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spk06: Ladies and gentlemen, good morning and thank you for joining us today to discuss O2's financial results for the second quarter of fiscal year 2021. If you would like a copy of the press release we issued this morning, please call Danny Myberg, 408-987-5920, extension 8888. It is also posted on the O2 website at www.o2micro.com under the heading investors. There will be a replay available through August 14, 2021, 9 a.m. Pacific time or by 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.
spk02: Thank you. Good morning, everyone, and thank you for joining O2 Micro's Financial Results Conference call for the second quarter of 2021, ending June 30th, 2021. This is Daniel Myberg, Corporate Communications for O2 Micro. I'd like to remind listeners that the discussion for today's Business Outlook 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 20th 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 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 second quarter of fiscal year 2021, ending June 30, 2021. Perry?
spk01: Thank you, Dan. We will now review our financial results for Q2 2021. Please note that financial results will be presented on a gap 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 second quarter of 2021 was $26.2 million. GAAP net income in the second quarter of 2021 was $3.2 million. If we exclude stock-based compensation of $442,000, the non-GAAP net income would be $3.6 million. GAAP net income per fully diluted ADS in the second quarter of 2021 was $0.10. Non-GAAP net income per fully diluted ADS was $0.12. Gross margin was 51.5% in Q2. The gross margin reflects the current revenue level and the product mix. R&D expense was 4.6 million or 17.7% of revenue. This amount is gross stock base compensation expense of 105,000. SG&A expense was 5.1 million or 19.6% of revenue. This amount is gross stock base compensation expense of $337,000. The non-operating income was $133,000. Income tax was $253,000 in the second quarter and is mainly based on the estimated effective tax rate on each taxable location. In Q2 2021, there was no stock repurchase. Q2 2021, revenue by end market breaks down into the following percentages. Industrial was 61 to 63% of revenue. Consumer was 35 to 37% of revenue. Computer was 1 to 3% of revenue. Communications was almost zero. At this moment, I would like to provide some additional information. O2 Micro finished the second quarter with $47.4 million in unrestricted cash and short-term investment. This represents cash and cash equivalents of $1.66 per ADS. In addition, O2 Micro has no debt. Account receivable at the end of Q2 was $16.6 million. Our DSO is 58 days. DSO is less than 60 days mainly from account mix. Inventory was 16 million at the end of the second quarter. This represents 109 days of inventory. And the inventory turnover was 3.3 times in Q2. Net cash generated from operating activities in the second quarter was about 3.6 million. Capital expenditure was about 3.5 million in the second quarter for R&D and IT equipment. Depreciation and amortization was 1 million in Q2. At the end of the second quarter of 2021, O2 Micro had 341 employees. 59% of which are engineers. Based on current market situation and the best updated managerial rolling forecast, the company has the following guidance for Q3 2021. Next revenue are expected to be $26.2 to $27.5 million, or frayed to 5% up from Q2 2021. Product growth 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 4.7 million or 5.2 million. SG&A expenses excluding stock-based compensation are expected to be in the range of $5 million to $5.5 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 $150,000 to $250,000 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 shareholders' value. We have accomplished this by taking the necessary steps, which include managing operating expenses and monetizing assets on the balance sheet. In regards to our share repurchase program, we have been active in the program historically. Since 2002, we have repurchased over 20.3 million ADA shares for $101.3 million. As of the end of Q2, we had $7.6 million remaining in our share buyback authorization. There are still many dynamic factors associated in the business development. We will carefully plan and execute to target revenue growth and maintain growth margin in Q3 2021. Jim and Sterling later will talk more about our focused efforts and investment for revenue growth with major account, product expansion, second-source development, and test facilities for more supply to ensure deliveries. We also monitor the supply chains tightly and have added timely both work-in-process level and inventory to support the dynamic demand from accounts in multiple end markets. Given the uncertain but increasing demand and micro environment, we are continuously investing R&D, patent filing, expanding our supply chains with more complete second sourcing suppliers, testing capabilities of complex product and capacity. And we always watch the expenses carefully and continue to manage costs as needed. although we believe we have a high current cost based on current and 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 updates to the additional measures to enhance shareholder value throughout this year. I would like to thank everyone for participating and turn the call over to Jim Kai to talk more about our business.
