OIIM - O2micro International Ltd (OIIM) Q3 2022 Earnings Call Transcript
O2micro International Ltd (OIIM)
Q3 2022 Earnings Conference Call
November 04, 2022, 09:00 ET
Company Participants
Daniel Meiberg - Corporate Communications Officer
Perry Kuo - CFO
James Keim - Head, Marketing & Sales and Director
Sterling Du - Chairman & CEO
Conference Call Participants
Theodore O'Neill - Litchfield Hills Research
Tore Svanberg - Stifel, Nicolaus & Company
Lisa Thompson - Zacks Investment Research
Presentation
Operator
Good morning, ladies and gentlemen, and thank you for joining us today to discuss O2Micro's Financial Results for the third quarter of fiscal year '22. [Operator Instructions]. If you would like a copy of the press release we issued this morning, please call Daniel Meiberg at 408-987-5920, extension 8888, and we will e-mail you a copy immediately. It is also posted on the O2Micro website at www.o2micro.com under the heading, Investors. [Operator Instructions]. Please note, this event is being recorded. There will be a replay available for the next 14 days by visiting the O2Micro website under the heading, Investors. With that, gentlemen, you may begin your presentation.
Daniel Meiberg
Thank you. Good morning, everyone, and thank you for joining O2Micro's Financial Results Call for the third quarter of 2022 ending September 30, 2022. This is Daniel Meiberg, Corporate Communications for O2Micro. I'd like to remind listeners that the discussion of business outlook for O2Micro 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 O2Micro earnings press release and the documents filed with the SEC to understand these forward-looking statements and the associated risk factors. These statements made herein are dated information. The company assumes no responsibility to provide updates to this information.
With me today are Perry Kuo, CFO and Director; Jim Keim, Head of Marketing and Sales and Director; and Sterling Du, O2Micro'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 to you, Perry Kuo, CFO of O2Micro for a discussion of the financial highlights of the third quarter of fiscal year 2020 -- sorry, 2022 ending September 30, 2022. Perry?
Perry Kuo
Thank you, Dan. We will now review our financial results for Q3 2022. Please note that financial results will be presented on a GAAP basis unless we designate otherwise. The non-GAAP results is gross stock-based compensation expense, onetime charges, nonrecurring 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 2022 was $18.2 million. GAAP net loss in the third quarter of 2022 was $1.3 million.
If we exclude stock-based compensation of $594,000 and the corporate special project expense of $1.3 million, the non-GAAP net income will be $649,000. GAAP net loss per fully diluted ADS in the third quarter of 2022 was $0.04. Non-GAAP net income per fully diluted ADS was $0.02. Gross margin was 52.3% in Q3. The gross margin reflect the current revenue level and the product mix.
R&D expense was $4.6 million or 25.4% of revenue. This amount is gross stock-based compensation expense of $212,000. SG&A expense was $4.6 million or 25.4% of revenue. This amount is gross stock-based compensation expense of $382,000 and a corporate project expense of $1.3 million. The nonoperating income was $615,000. Income tax was $239,000 in the third quarter and is mainly based on the estimated effective tax rate of each principal location.
In Q3 2022, there was no stock repurchase. Q3 2022 revenue by end market breaks down into the following percentages. Industrial was 48% to 50% of revenue. Consumer was 46% to 48% of revenue. Computer was 2% to 4% of revenue. Communication was almost 0. At this moment, I would like to provide some additional information. O2Micro finished the third quarter with $50.3 million in unrestricted cash and short-term investment. This represents cash and cash equivalent of $1.72 per ADS. In addition, O2Micro has no debt.
Account receivable at the end of Q3 was $13 million. Our DSO is 75 days. DSO is more than 60 days, mainly from account mix. Inventory was $22.5 million at the end of the third quarter. This represents 229 days of inventory and inventory turnover was 1.6x in Q3. Net cash provided by operating activities in the third quarter was about $1.8 million.
Capital expenditures were about $590,000 in the third quarter, mainly for R&D, IT equipment and testers. Depreciation and amortization was $971,000 in Q3. At the end of the third quarter of 2022, O2Micro had 345 employees, 60% of which are engineers. Based on current market duration and the best updated managerial rolling forecast, the company has a following guidance for Q4 2022. Net revenue is expected to be $16 million to $19 million as compared to Q3 2022 of $18.2 million. Product gross 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 $4.5 million to $5 million.
