O2Micro International Stock: The Status Quo Continues (NASDAQ:OIIM)

O2Micro International (NASDAQ:OIIM) has not done much in recent months. The most recent quarterly report caused a small drop in the stock, but the response was relatively underwhelming in light of what the latest guidance called for. It’s been mostly sideways for the last six months or so for the stock. Still, sales and profits are under pressure at OIIM due to headwinds popping up, but it appears there are other forces at work that are powerful enough to keep the status quo intact. Why will be covered next.

The stock seems to be waiting for something

The chart below shows how March was a pivotal month for OIIM. The stock had been declining up to that point, only to change direction in early March when news broke of a buyout proposal for OIIM. The non-binding proposal values OIIM at $5.50 per ADS, which is higher than what OIIM is going for, even to this day. Note that “the proposal constitutes only a preliminary indication of interest and does not constitute any funding commitment” as reiterated before by OIIM.

OIIM has put together a committee to evaluate the proposal, but there’s been nothing of significance since then. The special committee continues to review the proposed transaction and no decisions have been made as to the proposal, except to stay tuned for further updates in the future. In a nutshell, the proposal is out there, but it is basically in limbo. It may go through, but it may not go through as well.

Still, while the stock has yet to get anywhere near the proposed acquisition price, the proposal seems to have brought some semblance of stability to the stock, certainly in comparison to what it was doing beforehand. The stock was falling prior to the proposal, but it has since gone sideways more or less. The stock is still down 25% YTD, but it is also higher than where it was prior to the proposal being made.

The fact that the stock trades below the proposed acquisition price suggests a fair amount of skepticism towards the proposal. It’s possible the proposal may not go through for a number of reasons. For instance, shareholders may not agree or financing may not be there. On the other hand, the proposal seems to have put a floor under the stock, keeping it from falling too much, unlike how it behaved prior to the proposal. In that sense, the proposal has been a positive for OIIM.

It’s not as if there have been no forces exerting pressure on the stock. For instance, the stock market has seen lots of volatility in 2022 with many stocks suffering big declines. Yet OIIM has for the most part shrugged it off. Nothing has been able to change the trajectory of the stock in the last six months. This includes the most recent earnings report, which probably should have moved the stock more than it did as it contained a fair amount of bad news. If circumstances had been different and there was no pending buyout proposal, the stock may have reacted differently. Yet it passed almost unnoticed.

OIIM has an inventory problem

The most recent quarterly numbers were actually better than expected with revenue and gross margins near the high end of guidance. Q2 revenue still declined by 15.8% YoY, but it also increased by 2% QoQ to $22M. Net income was $0.56M or $0.02 per ADS in terms of GAAP, down QoQ and YoY. In terms of non-GAAP, net income was $2M or $0.06 per share, a decline of 50% YoY, but an increase of 20% QoQ.

Note that the GAAP numbers were negatively impacted by a one-time expense of $0.8M. Stock-based compensation expense also lowered GAAP earnings by $586,000, but they are excluded in the non-GAAP numbers. OIIM ended Q2 with cash and equivalents of $49.5M, which translates to $1.70 per ADS. The table below shows the numbers for Q2 FY2022.

(GAAP)	Q2 FY2022	Q1 FY2022	Q2 FY2021	QoQ	YoY
Revenue	$22.058M	$21.625M	$26.205M	2.00%	(15.83%)
Gross margin	52.6%	52.6%	51.5%	–	110bps
Operating margin	2.1%	3.9%	12.5%	(180bps)	(1040bps)
Operating expenses	$11.142M	$10.535M	$10.206M	5.76%	9.17%
Income from operations	$0.469M	$0.833M	$3.281M	(43.70%)	(85.71%)
Net income (loss)	$0.555M	$0.915M	$3.161M	(39.34%)	(82.44%)
EPADS	$0.02	$0.03	$0.10	(33.33%)	(80.00%)
(Non-GAAP)
Net income	$2.0M	$1.6M	$3.6M	25.00%	(44.44%)
EPADS	$0.06	$0.05	$0.12	20.00%	(50.00%)

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Source: OIIM Form 6-K

However, although the Q2 numbers showed some improvement over the ones in Q1, that’s not expected to be the case in Q3. The outlook sees a significant deterioration in the quarterly numbers. Guidance calls for Q3 FY2022 revenue of $17-19M, a decline of 18.2% QoQ and 34% YoY at the midpoint. Gross margin is expected to fall by 100 basis points YoY.