spk00: Thank you, Perry. Good morning, everyone. Let me highlight our company's revenue growth over the past two years. Q2 2021 was 51% growth over Q2 of 2020. Q2 2021 was 83% growth over Q2 of 2019. Let me provide a brief explanation of what is driving this growth. as well as an overview of our company's strategic positioning, market focus, and ongoing growth opportunities. As explained in prior quarterly updates, we did benefit in the past year from the COVID-19 crisis due to increased demand for mobility-based products. As more people faced stay-at-home situations, this resulted in rapid growth in demand for monitors, TVs, tablets, and notebooks, that use our lighting technology. Battery management products used in vacuum cleaners, power tools, garden tools, and e-bikes also enjoyed an acceleration in growth during the pandemic. However, this does not explain why we were well-positioned to take advantage of these growth opportunities and why we believe our sales prospects continue to be excellent going forward. For a number of years, O2 Micro invested heavily in R&D, far more than a typical company our size. We did this for several reasons. First, to diversify from our historic notebook market, which at one time was 100% of our business. And second, to broaden our product scope into rapidly evolving lithium-ion battery management business, as well as high-end lighting devices for new market areas. Our major R&D effort paid off in the growth that is now being evidenced. This has included growing our battery management business by a compounded rate of 30 percent a year for the past five years. While 30 percent of a very small revenue base at first does not show significant results, investors now notice the escalating revenues from the compounding of this growth. Indeed, 30 percent of a significant revenue base is very noticeable. As Sterling will mention later, we continue to see the markets for lithium-ion batteries expanding very rapidly, and we believe we are well-positioned to continue to dynamically grow our battery management business. Our lighting business has also evolved with new high-end products and has enjoyed significant growth as TVs and monitors have grown, both in size and complexity. While we once offered a small IC to light a miniature CCFL tube for notebook backlighting, we are now a market leader in complex ICs to drive an ever-growing number of LEDs and advanced display systems across a number of markets. In both lighting and battery management, we have dynamically expanded our business space into industrial applications and are also focusing increased efforts on the huge automotive market. This expansion in both revenue and complexity goes directly back to our major R&D efforts that produce not just products but patented technology that has enabled us to attract major customers. This revenue expansion is also due to a successful effort to strategically position ourselves with major market-leading OEMs. Unlike many semiconductor companies that try to sell to thousands of customers, we focused on a select list of market-leading OEMs that can use our advanced technology and enable high growth potential for our company. In fact, the major customers we have already penetrated can carry our company to much higher revenues. Major OEMs that already use our products 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, Hanhai Foxconn, Lenovo, Panasonic, Samsung, Sharp, Skyward, TCL, and Toyota. The products we deliver into these OEM systems are based on our unique technology, backed by a large intellectual property patent portfolio, much larger than most companies our size. Our internal motto is no IP, no IC. Our unique and advanced technology enabling higher system performance is the reason our products are used at these companies. Once in the supply chain of these major customers, It offers us many opportunities to expand with them into more product areas. We feel the potential for growth with our customer base is enormous. As an example, a customer where we begin to deliver a single IC for a single product in small volumes can and usually does lead us into other similar products they manufacture in higher volumes, as well as products for other market areas in which they are involved. Getting the first design into a major customer is difficult. Expanding the relationship is much easier. Given our excellent technology and key growth areas and excellent customer positioning, we are confident of our ability to continue to grow long-term revenues and enjoy good margins. I will now pass the call over to Sterling Du, our CEO, for closing remarks. Thank you.
spk04: Thanks, Jim.