SG&A expenses, excluding stock-based compensation and expenses for corporate special projects are expected to be in the range of $4.6 million to $5.1 million. Stock-based compensation is expected to be in the range of $550,000 to $650,000. Nonoperating income expected to be in the range of $300,000 to $400,000, 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 shareholder value. We have accomplished this by taking the necessary steps, which included managing operating expenses and monetizing asset on the balance sheet. In regards to our share repurchase program, since 2002, we have repurchased over 20.5 million added shares for $102.2 million. As of the end of Q3, we had $6.7 million remaining in our share buyback authorization. In Q3, we are facing inventory correction due to weaker demand from some selected markets by inflation. We will carefully manage the inventory. The volume process in end and finished goods will be highly controlled based on the market demand and the inventory adjustments.
Given the uncertain changes in demand and the macro environment, we are continuously investing in R&D testing capabilities of compressed product for more capacity and cost. And we always watch the expenses carefully and continue to manage cost as needed. Although we believe we have aligned current cost based on current and anticipated revenue levels in Q4, excluding the expenses for corporate projects, the cash breakeven point is expected to be $16 million to $17 million. Returns to shareholders are very much on our minds and will continue to be a focus in the future. We will provide update to the additional measures to enhance shareholder value throughout this year. I would like to thank everyone for participating and turn the call over to Jim Keim to talk more about our business. Jim?
James Keim
Thank you, Perry. Good morning, everyone. As projected, our Q3 revenue of $18.2 million was lower than Q2 revenue due to inventories that resulted from improving supply chains during Q2, while consumer spending simultaneously slowed for products like power tools, vacuum cleaners and TVs. This combination of events resulted in both ODM and their OEM partners having significant inventories of consumer products that impacted our Q3 revenue and will have ongoing impact on Q4 revenue. Most of these inventories will be cleared by the end of Q4, although some inventories will linger into the first half of next year.
Beyond the inventory issues, we continue to see industrial and automotive market remain strong where we have a growing presence. The slowed demand in consumer products enabled us to not only resolve previous product delinquencies but has enabled us to shift our capacity and resources more rapidly in the higher-end industrial and automotive products where we have focused much of our R&D and design efforts in the past 2 years. Simultaneously, we are continuing to broaden our overall production capability to enable us to support revenue growth across a much broader market and customer base. This includes expansion of wafer supply, assembly and test, including suppliers outside of China and Taiwan.
Our design activity in both Battery Management and Intelligent Lighting remains robust. This includes engagement with new customers who are leading suppliers of industrial and automotive products, as well as higher end products for consumer designs. In Intelligent Lighting, we completed Q3 with minimal delivery constraints and delinquencies. Working closely with ODMs and OEMs, inventory issues have been well managed. Our design activity remains robust in both monitors and TVs, including expansion into new customers for area backlighting applications.
In mini LED, we are moving forward with new products targeted for tablet and notebook, as well as monitor and TV. These activities are proceeding with well-known customers we expect to be in high-volume production in 2023. Finally, we are proceeding forward with multiple customers and advanced products, including new and innovative automotive drive monitor system applications for which we expect to become an industry leader.
In Battery Management, our fundamental business remains strong as we continue to see an expanding customer base and design win activity despite temporary inventory issues. In fact, we are experiencing increased R&D activity, including design wins moving forward with our integrated microcontrollers. While our market position in garden tools, power tools, vacuum cleaners and e-bike remains strong, we see expanding design wins for our Battery Management business in household and industrial energy storage systems that are showing rapid growth as well as automotive applications where we have begun high-volume production with one of our new products.
We strongly believe our new products will continue to drive long-term revenue expansion as we proceed forward. The major customers we have already penetrated can carry our company to higher revenues as we increase our product footprint with them. Major OEMs that already use our products in Battery Management include Bissell, Bosch, Dyson, Electrolux, Hitachi, Honda, Husqvarna, Lexi, LG, Makita, Murata, Panasonic, Philips, Samsung, Stanley Black & Decker, Shark, TTI and Toshiba. Major OEMs that use our lighting products include BOE, Dell, Denso TEN, HP, HiSense, Honda, Hon Hai, JVC Kenwood, Comcast, Lenovo, Microsoft, Mitsubishi, Panasonic, Pioneer, Samsung, Sharp, Skyworth, Sony, TCL, TPV and Toyota.
Given our excellent patented technology in 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.
