $405,000, the non-GAAP net income would be $2.9 million. Gap net income per fully diluted ADS in the first quarter of 2021 was $0.08. Non-gap net income per fully diluted ADS was $0.09. Gross margin was 51.6% in Q1. The gross margin reflects the current revenue level and the product mix. R&D expense was 4.5 million or 19.3% of revenue. This amount is gross stock base compensation expense of $91,000. SG&A expense was 4.7 million or 20.4% of revenue. This amount is gross stock base compensation expense of $314,000. The non-operating income was $358,000. Income tax was $244,000 in the first quarter and is mainly based on the estimated effective tax rate on each taxable location. In Q1 2021, there was no stock repurchase. Q1 2021, revenue by end market breaks down into the following percentages. Consumer was 36% to 38% of revenue. Computer was 2% to 4% of revenue. Industrial was 60% to 62% of revenue. Communications was almost zero. At this moment, I would like to provide some additional information. O2 Micro finished the first quarter with $47.6 million in unrestricted cash and short-term investment. It presents cash and cash equivalent of $1.68 per ADS. In addition, Ultramicro has no debt. Accounts receivable at the end of Q1 was $17.4 million of DSO is 66 days. DSO is more than 60 days, mainly from account mix. Inventory was $14.7 million at the end of the first quarter. This meant 109 days of inventory, and the inventory turnover was 3.3 times in Q1. Net cash generated from operating activities in the first quarter was about $1.1 million. Capital expenditure was about $2.4 million in the first quarter for R&D and IT equipment. Depreciation and amortization was $969,000 in Q1. At the end of the first quarter of 2021, O2 Micro had 327 employees, 57% of which are engineers. Based on current market situation and the best updated managerial rolling forecast, the company has the following guidance for Q2 2021. Net revenues are expected to be flat to up 8% or 23.2% to $25.1 million as compared to Q1 2021. Product gross margin 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 $4.3 million to $4.8 million. SG&A expenses excluding stock-based compensation are expected to be in the range of $4.4 million to $4.5 million. Stock-based compensation should be in the range of $400,000 to $500,000. Non-operating income is expected to be in the range of $200,000 to $300,000, excluding foreign exchange gain or loss. Income tax expense 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 shareholders' value. We have accomplished this by taking the necessary steps, which included managing operating expenses and monetizing assets 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 20.3 million ADS shares for $101.3 million. As of the end of Q1, we had $7.6 million in our share buyback authorization. There are many dynamic factors associated in the business development we will carefully plan and execute to target revenue growth and maintain growth margin in the first half to 2021. First is to continue to invest in new products while allocating some resources for the second source development for the capacity support. An in-house R&D testing center was placed in March quarter, and more advanced testers for advanced IC testing ship and will be shipped through 2021. We also monitor the supply chains tightly and have added timely both work in process level and inventory to support the dynamic demand from account in multiple end markets. 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 shareholder 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 costs 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.

