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OIIM: Unusual R&D Expense in Q3 Pushes Cash Breakeven to Q4

08/01/2018
By Lisa Thompson

NASDAQ:OIIM

READ THE FULL OIIM RESEARCH REPORT

O2Micro (NASDAQ:OIIM) reported Q2 2018 revenues of $15.2 million, up 8% sequentially, and 5% year over year and within the range of guidance of up 2-10%. The company returned to growth after two down quarters. Guidance for revenue for the third quarter of 2018 is sequentially up 6-14% from Q2 2018. The midpoint in revenue guidance would result in revenues being up 8% from a year ago.

The first half of 2018 was virtually flat with the first half of 2017.

The company had projected cash breakeven at $15.5 - 17 million in quarterly revenues and profitability at $17-19 million, however Q3 will be unusual. Due to a push in getting out new battery management products it will be spending $5.0-5.5 million in the quarter on R&D rather than a typical $4.7 million. This will reduce the cash breakeven for Q3 to $17 - 19 million and profitability breakeven to $19 - 21 million. At midpoint guidance the quarter would come in at $16.7 million although the top end of the range is $17.6 million. Q4, which we are projecting at $17.5 million, would be a profitable quarter.

Gross margin was 52.1%, up sequentially from 51.2%, and year over year from 50.9%, due to higher revenues and product mix.

Operating expenses in the quarter were $9.7 million versus $8.9 million last year and $9.8 million in Q1 2018. Both SG&A and R&D increased versus last year.

Operating losses increased to $1.8 million in Q2 2018 from $1.6 million a year ago, due entirely to increased spending.

In the quarter the company had an unrealized gain of $3.1 million on a long-term investment. This gain was again from ownership of the stock of Excelliance MOS Corp. (5299.TWO) a private company that went public on January 23, 2018 and appreciated in price since the end of the March quarter. With the help of this gain, the company reported positive GAAP net income of $1.5 million versus a loss of $1.4 million last year. This yielded fully diluted GAAP EPS of $0.06 versus a loss of $0.06 a year ago.

Non-GAAP net income was a loss of $1.3 million versus a loss of $1.1 million last year. The company reported non-GAAP EPS loss of $0.05 versus a loss of $0.04 last year.

At June 30, 2018, the company had $40.8 million in cash and equivalents (or $1.57 per ADS), down $4.3 million sequentially. The company expects to be cash flow breakeven in Q4, but not for the full year.

Business Units

Intelligent lighting is experiencing design win acceleration with its new backlighting product line and continues to see higher volumes ordered. The shortage of large panels for televisions ended, and there are only limited silicon shortages. The market for televisions continues to improve, especially at the high end where manufacturers make all their money. 8K televisions are starting to come to market and key OEMs are seeking to differentiate their other high-end products. In addition, O2Micro continues to add new backlighting customers in industrial and automotive markets. In general lighting there has been modest growth particularly in the company’s free-dimming products.



View Exhibit I

Battery management is the company’s second largest sector and fastest growing as the industry continues to move to lithium ion batteries. Customers selling products such as e-bikes, e-vehicles, and vacuums and UPS power supplies are making the business less cyclical than when most of the product went to power tools. The company is providing the industry with more cost effective products, as well as more complex patent protected products for high-end solutions. More customers are being attracted to its proprietary cell balancing methodology.

Power Products continue to expand its product line, increase its design wins, and serve a broader array of customers. It is growing after several years of declining revenue as smartphones and tablets offset weak notebooks. The laptop market has started to grow again and O2Micro is benefitting from this growth. In particular the market is interested in O2Micros fast charging solutions that result in less heat generation. It two products, a double charge design and an express charge for use in an A/C adapter that are now in preproduction. The company’s products are now designed into between 6-8 smartphone manufacturers including BDK, Coolpad, HCT, and Coosea. It expects to begin shipping to a tier one customer in 2019.

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