OIIM: O2Micro's Strong Q1 Was Driven By Sales of TVs and Garden Tools Due to Stay at Home Policies

By Lisa Thompson

NASDAQ:OIIM

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Following its strong Q4 (which benefitted from a one time license fee of $2.1 million,) Q1 came in above our estimate both in revenues and earnings mostly due to lower operating expenses. China which was hard hit by Covid19 earlier than in the US, was shut down in much of Q1. Consumers there bought TVs and garden tools to fill their time at home keeping orders to O2Micro OIIM flowing. O2Micro gets almost all its revenues from backlighting chips sold to Chinese manufacturers of televisions and portable devices powered by lithium batteries. Even laptops had a resurgence of demand as companies had their employees working from home. We know of one IT services companies that bought 70,000 laptops in one fell swoop last quarter. There has also been a surge in the sale of bicycles and ebikes as consumers have both leisure time and an aversion to mass transit. The BBC just reported that 61% of Britons are nervous of taking public transportation post-lockdown. In Q2 we expect these trends should continue throughout the world.

Revenues were $15.6 million compared with $12.8 million in Q1 a year ago, up 22%. Guidance for revenue for the second quarter of 2020 was for revenues between $16.5 and $17.5 million or a midpoint of $17 million, which would be growth of 19% year over year.

Coronavirus Impact

While the supply chain is mostly back to normal, there is disruption in logistics with limited air travel. While factories are operating, restaurants and stores are still not open. Orders in Q2 have continued strong and the company is mindful that some orders may have been pulled forward and is keeping an eye on demand.

Q1 Results

For Q1 the gross margin settled back to more normal levels without the impact of the $2.1 million 100% margin license fee booked in Q4. It was 51.9% compared to 50.5% a year ago and 56.7% in Q4 2019. The company said to expect Q2 2020 gross margin to be in the range of 51-53% as it phases out its low margin offerings to focus on high margin products.

Operating expenses were lower than expected as business was interrupted in Asia and spending was pushed out. Operating expenses were only $8.7 million down again from the $9.2 million spent in Q4 2019. The company had expected expenses to rise in Q1 2020.

R&D declined again in the quarter to $4.1 million, as the company reigned in expenses and SG&A decreased to $4.5 million from $4.8 million in Q3. For Q2, the midpoint of guidance is $9.5 million, up $820,000 sequentially. The company will be laying off staff, primarily those in difficult low margin efforts with limited return such as smartphones. The Chinese market for handsets decline 20% in Q1 2020 according to IDC with Apple and Huawei holding up better than the second and third tier players. In addition, the US government is scrutinizing sales of communications components to China making future prospects in that market even more risky.

Total other income was a negative $764,000 million versus a positive $74,000 last year. This year included a $1.1 million unrealized loss on the company holding in Excelliance MOS stock. In Q1 O2Micro sold 14,000 shares of Excelliance MOS stock for proceeds of $50,000 at an average price of $3.58. It had a cost basis of $0.53. It still holds 780,000 shares, and expects to sell more in Q2 2020. EMC is up 54% since March 31, and there could be an unrealized gain in Q2.

The company reported a GAAP loss of $1.5 million versus last year's loss of $3.5 million last year. This yielded GAAP loss per share of $0.06 versus a loss per share of $0.15 a year ago.

Non-GAAP loss was $43,000, versus a loss of $3.5 million last year. Non-GAAP EPS was virtually breakeven, versus a loss of $0.13 last year. In Q1 2020, the company repurchased 83,479 ADS units at a cost of $100,000.

On March 31, 2020, the company had $44.7 million in cash and equivalents (or $1.67 per ADS), down $1.7 million sequentially. Net cash used by operating activities in the quarter was $1.3 million. Capital expenditures were $200,000 and depreciation and amortization was $502,000.

In Q2 the company is streamlining operations for profitability and to focus on higher margin products. The company plans txo take a one-time charge for severance of between $1.1 and $1.2 million that will push the company's cash breakeven point down to between $14-16 million and the profit breakeven to $16-18 million. The full effect of these cost savings efforts will be felt in Q4 2020.

Despite challenges in the supply chain due to both shutdowns and Chinese New Year, the company showed strong growth in the quarter. This is against a backdrop of a particularly weak Q1 in 2019 driven by lackluster TV sales in China, coming off an inventory correction from wafer shortages. O2Micro had particular strength in TV sales in China as well as HDR monitors and garden tools as people were forced to stay home. Other products that benefited were notebooks as companies sent their workers home with computers, ebikes as public transportation was shunned, and medical monitors. Notebooks are also benefiting from companies upgrading to Windows 10. While China is beginning to get back to normal, shutdowns are staggered throughout the rest of the world where these trends should continue in Q2 and possibly beyond. Over 90% of the company's sales come from TVs and battery-powered devices.

Figure 1. Makita Battery Operated Garden Tools

Source: Zacks Investment Research

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