Sterling Du
Thanks, Jim. Our revenue for the third quarter of 2022 is within the guidance publicly released on July 29, 2022. We developed high-end analog technology supported advanced power management product in both the Intelligent Lighting and Battery Management markets. Our products are targeted at more complex industrial, consumer and automotive markets, as well as the top-tier customer that will not only expand our customer base but engage with the next-generation product development.
Let us review the current market trend in which we anticipate some short-term headwind due to the inventory correction. The Russian, Ukraine work disrupted the opportunity of global economy recover from a COVID-19 pandemic. The war between these 2 countries has led to economic challenges, surge in commodity prices, in supply chain disruptions, in fact, in many markets across the globe. The smart TV market, which is our target sector is expected to go to $244 billion in 2026, at a compound annual growth rate of 6.9% according to the business research company.
If we compare this number to the previous market estimation, the growth of 4K TV market size is expected to reach USD 380 billion by 2025 and a compound annual growth rate of 21.2% according to the report from Grand View Research. The number indicates how the disrupted market demand and the supply chain challenges and the regional geopolitics risk, which affect us. On the other hand, the increasing popularity of video demand services is a key growth driver of the smart TV market. Video demand is one of the innovative feature that Internet protocol TV gives.
In the meantime, the 8K TV started to grow from professional usage such as health care, building, construction, and automotive industry to entertainment consumer sector in coming years, we believe the much higher video experience and a motion for reduction from fast movement will create more business opportunity for our backlighting technology.
Here are some highlights of our technologies. The full array local technology will dominate the large screen TVs and desktop monitors. IC will roll out, process the ability to control the dimming through either analog function or [indiscernible] want a remote control to further simplify the TV system design if our customers designed to circle different type panel dimming solution with one IC. The upcoming technology, Mini LED issued by multiplying a number of LED chips and mounting this LED dye or subset, therefore, reducing the spacing between each light source and the thickness of the big light. More importantly, they also can significantly increase the number of zones, which could reduce the halo effect and the power consumption. We are seeing that this activity continues to be very active and Mini LED could expand further business opportunity.
Now let us review our battery market trend. The global power tool market size was value-add USD 32 billion in 2019 and is expected to grow at a compound annual growth rate 4.2% from 2020 to 2027. Tools were activated using the power source apart from the menu label, so much more portable usage, more freedom to do the construction or gardening such as lawn mowing, and DC iron battery market size exceeds the USD 40 billion in 2019 is anticipated to grow at compound annual growth rate of over 15.4% from 2020 to 2026.
The surge in demand for electrical vehicle due to the ongoing concern towards increasing pollution level will positively fuel the market growth. However, during the COVID-19 pandemic, construction, manufacturing, hotel, tourist industry are majorly affected. Manufacturing activity are holded or restricted. This led to a decline in manufacturing of various equipment used for electrical power tools, as well as their demand in the market.
Now we are recovering from COVID-19 pandemic. The hotel tourist industry faced the main power shortage. On the other hand, one of the major manufacturer countries, China still are in the COVID-19 restriction. These factors led to the slow recovery and the channel inventory concerns. With a low visibility and various dynamics, it is challenging to forecast when is the end of the inventory correction and yet inventory correction should be improved by end of this year. Though the external market conditions are not ideal, we're confident for our long-term growth with existing growing design win activity.
We observed a higher number of sales applications continue to grow, and we are getting more market share as extended battery capacity, the freedom of long hours operation with more complicated BMS solution also is driven by quick cost decline as well as the improving of the battery quality and cost. Battery chemistry type will also become more versatile. For example, the rising acceptance of the light electric vehicle will stimulate the demand for the nickel, magnesium, cobalt oxide battery. This battery had wide range application, which include power tool, powertrain for electrical vehicles due to the low cells heating rate, which further foster the market opportunity.
Meanwhile, the high energy density means the higher resolution and faster aided converter are needed. Our analog front end and BMU were designed with our 14 big high accuracy AD converter that could meet the customer needs. Our high accuracy AD converter reached 15 renewal resolution performance, which is beyond the customer expectation. On the other hand, our ARM-based OEM BMS solution enabled the power tool to be connected as one of IoT device. The 5G deployment will further enrich the power tool connectivity.
We expect to continue to grow the business despite the dynamic market situation and short-term inventory correction. We are agnostic for our long-term goal and focus on high-margin, high-performance business. We expanded several new products to the new project to address, one, automotive market, including we started automotive rating quality standard program. We also focus build a second source supply chain to recruit more engineers outside China. We also watched our expense carefully to build the base for the drive future momentum. We will keep the shareholder best interest in mind, especially at current dynamic situation. At this moment, I'd like to thank you for listening to our conference call and return back to Dan. Dan, please?