Thank you, Perry. Good morning, everyone. We were pleased with our Q1 2021 revenue growth that was up 49% over the Q1 2020 revenue and 82% over the Q1 2019 revenue. We expect Q2 2021 revenues to remain strong despite ongoing production issues and limitations in the semiconductor supply chain that create many issues for our operations team. Our revenue growth and resulting profitability continue to be driven by several factors. First, our product groups have successfully developed next generation products that appeal to top tier and brand name OEMs. Secondly, our company's market focus of developing critical new products enhancing customer mobility as noted in our company logo of breathing life into mobility. As stated previously, mobility was thrust into the limelight with the COVID-19 pandemic that helped drive our company revenues upward as the markets we serve experienced a surging demand from a number of factors, including employees being equipped to work from home with computers and monitors. Robert Marlayson, remote learning increasing sales of tablets notebooks and monitors stay at home mandates increasing sales of high end TVs I am monitors for gaming battery managed garden equipment power tools and vacuum cleaners. Robert Marlayson, hospitalizations from coven 19 increasing sales of advanced monitors for diagnosis. travel restraints, and social distancing leading to a rapid surge in the sale of e-bikes. Even as vaccines enable part of our lives to return to a more normal status, we will continue to see increased work from home, education from home, and more sophisticated at-home entertainment. Battery managed power tools, vacuum cleaners, garden tools, e-bikes, and e-vehicles are continuing to expand in usage as increased mobility is here to stay. We continue to express appreciation to our disciplined and dedicated operations team that has worked tirelessly to overcome many COVID-19 obstacles to keep product flowing from wafer fabs to assembly and test with shipment onward to our customers. I will now make some abbreviated remarks about our product lines. Our intelligent lighting product line has enjoyed excellent growth as a result of our many design wins that include both 4K and 8K TV, an expansion of HDR monitors into gaming, medical, and industrial applications, along with expanded home usage. Our next generation of patent-pending products are focused on HDR mini monitors, LED applications in key high-volume markets. These HDR mini-LED products are now being introduced to the market and will be highlighted in more detail in ensuing quarters. While much of our design focus involves leading-edge products, we have not ignored our overall market share and continue to expand design activity in lower-end TV and monitor products using our patent patented backlighting products with integrated MOSFETs. Additionally, our intelligent lighting R&D efforts in the industrial and automotive lighting have enabled ongoing progress in 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 enjoy excellent growth driven by the ongoing expansion of our designs with major OEMs, power tools, e-bikes, e-vehicles, vacuum cleaners, garden tools, and energy storage systems. As previously noted, our battery management products include arm-based microcontroller ICs, for market applications where our existing customers need more sophisticated battery management. This has enabled us to engage with higher end customers, including those in the rapidly growing energy storage market. We continue to see more customers moving forward to design our arm-based battery management products into their next generation high performance systems. Additionally, we are introducing patent-pending high-performance digital front end products for higher cell count applications, including power tool, garden tool, and vacuum cleaners that enable enhanced safety features desired by key customers. We already have key design wins with name brand OEMs for these products. Major OEMs utilizing our battery management products continues to expand It includes Bissell, Black & Decker, Dyson, Electrolux, Luxy, 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, Jim, and good morning, everyone. AutoMicro reported the first quarter 2021 revenue $23.2 million, Revenue was up from the previous quarter and up 49% from the same quarter prior year. The gross margin in the first quarter of 2021 was 51.6%. The gross margin was up from the 51.3% of the previous quarter, which is in our company average range. And our revenue was in line guidance publicly released on February 6, 2021. Our intelligent lighting group sees the rising demands of all sectors, including the TV, monitor, and the tablet. Our TV market focuses on high-end 4K, 8K HDR, local dimming backlighting product, to which we continue to be the market leader. Furthermore, the trend for the next advanced technology is the mini LED, which offers much smaller size only 1% of the conventional package LED size. It means it could deploy 100 times more mini-LED unit in the same area if designer wants to. Therefore, the Panopixel HDR achieves much more fine resolution with a much higher contrast ratio. The high-end tablet market will be the first deployment for mini-LED, followed by high-end gaming monitor when close, becomes more effective. Let us talk about the multi-scan and mini-LED. Motion blur on LCD display comes from several factors, including the pixel transitions and persistence. A sample and hold display creates very high persistency and it creates lots of motion blur, even if the transition were instantaneously. most common way LCD monitor use to refresh pixel in a top to bottom fashion. We address this market with multi-scan LED backlighting technology. The multi-scan methodology could be combination of the full scan and all the way up to the 32 scans instead of only one scan. It reduces the motion blur and halo effect in an optimized way. With the multi-scan local area dimming technology being applied to the mini-LED, the visual experience of panel display improves the crystal ability, even the fast-moving object. The global 4K TV market size is expected to reach the US $380 billion by 2025 at CAGR about 21%, according to the new report from the Greenview Research. Our battery product revenue grew strongly in the older sector, such as cordless flow care product, the cordless household appliance, an interrupt power system, battery storage system, and so on. With the energy density improved, the battery management IC required higher resolution voltage or current and accurate temperature measurements. Our analog front end and the BMU business management unit were designed with 14-bit high-accuracy AD converter to meet customer needs. Our high-accuracy CADC-rich 15-mini-volt resolution performance was well beyond the customer's expectation. Regarding the power tool in the market, The potential is projected to grow from the U.S. $30 billion in 2020 to U.S. $36.9 billion by 2025. The key factors fueling the growth of the industrial market include the increasing adoption of coal-less power tools, the rising demands of the fastened tools in the industrial environment, and the growing construction industry in emerging economies. On the other hand, the power tools are not limited to any single industry. From at-home DIY tools, garden tools, to seasoned contractors, power tools help simplify the labor involved in the production and speed up the production time. And more and more industries utilize the power tools with connectivity, which is expected to grow into the part of the IoT market. The global e-bike market is a project to grow to US $70 billion by 2027 from the US $40 billion in 2020. We notice not only the unit growth of the e-bike, but the number of the battery cell growth to extend the e-bike range. We offer the battery management unit, second level protection ICs, and the support cascade design to be connection up to 20 sale system. We continue to grow the business despite a dynamic market situation. We are optimistic for the mental of our business. We focus on high margin, high performance business, as well as operation, the expense management in order to create the best return for shareholders. We always keep the shareholder best interest in mind, especially at current dynamic situation. At this moment, thank you for listening to our conference call. Turn back to Dan. Dan, please.

