O2Micro International Limited

And welcome to the 2022 first quarter earnings release conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Daniel Mayberg. Please go ahead.

Thank you. Good morning, everyone. And thank you for joining O2 Micro's financial results conference call for the first quarter of 2022, ending March 31st, 2022. This is Daniel Mayberg, corporate communications for O2 Micro. If you'd like a copy of the press release reissued this morning, you can call me at 408-987-5920, extension 8888, and we will email you a copy. It is also posted on our O2 Micro website at www.o2micro.com under the heading Investors. There will be a replay available for the next 14 days by visiting the O2 Micro website under the heading Investors. Following the presentation by management, the conference will be open for questions and answers. I'd like to remind listeners that the discussion on 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 meaning 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. The statements made herein are dated information. The company assumes no responsibility to provide updates to this information. With me today are Perry Kuo, CEO and Director, Jim Kine, Head of Marketing and Sales and Director, and Sterling Du, O2 founder, CEO, and Chairman. After the prepared remarks from these gentlemen, the floor will be open for your questions. At this point, I'd like to introduce Perry Kuo. CFO of O2 Micro for a discussion of the financial highlights of the first quarter of fiscal year 2022 ending March 31, 2022. Thank you, Dan.

We will now review our financial results for Q1 2022. Please note that financial results will be presented on a gap basis unless we designate The non-GAAP results include stock-based compensation expense, one-time charges, non-recurring gains and losses. Our full GAAP results are available in our press release that was issued earlier today. GAAP revenue in the first quarter of 2022 was $21.6 million. GAAP net income in the first quarter of 2022 was $915,000. If we exclude stock-based compensation of $574,000 and one-time spatial project expense of $136,000, the non-GAAP net income will be $1.6 million. GAAP net income per fully diluted ADS in the first quarter of 2022 was $0.03. Non-GAAP net income per fully diluted ADS was $0.05. Gross margin was 52.6% in Q1. The gross margin reflects the current revenue level and the product mix. R&D expense was 4.8 million, or 22% of revenue. This amount is growth-based compensation expense of $207,000. SG&A expense. was $5.1 million or 23.4% of revenue. This amount is gross stock base compensation expense of $367,000 and the one-time special project expense of $136,000. The non-operating income was $285,000. Income tax was $203,000 in the first quarter. It is mainly based on the estimated effective tax rate on each taxable location. In Q1 2022, we repurchased 110,924 ADH units at a cost of $463,000. Q1 2022, revenue by end market breaks down into the flowing percentages. was 60% to 62% of revenue. Consumer was 36% to 38% of revenue. Computer was 2% to 4% of revenue. Communication was almost zero. At this moment, I would like to provide some additional information. Ultramicro finished the first quarter with $48.2 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of $1.65 per ADS. In addition, O2 Micro has no debt. Account receivable at the end of Q1 was $16.2 million. Our DSO is 73 days. DSO is more than 60 days mainly from account mix. Inventory was $21.8 million at the end of the first quarter This represents 181 days of inventory, and inventory turnover was 2.0 times in Q1. The strategic increase in inventory is mainly for wafer, die bank, and the battery ICs. Net cash using operating activities in the first quarter was about 1.2 million. Capital expenditure was about 700 28,000 in the first quarter for texture, R&D, and IT equipment. Depreciation and amortization was 1.3 million in Q1. At the end of the first quarter of 2022, O2 Micro had 319 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 2022. Net revenue are expected to be 20.5 to 22.7 million as compared to Q1 2022 of 21.6 million. Product growth 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 $4.8 million to $5.3 million. SE&A expenses excluding stock-based compensation and one-time expense for special projects are expected to be in the range of $5 million to $5.5 million. Stock-based compensation is expected to be in the range of $550,000 to $650,000 Non-operating income expected to be in the range of $200,000 to $300,000, excluding foreign exchange gain or loss. Income tax expense expected to be in the range of $200,000 to $300,000. The goal of our management team and the board of directors is to maximize shareholder value. We have accomplished this by taking the necessary steps, which included managing operating expenses, and monetizing 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 20.5 million ADA shares for $102.2 million. As of the year of Q1, we have $6.7 million remaining in our share buyback authorization. There are still many dynamic factors associated in the business development. We will carefully plan and manage the inventory throughout 2022 and maintain at a strong cash level in the balance sheet. Given the uncertain demand and the macro environment, we are continuously investing in R&D, patent filing, expanding our supply chain with second sourcing suppliers, and capabilities in testing complex product and capacity. We always watch the expenses carefully and continue to manage costs as needed. Although we believe we have a lot of current costs 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 shareholders' value throughout this year. I would like to thank everyone for participating and turn the call over to Jim to talk more about our business.