Daniel Meiberg
Thank you, Sterling. We'll soon shortly open up the lines for questions. We will not be addressing any privatization related questions on this call. As disclosed in O2Micro International Limited, press release as of March 18, 2022, O2Micro International Limited Board has received a preliminary nonbinding proposal letter nor press release dated September 30, 2022, O2Micro enters into a definitive agreement for going private transaction. Following receipt of the proposal, O2Micro International Limited Board formed a special committee consisting solely of independent directors to evaluate and consider the proposal and proposed transaction and has also engaged its own financial and legal advisers.
The O2Micro International Limited has been making SEC filings and issuing press releases in connection with the proposal and proposed transaction and will continue to do so in pursuant to the requirements of the SEC rules and regulations. We encourage you to periodically check the company's SEC filings for more information regarding the proposal or proposed transaction.
Operator, at this point, we would like to open the call to questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question for today comes from Theodore O'Neill with Litchfield Hills Research.
Theodore O'Neill
Last quarter, in answer to questions about the automotive market, Sterling, you talked about having products related to the so-called driver management system. Can you give us any more insight into how things are going and penetrating the automotive market and the applications for that?
Sterling Du
Yes. Thank you. When we mentioned about the driver monitor, first of all, we are providing the power management IC, which is the PMIC to provide the power to driving the sensor. The particular sensor for the driver monitor system could be two kind. One is infrared. Another is probably the different devices, which is, we do not really know the detail, but we are providing in a synchronous mode to provide the power so that the sensor can send out those invisible light and to collect the driver's facial -- extraction of the facial features to determine the driver's driving conditions.
So this is -- basically, we are doing this power management IC. And the sensor could be positioned at different places such as steer wheel. We have a copy in the console, different place in the console as long as it can see the driver. So that's why we're providing. Now according to the ISO and ACQ, the different level of the IC in automotive and probably in the lighted requirement level, which is maybe between A and B, that is not crucial in the battery or motor or the particular -- the driving system is more like in a copy management.
Even by that, the design activity will be low. And our -- we're also in the mid of the -- middle of the processing ISO-26262 even with this IC we'd like to be providing to the customer. So we estimate still have some time headwind for the first production. But in the meantime, normally, the design period is quite extended. So we are in a design in the activity right now in many of the module makers, yes.
Theodore O'Neill
That's very helpful. My second question is about -- last quarter, you talked about the inventory issue being primarily in power tool and vacuum cleaner. Has any of that -- is that still the case? Is that where the inventory is? Or have other inventory issues surfaced?
Sterling Du
I can answer that, and Jim can jump in. Yes, it is related to different applications. And we do see some recovery of the power tool. We do see that. But it's going to be some of the more clear picture towards the end of the year when we see how the inventory status. Jim, do you care about any comments?
James Keim
Yes. There's still quite a bit of inventory, certainly, we know in the vacuum cleaner channel. I'll also mention there is some inventory in the TV channel, which we do expect to be through here by the end of the year, very early next year. The vacuum cleaner inventory and some of the power tool inventory is more nebulous because of the supply chain nature of those products. And I think it will be the end of the year before we really understand the inventories. But certainly, I think by Q1, we'll be through most of that inventory issue. Those are my comments.
Operator
Our next question comes from Tore Svanberg with Stifel.
Tore Svanberg
So looking at your own inventory, it looks like your inventory days, I think it's the highest I've ever seen them. Just wondering what's your comfort level with inventory days above 200? And what are your plans going forward?
Perry Kuo
Yes. Tore, it's the -- our internal inventory, it's increased by the wafer of which we have contracted with the foundry earlier. So it may probably take until Q1 2023, and of course, it will also depend on our delivery to our account after the 2022. I hope, let's see, by Q1, we can see the decrease in the wafer inventory. In Q3, actually, our inventory for the back end was in process, it has decreased from the Q2. So hopefully this is helpful.
Tore Svanberg
No, that's very helpful. And a question for you, Jim. You said that the inventory -- the external inventory correction should be complete by the end of the year. Just wondering what gives you that confidence? Is this based on conversations you've had with customers? Or do you expect sell-through to perhaps start improving by then? Any additional color on that type of confidence would be helpful.
James Keim
Okay. I'll be happy to answer that. First of all, I think we've been very fortunate because we have a history of working close with customers. And we have a significant amount of dialogue that's gone on with some of the OEMs directly, even where they use an ODM to help clear up some of the inventory issues. So they have been, I think, very helpful in terms of giving us knowledge of what products they have in their supply chain through the ODMs and also in retail.