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

Most certainly, sir. Ladies and gentlemen, if you'd like to ask an audio question, please press star 1 on your telephone keypad. Please ensure your mute function is not activated until I send through your equipment. Today's first question is coming from Torres Spanberg, calling you from Stifo. Please go ahead. Your line is open. Thank you.

Yes, thank you. First question, now that industrial is approaching two-thirds of your business, could you give us a little sense for some of the sub-segments, how big they are? I assume power tools is still the largest segment, but any more color you can give us there would be great on relative size of the sub-segments.

Yes. Well, the battery management activity has indeed continued to grow very quickly. We've really seen an expansion in the whole battery management area. That includes the power tool activity, as you mentioned. We also have seen significant steps forward in some of the energy storage systems that we have mentioned with many design activities going forward. Some of the garden tool activity includes things like power mowers at this point in time, heavier duty products that aren't lumped into that category, so we continue to see larger cell count, higher content battery management activity going forward. So this is largely driven by the battery management activity.

Great. Thank you, Jim. And a question for you or for Sterling, as we think about the mini LED market, how should we think about content opportunity for O2 Micro? I mean, it sounds like there's going to be so many more LEDs and they will probably need a driver each. So, yeah, if you could comment on what sort of content opportunity you can have, you know, whether by percentage or factors as you're going from a regular LED monitor to a mini one.

Yes. We could be looking at about three factors. Number one is the LED, the mini LED is smaller size compared to the package conventional LED. So the design will always go for the number of the mini-LED usage will be more, and that also create opportunity for the driver. That's number one. Number two, because the package of the mini-LED is much smaller, so the driver is not going to be single driver, but one driver IC combined with a lot of the driving capability, and that increase the packaging and also the size and the content of our IC for the mini-LED. And that means that the pin is much more than conventional one. Number three, so when a smaller package of a mini-LED coming out, and we cannot, we have to accommodate the MOSFET. If continue using conventional external MOSFET, And that actually is not effective, as the total solution area used is much smaller, much reduced. So that we see the integrated MOSFET is the trend for the mini-LED. So that also fuels the ASP content for each driver we are going to ship in a current design. So with the three factors, yes, you are right. is going to be bigger IC, integrated MOSFET, and also the number of the driver will be increased applicable to this mini-LED market.