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

Thanks, Jim.

Our revenue is with the guidance publicly released on January 26th 2022, and our design activity and growth opportunities remain very strong. Our high-end analog technology supports advanced power management products in both intelligent lighting and battery management markets. New products are targeted at more complex industrial, consumer, and automotive markets, as well as top-tier customers that will not only expand our customer base but engage with next-generation product development. On the other hand, the supply chain continues to be in high demand mode. The trend to integrate MOSFET transistors enables higher ASP and larger die size in the roadmap. Therefore, the new products, which are based on proprietary technology backed by a large IP patent portfolio, will not only grow in unit number but higher ASP. We strongly believe that the new products will continue to drive our revenue expansion in 2022 and beyond. While our major customers can carry our product to a higher revenue, we also increase our penetration of their product family. Our Intelligent Lighting Group business continues to grow as the global 4K TV market size is expected to reach US $380 billion by 2025 and a compound annual growth rate of 21.2% according to the report by the Great View Research. We foresee today AK high-end will become mainstream product line in 2025 and beyond. For the full array local dimming technology dominant TV and the digital monitor today, our IC will roll out, process the ability to control the dimming through either analog function or PWM, path-width function, two-in-one mode, control the further Simplify the TV system design architect if our customer design to support a different type panel, dimming solution with one IC. The next generation IC following the full array local dimming is mini LED. Mini LED solve the issue by multiplying the number of LED chips and mounting LED die on substrate, therefore reducing the spacing between each light source and the thickness of the backlight. More importantly, they also can significantly increase the number of zones, which should reduce the blooming and the hair root effect, while the bright object of the highlight much smaller than the individual dimming zones are displayed against a very dark background. Also, miniLED backlight can enhance LCD contrast performance to the level close to the organic LED while maintaining LCD high brightness characteristics and a long lifetime. They can also reduce power consumption as the mode zone will be off in a dark image or the brightness will be dimmed. This miniLED technology over much smaller size compared to the conventional package LED size, it enables the system designer more ability to design a dimming layout while over the multi-scan technology. With the multi-scan, the miniLED could easily compose many redefined smaller local area due to its smaller size. This technology represents crystal clear picture even with fast moving object in a display. We are expect by our new Mini-LED technology and we have a total of nine different solutions to address this market. Each solution meet the different customers need. We believe our Mini-LED business will ramping up step by step in the coming years. Our battery design wind activity grew strongly in the older sector despite the dynamic market and the supply chain situation. We observed a higher number of sales applications to promote market share. It was targeted from the cost curve sharply as well as battery quality improved, which enhanced the yield rate of high sales number battery packs. We believe the strong growth coming from both consumer and the industry sectors. On the other hand, we see the new battery-powered devices produced for the light, transportation, innovative household energy storage, and the industrial grading on internal power supply. October 1, 2021, last year, USB 4.0 power delivery type C announced the standard expense to the new 240 watts from the existing 60-watt standard. This news explained the USB Type-C to power to a market size and to fuel the future growth of power to the next level. Meanwhile, the higher energy density means higher resolution and a faster AD converter are needed. Our analog front end and our battery management unit were designed with a 14-bit high accuracy AD converter could meet customer needs. Our high-accuracy AD converter reaches 15 millivolt resolution. This performance is well beyond customer expectation. Our arm-based, all-in-one battery management system solution enables power tools to be connected as IoT devices. And the 5G deployment will further enrich the power tool connectivity. We expect to grow the business despite the dynamic market situation and the tight supply chain. We are optimistic for the fundamentals of our business and focus on high-margin, high-performance sectors. We started several expansion projects a few quarters ago to address the automotive market, second-source re-engineering, and recruiting more engineers outside China. We always watch the expansion carefully will help build the base to drive future momentum. We always keep the shareholder's best interests in mind, especially in the current situation. At the moment, I'd like to thank you for listening to our conference call, and I turn back to Dan. Dan, please.