However, I think it's going to be December, January before we really have a good idea of the sell-through for vacuum cleaners, TVs and some other areas. And I think some of the ODMs have expressed that basically they still don't have good clarity into the sell-through in the end market. And I think once we get through the traditional holiday time frame, we'll have a much better idea of, first of all, what the sell-through volumes are and then if there's any inventories that are left that need to be cleared.
But we've been very fortunate, I think, in the inventory issues. And I'll also mention, Tore, on Perry's comments about our internal inventory. Most of that's in very high-volume products where we're literally the industry standard in both the Battery Management as well as the backlighting area. So the wafer issues in my opinion, are not difficult to clear over the longer term. So those are my comments.
Tore Svanberg
That's great color. And just one last question. So you're approaching cash flow breakeven again and you're actually guiding OpEx to be up in Q4. So for either one of you, how do you expect to manage OpEx going forward, especially as you navigate around the sort of $16 million to $18 million revenue level?
Perry Kuo
Yes, the OpEx, I think that the OpEx will be in the stem label as the Q3, Q4 area has just guided. Solid [indiscernible] we try to maintain our cash breakeven point in the area of the $16 million to $17 million area. And -- in addition, we do have a lot of the cash in balance sheet. So it's -- I think that it will enable us to pass through this inventory correction period.
Operator
Our next question comes from Lisa Thompson with Zacks Investment Research.
Lisa Thompson
I was just curious about the one statement you made that you have one product in high volume for automotive. Can you describe a little bit what that product is? What it goes into? Or maybe who the customer is?
Sterling Du
So these are first of all that those -- our product called the driver monitor system go to the copy management, which is like monitor the driver's conditions. Those we don't expect that quickly becomes very high volume. There are 2 reasons. One is the qualified cycle is long and slow, come relatively compared to consumer. And second is the deployment of those it also needs some time to deploy and penetrate the different automotive. And this part is not limited to the electrical vehicle. They're going to be hybrid or even gas-powered vehicle. That's good news.
So we're providing this power management IC, which is providing support very high accurate power. They will simultaneously driving multiple sensor with a very short time frame so that the license, they can monitor the driver and get accurate reading because the sensor gains is meeting some infrared, and receive those infrared back. So the business model we designed is not ready to go to the vehicle, but go to the module makers. We have multiple design activity with the module maker.
Then thirdly, those IC, although it's in a copy management, they still need some ISO262. But the rating is much -- is lighter one, like AOB label rating, yes. So that would be not a major event. But the 26261 program, you want to qualify, that takes about 18 months to 24 months. That's another thing that will be making these penetration and production state-by-state is not quickly as consumer electronics product market.
Lisa Thompson
Okay. So it's whoever the module maker finds for a customer as to what cars that's going into, right?
Perry Kuo
Right.
Lisa Thompson
Okay. All right. As far as the privatization according to your filings, all I've noticed is that you need to do a shareholder meeting. Is that the only step left to have the vote? Or are there more things that need to happen?
Sterling Du
So Dan, do you want to comment?
Daniel Meiberg
So Lisa, could you repeat the question, please?
Lisa Thompson
Right. So according to what I've seen in your filings, it looks like you just need to do a shareholder meeting and a vote on the purchase? Is there any more steps that happened between now and then?
Daniel Meiberg
Yes. We will be releasing more information through the proper channels when that happens. Lisa, I'm sorry, we just can't make any comment or won't make any comments on this call.
Lisa Thompson
I was just hoping you would help us read the filing, that's all. Okay.
Daniel Meiberg
Yes. Sorry about that.
Lisa Thompson
Just wanted to check. And you're still talking about Q1 closure, right?
Daniel Meiberg
Correct.
Lisa Thompson
That was the latest information. Okay.
Daniel Meiberg
I believe so. But again, everything is going to be through the SEC. That's going to be the formal communication. As far as dates go, the world changes quickly.
Lisa Thompson
Right, I saw the forms with the dates blank. So that much I know.
Daniel Meiberg
Okay. Perfect. Thank you, Lisa.
Operator
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.
Daniel Meiberg
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 ir@o2micro.com with any follow-up questions. Have a wonderful day, everyone, and thank you for your time and attention. Goodbye.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.
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O2micro International Ltd (OIIM) Q3 2022 Earnings Call Transcript