That's very helpful, Sterling. Last question for Perry. Perry, assuming that the semiconductor industry is going to remain tight on capacity this year, could you just give us an update on you know, your situation, especially some of your foundry suppliers? Are you adding more foundries at this point? Or, yeah, anything that you could comment on as far as your suppliers would be great.

Yes. We are, indeed, we are actually, as I reported, we allocate resources to do the second source. Not only on the foundry supplier, but also on the back end. And also, we are adding the in-house tester for our sale. This will be happening in 2021, ending quarter. We'd like to pull in even with the HR costs to support our customers' demand in the coming quarters. And also, we're also adding the inventory, as you may You may see the balance sheet from the inventory level. So we have a higher inventory in Q1 to support Q2 compared to before, compared to earlier quarter. So we are also adding the inventory to support. So we, whatever that our foundry can offer the incremental part, we will just take it. As we have long-term relationship with our foundry and the bank, we always can get this kind of the extra supply. It's limited, but it's helpful. Yeah, this is my update, yeah.

Yeah, and Perry, you meant, related to that, you spent $2.4 million in CapEx this quarter. Do you have an estimate for the full year?

For the whole year, I expect that it depends on the delivery. But actually, I expect that the CAPEX this year will be in the area of the $10 million to $15 million, based on the delivery and based on the coming requests from our customers.

Great. Thank you very much.

Thank you, sir. We'll now go to Theodore Odeo, calling in today from Litchfield Health Research. Please go ahead.

Thanks very much. I was wondering, are you seeing, on the test equipment side, are you seeing any constraints or lead time issues in getting your test equipment?

Yes.

Yes. Getting longer and longer from Q1. You may add a comment.

Yeah, we comment the same thing, yeah. So, Perry, please go, yeah.

Oh, yes, I think we received the first shipment, but we start to see the delivery getting longer and longer, yeah. But we are in good faith as we also added the in-house testing unit in Wuhan to support our testing program and also in-house testing. So we are in good shape in Q1, yeah. It's on schedule.

Do your customers expect your battery management systems to have a role in minimizing or preventing a thermal runaway? And if so, what trends do you see there?

Could you say it again? Prevent from runaway? Yeah, in terms of thermal. Thermal runaway, yeah. Yes, yes. We call that analog front end ICs, together with the secondary protection ICs. So our analog front end can detect voltage, current, and of course, the thermal. So the way we contribute to this thermal management is we provide a very finite and a very fast responding time to sample the thermal, and it becomes the digital signal, and then we can send to the CPU. While our secondary protection IC can quickly do the same machine-driven. They don't need to wait for the CPU extrusion, and they can do the so-called over-temperature protection. They can trigger the point that we shut down the power or shut down the throughput of the battery. So that's our IC, the functionality in terms of the whole thermal management system. Of course, the whole thermal management system is also made up by other parts, but we are a critical one in the whole system.

Do you see any differentiation in the marketplace where that's more important or less important?

This is very important because when the density, energy density increases and the thermal density also increases, that's That's not only linear. Sometimes it's square functionality, which means that the same cubic, the standard unit space, you're going to pack more energy. So when you are to throughput those battery to a thermal management, the importance is not only just linear. Sometimes it's more than that. You're going to handle that by your detection and also your responding speed. So that requirement is continue going up. Thank you very much.

Thank you much, Mr. O'Neill. Now I'll go to Lisa Thompson calling you today from Sachs Investment Research. Please go ahead, ma'am.

Good morning. I wanted to follow up on the mini LEDs. Could you just give us a vague idea of a television set that's the same size using mini LEDs versus conventional? How much is your content? Is it two times more ASP or 10 times? Just give us a vague idea.