spk05: O2 Micro reported the second quarter of 2021 revenue of $26.2 million. Revenue was up 12.8% from previous quarter and up 51.6% from the same quarter prior year. The gross margin in the second quarter of 2021 was 51.5%. The gross margin was slightly down from 51.6% of the previous quarter, which is in our company average range. Our revenue exceeds guidance public released on April 30, 2021. Our battery business grew strongly at all the sectors, especially the cordless flow care product, which comes from the strong household demand as work-from-home or flexible work-from-home continues. We also see the garden tools, professional tools market expand rapidly. we believe it is a healthy product mix and strong growth coming from both consumer and construction industry. On the other hand, we see the new battery-powered devices product from the light transportation, innovative household energy storage, to industry-grade inter-power system. With the high growth demand of battery industry Innovative technologies continue to improve energy density and production capacity continue to expand. For example, CATL produced 30.5 GWh in 2019 and 230 GWh in 2020. Project to produce 1,200 GWh in 2025, which will be five times growth in five years. We see such drastic capacity expansion will drive many new innovation battery-powered applications with higher energy density inside in the battery battery core structure. Meanwhile, the higher energy density means the higher resolution needed and the faster AD converter needed. Our AFV analog front end and the BMU, which was designed with 14-bit high-accuracy AD converter could meet customer needs. Our high-accuracy AD converter reached 15 minimum resolution performance, which is way beyond customer expectation. As power tool market grow, coming from the existing marketplace, and also newly creative applications, it expands to more area, including at home, DIY tools, garden tools, to the seasoned contractors. PowerTool helps simplify the labor involved in the production and speed up the production time. Furthermore, our arm-based all-in-one BMA solutions enable PowerTool to be connected as IoT devices. 5G deployment would further enrich the PowerTool connectivity. Our intelligent lighting group business continue to be strong without the sign of slowdown. An interesting trend might drive the high-end TV and monitor sector. We see one of the many reasons of so-called great resignation, which is that people change jobs upon back into office for flexible working hours. Therefore, spending more time at home or flexible working from home remain part of the daily life after pandemic. It is consistent to our observation as we see high-end TV as well as high-end monitor demand continue to expand. Our TV high-end 4K and 8K local dimming backlighting product demand continue to be very strong. The latest IC we rolled out process the ability to control the dimming to either analog function or PWM, pulse width function. Two-in-one mode control further simplify the TV system design architecture if our customer desire to support different type panel dimming solution with only one IC. The global 4K TV market size expect to reach the US $380 billion by 2025. a compound annual growth rate of 21.2% according to the report by Grandview Research. We foresee today's 8K will become the mainstream product in the following years. The mini-LED technology offers much smaller size, only 1% of conventional packaged LED size. It gives the TV system designer the great freedom to design a dimming layout by offering the multi-scan technology without compromising other performance. Why is multi-scan important? The motion blur on LCD display comes from several factors, including pixel transitions and persistence. Our multi-scan technology reduces motion blur effect by refreshing the many predefined motor local area, LED, from different directions simultaneously. The mini-LED could easily compose many predefined smaller local area due to its smaller size. This technology presents a crystal clear picture even with fast moving object in a display. Lastly is not least, both LED backlighting and our battery safety protection technology continue to receive patent grants lately as of our new multiple press release speaking themselves. We continue to grow the business despite the dynamic market situation. We are optimistic for the fundamental of business and focus on high-end and high-performance business. We initiated several expansion projects which incur additional expense for new quarters, including implementing the automotive-grade ISO 26262 STS qualification program. Second, saw spongy qualification tape out, expanded the packaging and the test facility supply chain to ensure delivery on time, and et cetera. We always watch expense carefully, well-built base to drive the future momentum. We always keep the shareholder best interest in mind, especially at current dynamic situation. At this moment, I'd like to thank you for listening our conference call and return back to Dan.
spk09: Dan, please. Thank you, Sterling. At this point, operator, we'd like to open the call to questions.
spk06: Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star 1 to ask a question. We'll pause for just a moment to assemble a queue. We will take our first question from the line of Theodore O'Neill from Litchfield Hills Research. Your line is open. Please state your question.
spk03: Theodore O' Thank you very much. My question is about the battery management market for industrial tools. We all see the proliferation of battery-powered consumer tools, but in recent discussions I've had with commercial construction managers, they're seeing a change to almost all battery-powered commercial tools. And I was wondering if you could comment on if you're seeing this sort of thing, seeing this trend as well.
spk00: Well, yes, we are seeing a trend. And one of the key areas for this whole area of power tools is the ability of, for instance, a construction company to keep track of their tools. So what happens on a major job, for instance, they actually will have global positioning built in. They'll be able to track actually the individual tool, where it is at, and should that tool somehow go astray, they can actually make it dysfunctional. So basically, this is a major, major activity within the power tool industry. And we do see this as being a very dynamic growing market.
spk03: Last quarter, you talked about capex for the year coming to between $10 and $15 million. Is that still your thought for this year?
spk01: The capex, altogether testing and also other area, Yes, still in the 10 to 15 million, but it will up to the delivery schedule. So based on the current update, it could be in the area of a little bit 10 around, 10 million around. Okay.
spk03: Thank you very much.
spk06: We'll take our next question from the line of Lisa Thompson from Zacks Investment Research. Your line is open. Please state your question.
