Benzinga | Nov 1, 2021 09:42AM EDT

OIIM: Q3 Revenues Hit Another Record with Growth of 23% and Margin Expansion

By Lisa Thompson

NASDAQ:OIIM

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If nothing else, Q3 results and Q4 projections for O2Micro (NASDAQ:OIIM) proves we live in interesting times. This has also led to much lower visibility for the company. Product demand at O2Micro has been hit by a myriad of issues, which has mostly affected its customer base. Like everyone else worldwide, the supply chain has been hit by shortages, delivery problems, and COVID shutdowns. TV demand may have softened at Chinese manufacturers as they lose market share, but in general the issues are supply. This quarter the company was affected by plant shutdowns due to COVID from TV manufacturing customers in Malaysia and Viet Nam. It was also hit by capacity constraints at assembly plants in China that have been affected by a lack of electricity which may have been caused by a lack of coal which may have been caused by poor planning as well as shipping chaos. Despite this partial implementation of Murphy's Law, O2Micro reported a record quarter.

Considering management has no idea when plants in other countries will reopen, coal will show up, or other people's components will be delivered to its customers, it has given lower sequential guidance as it goes into its seasonally soft fourth quarter which is typically impacted by a slow down in garden and power tool demand.

Friday O2Micro announced another quarterly revenue record at $27.3 million. Revenue has now been growing sequentially since Q1 of 2020, all through the pandemic. The company is now solidly profitable with EBITDA at over an 18% margin and this should continue for the foreseeable future as demand for its products outstrips supply. The company continues to invest in capacity to meet this demand by adding testing capabilities and second and third source fabs causing an unusually high level of cap ex this year. The company expects to reap the benefit of that investment in 2022 through higher margins.

For 2022 we are still expecting revenues of $118 million with non GAAP ADSPS of $0.59 resulting in a current 2022 PE of 10.4xs. This company trades at EV/trailing 12-month sales of 1.9 times. Fabless semiconductor peers are trading at 10.9 times EV/12 month trailing sales.

For Q4 2021, O2Micro expects revenues between $25.5 million and $26.5 million or a midpoint of $26.0 million, which would be growth of 12% year over year. Battery management revenues increased approximately 104% in Q2, but were only up 54% in Q3. Sales to TV manufactures were down slightly year over year with certain customer shutdowns.

Revenues by end market break out:

Industrial, which is battery management, now has revenues almost double those coming from backlighting, formerly the company's major business. It was between 63% and 65% of sales this quarter and is growing much faster that the rest of the company. If this continues, which at this point we have no reason to think it would not, the total revenue growth of the company should continue to accelerate by virtue of simple math. In the near future, the company will show ramping sales on mini-LED technology. O2Micro started by booking sales to tablet and monitor manufacturers and then this technology moved to the TV business. Ultimately all monitors and TVs will be built using mini-LEDs. O2Micro is the leader in this and is currently working with Japanese and Korean pioneers on even more designs.

In contrast to Q2, sales to TV manufacturers were down compared to last year, lowering overall growth. If plants reopen in Q4 or early Q1, O2Micro may be able to have a stronger than usual Q1 in 2022 due to catch up. Longer term the company is working with car battery manufactures to enter the EV market. It has not yet worked out what the economics would be but products built for this market would most certainly be at higher ASPs and probably higher margins despite lower unit volumes.

The company has invested heavily in R&D over the years. This year's focus has been to increase capacity by investing in testing equipment and qualifying more fabs to be second and third sources, as the company needs to produce more to meet demand. This quarter it spent $998,000 down (from $3.5 million in Q2) on cap ex which includes expensive wafer starts that produce more volume six to nine months later and testing equipment. In 2022, the company will need to spend much less, which should also increase cash generation and increase operating margins.

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