OK. Let me give analytical factor. Number one, mini-OD is still in the expensive range right now. So we don't see any very coming soon that is going to be the TV, especially large TV. So the first mini-OD is happening is going to be in a tablet, and followed by, of course, probably some high-end TV. And then into the gaming, the monitor is going to be mini-OD is much, much better, just because gaming monitor, they handle fast-moving object. So from the tablet to the gaming monitor and the high-end TV. Secondly, if the LED drop the cost effective so that a TV can utilize, which is in the future, and you compare with that, and then we have look at how you combination or set up your mini-LED by the multi-scan. So we are pioneer in the technology for the multi-scan. And that depends how many combination of the multi-scan you're going to use. For example, the two scans, that will be at the low end of the mini-LED arrangement. But the 32 scan, even 64 scan, then you look at that, it's more the mini-LED, more high performance, and so the IC, the number of ASP also go up. So that's the second factor we have to look at that. But just give you a very vague, which is, I really doesn't know who is going to be much more popular in the future TV. So the number of our ICs is coming, becomes big IC. Right now it's small IC, but when you go to the two scan, all the way go to 32 scan, 64 scan, the IC grow. So the IC itself, the pin count could be double. Okay, that's number one. And then number two, Because the mini-LED, they pack more units of the mini-LED, and separate ICs can also go up. So the total silicon area we're providing, I think, will be together to 30% to 80% growth in terms of the silicon area. And how much is going to present really depends on the future, and I will expect Initially, the IC will be expensive, but it will become close to be more effective together with a number of the mini-LED TV or monitor shipment. So that's about the big idea. Thank you.

Okay. That didn't help, but yes. I'm just trying to figure out how much you could grow even if you sold the same amount of units. you know, end user units. But we don't know until the... Is your product going to first show up in a tablet? Is it already designed in?

Yes, we have design activity going into tablet and that will, in fact, be a good growth market for us because we see the tablet market really expanding at this point with a lot of focus on tablets. Everything from travel to education. We see many, many educational institutions now turning to tablet-type devices. So we do expect that to open up significant market opportunity for us.

Okay. I could just go back to what you said something about in battery management. You're introducing digital front-end, patent-pending with key design wins. Can you talk a little bit more about what that is and where that's going into?

As Jim mentioned, this is related to the fast responding time to make the power measurement decision, the digital front end. As a conventional digital front end, they receive the signal, and they make certain decision. But what we're providing is we make fast decision without to notify the CPU. That's number one. We don't wait for CPU, sometimes too late. And number two, we also have complicated the algorithm behind the power measurement decision based on a more complicated factor, such as maybe the aging of the battery, maybe only one cell of the battery has issue, or there's a certain situation which is not not related to battery, but from the charging current coming. And number four, of course, we also measure the thermal, which is the temperature. And then we do the more complicated and faster responding time, and providing the immediate data for the secondary protection IC to make decision. And that is our so-called patent-pending technology handle the issues.

And what end-user products would we see that in first?

I think we have potential vacuum cleaner, which is a very fast-growing market segment, and also the e-bike, because the e-bike using more battery cell and a higher density to reduce the weight. and make the battery management more critical. So they need a more sophisticated protection IC and also DFE, digital front end.

Okay. And one last question is you mentioned again e-vehicles. Can you tell us what's happening in that area as you move up to bigger things?

Yes, we have a plan but still undergoing. And right now, still in the R&D stage. That's what I can say. And that will be the same thing we do for the e-bike. But in an e-vehicle, it's different. I'll just give you one example. The difference is, in an e-vehicle, you need to have the cascade and a lot of stacks, which will be a lot of small module. to made up as the big module, and the many big module and make up the battery pack. Then you have a several battery pack inside a e-vehicle. So communication will be totally different. So that's the technology we are working on, yeah.

OK, great. Thank you. That's all my question.

Thank you.

Thank you. Thank you much, ma'am. And we have no further questions in the queue. I'm going to turn the call back over to Dan for any additional or closing remarks.

Thank you.

Thank you, everyone, for your time and attention this morning. Please feel free to contact me, Daniel Myberg, at 408-987-5920, extension 8888, or at ir.02micro.com with any follow-up questions. I'd like to thank everyone for your time today, and have a great day. Thank you.