Thank you, Sterling. We will shortly be opening up the lines for questions. We will not be addressing any privatization-related questions on this call. As disclosed in the O2 Micro International Limited press release as of March 18, 2022, O2 Micro's board has received preliminary non-binding proposal letter dated March 14, 2022 from FNOF Precious Honor Limited to acquire all of the outstanding shares of the company for a purchase price of US $5.50 per ADS or US 11 cents per ordinary share in cash. Following receipt of the proposal, O2 Micro International Limited, sorry, O2 Micro International has formed a special committee consisting solely of independent directors to evaluate and consider the proposal and proposed transaction and has engaged its own financial and legal advisors. The Special Committee is continuing its review and evaluation of the proposal and proposed transaction and has not made any decisions with respect to the proposal and proposed transaction. The proposal constitutes only a preliminary indication of interest and does not constitute any binding commitment. The O2 Micro International Limited has been making SEC filings and issuing press releases in connection with the proposal and will continue to do so pursuant to the requirements of the SEC and rules and regulations. We encourage you to periodically check the company's SEC filings for more information regarding the proposal or proposed rights actions. Thank you. Operator, at this time, we'd like to open the call to questions.

Thank you. And 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 take our first question from Theodore O'Neill with Litchfield Hills.

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

Yes, I'd be happy to address that. First of all, you are right. We can't be compared to a distributor because demand is still out there for the broad base of products that they have and they can basically ship everything they can get their hands on basically there's several fundamental reasons for us being flat intelligent lighting is pretty simple we're wafer limited and we expect to be wafer constrained until we get into q3 so very simply put we can't ship additional lighting product until we get additional wafer supply on the battery management side Dave Kuntz, The issues are several first of all you're in a seasonality situation going into Q2 for some of the power tool garden tool type products, as we mentioned on the call. Dave Kuntz, Secondly, we do have some and we know we have with with some of our major customers. Some inventory that is in place they built some strategic inventories during the shortage Which we were able to deliver to them last year even and so at this point They are going to work through some some inventory issues So we do expect q2 to be flat as well in the battery management area That's my comment on That's that's that's great.

Thanks very much

Our next question from Torres Fanberg with Stiefel.

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

Yes. Yes. Sorry. Yes. Confirm. Yes. Sorry.

Yeah.

Go on.

I had just one word. Answer. Confirm. Go on, Gary.

Oh, yeah. I think the inventory increase is our strategic inventory. Yeah. I think this is arranged to meet the future upside from the key account after they consume some inventory, as Jim just indicated. and the demand from the key customers in China and also in other area actually for some battery product. The upside orders, it comes actually in a very short lead time as we experienced in Q2 last year. So that's why we have done some strategic inventory. Also, we also experienced some longer testing time for the battery product. So let's also we increase some a big end area to support our customers. Yeah.

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

Yes, I think that... Oh, sorry. I think that starting from Q2, the end of the Q2, inventory will be down in terms of the inventory turns will be up. This is what I simulate currently. Jim, would you like to add your comment?

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

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

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

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

Yes. It comes with the new technology. Always enjoy higher gross margin. Yeah, it is.

Okay. Very good. Thank you very much. Thank you.

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

Good morning. Going back to your capacity constraints and backlighting, I know you spent a lot of money last year trying to increase capacity. When that comes online, how much more will you have?

And can you translate that into like revenues per quarter?

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

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

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

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

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

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

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

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

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

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

No, no. I have no comment on this.

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

We'll take another question from Torres Banberg with Steve Full.

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

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

But is the 14-bit analog front-end solution shipping at this point, or is it sampling?

It's shipping right now, yeah. Great. Thank you very much.

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

Great. Great. Thank you. Thank you. Thank you everyone for your time and attention this morning. Please feel free to contact me at 408-987-5920 extension 8888. or at irat02micro.com with any follow-up questions. I'd like to thank everyone and have a great day for your time and attention. Goodbye.