On Oct. 30, 2019 O2Micro (NASDAQ:OIIM) announced that it entered into a strategic agreement with Feit Electric Company, Inc., a leading supplier of lighting products. This agreement allows Feit Electric to fully utilize O2Micro’s patented Free Dimming technology in its general lighting products. In addition to being granted a license for O2Micro’s free dimming patents, the hope is with Feit using O2Micro’s technology, and marketing free dimming products, this category could expand both in the residential and commercial markets. Free dimming bulbs allow lights to be dimmed without a dimmer switch. In addition to licensing, we expect Feit may be buying free dimming chips from O2Micro and ultimately, other general and intelligent lighting products O2Micro provides. Feit is privately and held was founded in 1978 in Pico Rivera, California. It has over 100 employees and more that $100 million in annual sales and sells through stores such as Ace Hardware and Home Depot in the US. This agreement is an important step in expanding O2Micro’s footprint in the US. To date virtually all of O2Micro’s free dimming sales have been in Asia.
Source: Zacks Investment Research
Guidance for revenue for the fourth quarter of 2019 was only that it would be up sequentially. It appears that the partnership with Feit may include the payment of a licensing fee to be booked in Q4 and management indicated they are waiting for a ruling by the auditors as to how to account for it. If it were a one-time licensing fee, booked in revenues in Q4, it would not be broken out, but would affect guidance. There was no indication as to if there is to be a payment for past infringement, a one-time payment for patent licensing or if there would be ongoing payments based on Feit sales of free dimming products. As Feit is a private company, it does not want to disclose its specific financial arrangement with O2Micro for competitive reasons.
Q3 Results Beat Expectations
In the September quarter just announced the company beat the high end of its revenue guidance reporting $16.0 million in sales, down year over year by 5%, but up sequentially by 12.3%.
Intelligent lighting revenue grew due to the recovery in the Chinese TV market and O2Micro’s many design wins in both 4K and 8K TVs, expansion of HDR monitors, and gaming, medical, and industrial applications. Lower end TVs are using its new line of backlighting products with integrated MOSFETs. The company is also introducing new backlighting products for use in the industrial and automotive markets.
Battery management continued to grow with the increased use of lithium ion batteries. The global lithium-ion battery market has a CAGR over 10%. Customers are starting to design in O2Micro’s first ARM-based products but due to the complexity of these designs, including firmware development, major revenue is not expected from these products until 2020. Gross margin in the quarter was 51.4%, up sequentially from 50.1%, and up year over year from 50.5%. Management expects margin next quarter to in the range of 49% to 51%.
R&D declined in the quarter to $4.7 million, as the company reigned in expenses and SG&A declined to $4.6 million from $4.9 million in Q3, reducing operating expenses $375,000 sequentially. Total operating expenses in the quarter were $9.4 million, down from $10.2 million last year, and compared with $9.7 million in Q2 2018. For Q4 the midpoint of guidance is $9.9 million, up $500,000 sequentially with increased spending on R&D for new products, but still below the $10.4 million in last year’s Q4.
The operating loss in Q3 decreased to $1.1 million versus $1.7 million last year and $2.6 million in Q2. This is the company’s lowest quarterly operating loss since 2016. Adding back depreciation and amortization and stock-based compensation, the adjusted EBITDA looks to be a loss of $301,000.
Total other income was $1.2 million versus -$1.5 million last year, mostly from Excelliance stock marked to market and a realized gain from selling some of the stock. In Q3 2019, O2Micro sold 630,000 shares of Excelliance MOS Corp. (5299.TWO) at $3.80 per share for $2.4 million with a cost basis of $0.53 per share. O2Micro will continue selling stock in Q4.
The company reported a GAAP net loss of $256,000 versus last year’s loss of $3.5 million last year. This yielded a GAAP loss per share of $0.01 versus $0.13 a year ago.
Non-GAAP net loss was a loss of $542,000 million, versus a loss of $1.4 million last year. The company reported a non-GAAP EPS loss of $0.02, versus a loss of $0.05 last year. In Q3 2019, the company repurchased 37,994 ADS units at a cost of $52,000.
On September 30, 2019, the company had $38.5 million in unrestricted cash and equivalents (or $1.46 per ADS), up $3.6 million sequentially. Net cash generated by operating activities in the quarter was $1.6 million. Capital expenditures were $156,000 and depreciation and amortization was $432,000.
The company believes it can be EBITDA positive between $16 million to $18 million in quarterly revenues, and profitable between $18 million to $20 million in revenues. The company expects “cash profitability” in Q4 2019.
Company Has Significant Upside If It Can End Cash Burn and Turn a Profit
The company trades at an enterprise value of $4.2 million. At the end of Q3 2019, the company had $38.5 million (or $1.46 per ADS) in cash and equivalents, no debt, and valuable real estate in China and California. In California it owns a 37,180 square foot building where it has its USA operations, which was bought for $4.6 million in May 2004 and believe it is now worth at least $7 million. Plus it also owns other real estate in China and Taiwan. Also on the balance sheet are long-term investments in other companies, including 1 million shares of stock in Excelliance MOS (worth $4.2 million.) The company has a very high liquidation, as well as acquisition, value. Activists have tried to encourage a transaction with an acquirer, but the company has no interest in a sale and due to restrictions, it is difficult to force one. Using the average of its peers of enterprise value to trailing twelve-month sales of 6.2 times and applying it to OIIM’s trailing 12-month $59.7 million revenues, we would calculate an enterprise value of $368 million and a market cap of $406 million or $15.43 per share. We believe that once the company shows sustainable revenue growth and cash breakeven, the market should afford it a valuation closer to this price.
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