spk07: Good morning. Great to see another great quarter and another one coming up. Um, I have a few questions. First off, SG&A seemed like it was a little high for the quarter. Did you do anything special and spend on something? Was that just hiring?
spk01: Oh, uh, the, the SG&A is, uh, partially, uh, uh, is, uh, partially related to the revenue growth, higher revenue, of course. And the second one is because we are setting up more service team to the different market sectors, and also the extra cost up in the logistics to shorten the time notice from the customers. Also, we are adding some China resumed some traveling to visit the customer and also the account. So this will be at least up a little bit in the amount and also, but however, we also will control the ratio of the rate of the HCNA to the revenue, yeah.
spk07: Okay, great. In the industry, we keep hearing now that there's record double ordering for products. Are you seeing that also? I know this isn't your first rodeo. Are we to fear that maybe next year there will be some inventory collection?
spk00: Lisa, we monitor that issue very closely and it always a concern. One of the things we mentioned in the call is that we focus on major customers. We deal directly with major customers. We do not have distribution channels that typically build up a lot of inventory. And one of the things we do with major customers is we monitor their forecast and usage very closely so that we avoid to the maximum extent any buildup of significant inventories. And we will continue to do that. So at this point, we do not see a major downside risk to ourselves due to any customer holding significant amounts of inventory.
spk07: Right. One thing I noticed for this quarter, it looks like your battery management business is accelerating its growth. It's more than a double-ish. Do you see that continuing based on what you see happening with customers in the markets?
spk00: Well, the battery management business indeed had a very strong quarter, although I will say that lighting also enjoyed a very strong quarter due to both the monitor and TV business. So our growth wasn't just out of the battery management area. We do see ongoing opportunities to expand growth. I will mention that both Perry and Sterling indicated we are looking at expanding our operating capability, including additional fab capability, test capability, as well as assembly capability. And actually, at this point, we have restricted somewhat our customer base due to the rapid expansion. There's only so fast we can expand with the current supply base. But we are now doing that expansion, and so we do expect ongoing growth, but it can't just be unlimited growth due to the time and money it takes to expand.
spk07: Great. That sounds like a good problem to have. So talking about back to the lighting business, I keep reading now a lot of talk about mini LEDs in laptops and notebooks. Do you think that business is going to come back?
spk00: Well, the mini LED business is certainly going to grow. I think in the prior call, we did mention that we are doing some significant work in The mini-LED, including R&D, and we did recently release a press release on a patent that is directly related to mini-LED. So we see the mini-LED market ready to really grow, first of all, in the tablet business, and then it will grow on up into the TV business over time. But the mini-LED business will be a major, major growing business over the next five years.
spk07: So speaking of the patents, I guess you released two of them, two press releases on them this quarter. Could you just dumb them down a little for the rest of us to what that affects those two specific patents?
spk09: Sterling, do you want to comment on that?
spk05: Yes. These are for the miniOD. I think I have only fake impression, but I did write off some of the battery. What we did for the battery pattern, we just put a press release, including we detect when a battery cell, when you have a multiple battery cell, and a certain of the cell has been either malfunction or shortage or even they have a bad connection between each individual cells. At that moment, you're going to see some, you maybe detect the voltage have a significant drop down, however, but you don't know it is going to be the battery intrinsic have chemical issues or just this safety issue. So we come up with a methodology to give a small step up mini current to testing that voltage. and to see that the current and the voltage, we'll call the IV curve, to match certain of the reasonable explanation and to determine this is coming from the failure or it's just simply the aging problem or the health status of the battery. So this is a pattern we just, one of the patterns we issued. And other pattern, sorry for that, I doesn't record that clearly at this moment.
spk07: All right. That sounds really good. Is there anybody in particular that's going to take that up first that's most important to?
spk00: In the mini-LED area, we are working with several very significant entities. We're not able to, due to nondisclosures, we're not able to give out names and specific activity, but But when we are doing these developments, we are working with customers.
spk07: Okay.
spk09: All right. Thank you. That's all my questions.
spk06: We have no further questions. I will hand over the call back to Dan for any additional closing remarks. Please go ahead.
spk02: Thank you. I'd like to thank everyone again this morning for your time and attention. please feel free to contact me at 408-987-5920, extension 8888, or at ir.o2micro.com with any follow-up questions. I'd like to thank everyone. Have a great day and for your time and attention. Goodbye.
spk06: Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.
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