OIIM barely made it, but it managed to avoid ending up with losses in Q2. However, this is not expected to continue in Q3. The drop in the top line and a reduction in gross margin is expected to push OIIM into the red. Consensus estimates have been revised downwards in light of the worse-than-expected guidance and are now calling for a GAAP loss of $0.06 per share in Q3, the first loss for OIIM since Q1 FY2020 when COVID-19 showed up.

	Q3 FY2022 (guidance)	Q2 FY2021	YoY (midpoint)
Revenue	$17.0-19.0M	$27.3M	(34.07%)
Gross margin	50-52%	52%	(100bps)

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OIIM added some color as to the reasoning behind the latest guidance. From the Q2 earnings call:

“In Q3, we are facing an inventory correction due to weaker demand from some selected market by inflation. We will carefully be managing the inventory, while we also continue to qualify second sources for cost and additional supply chains as reported area.”

A transcript of the Q2 FY2022 earnings call can be found here.

Similar to a growing number of companies in the semiconductor space, OIIM is dealing with excess inventory at some of its customers, especially in the battery management segment. Some customers have enough inventory for Q3 and Q4 to a lesser degree, which means they will need less from OIIM in the coming quarters.

“We expect to be through the majority of the inventory correction in Q3. We understand from the leaders list primarily in the power tool and vacuum cleaner area. We understand the magnitude of those inventories and we understand their ongoing run rates. In most cases we give direct forecasts from them for their ongoing run rate. So we do expect to have most of the inventory correction done in Q3 and some into Q4. We don’t expect to have any issues of any significance as we move into next year.”

However, OIIM had some good news to add. The inventory issue is expected to pass soon enough. OIIM expects improvement in Q4 and the issue should be pretty much resolved heading into 2023.

Valuations are not as nice as before

Earnings expectations are not the only thing that has undergone revisions. Multiples have also changed along with earnings expectations. For instance, the trailing P/E has ticked up to 13 with the decline in earnings per share, up from the single digits where it used to be not that long ago. Furthermore, OIIM no longer has a forward P/E with the company expected to end up in the red.

EV/EBITDA has also gotten worse. OIIM has an enterprise value of $55M, which is equal to 5.5 times EBITDA on a trailing basis and 11.6 times EBITDA on a forward basis. The fact that the forward multiple is much higher than the trailing one is a reflection of earnings that are expected to get much worse in the near future. On the other hand, the stock is still valued at around book value. Half of OIIM’s current market cap consists of cash and equivalents. The table below shows the multiples OIIM trades at.

	OIIM
Market cap	$102.04M
Enterprise value	$55.35M
Revenue (“ttm”)	$95.3M
EBITDA	$10.0M
Trailing P/E (GAAP)	12.69
Forward P/E (GAAP)	N/A
PEG ratio (GAAP)	N/A
P/S	1.06
P/B	1.01
EV/sales	0.58
Trailing EV/EBITDA	5.51
Forward EV/EBITDA	11.63

Click to enlarge

Source: SeekingAlpha

Investor takeaways

The stock doesn’t show it, but OIIM has gotten worse in the last six months in terms of the top and the bottom line. Sales and profits are both heading down. OIIM is projected to end up with its first loss in years in Q3. The inventory problem that has swept aside a number of semiconductor names has found its way to OIIM. OIIM has joined the list of companies that were forced to lower guidance due to deteriorating market conditions.

I am nevertheless bullish on OIIM as stated before in a previous article. The bull thesis has certainly taken hits recently. Guidance was a disappointment. However, the inventory correction is only expected to last 1-2 quarters. The outlook sees growth in 2023. The fact that the stock did not fall all that much in response to the latest guidance suggests the market is looking beyond the short-term inventory issue towards other issues it deems to be more important.

Chief among them should be the pending buyout proposal. It’s not a coincidence the stock has gone flat with the arrival of the proposal. The market may not be totally convinced of the proposal going through as proposed, but the proposal has been able to keep the stock afloat through all the turmoil that has rocked the stock market in recent months.

Valuations are not as nice as a few months ago with earnings expectations downgraded in line with recent guidance, but they are still more than fair for a stock like OIIM. The stock is available at book value. Half of OIIM’s market cap of $102M is made up of cash and equivalents in the amount of $49.5M. The balance sheet is in top shape. OIIM has the means to absorb any temporary losses before growth picks up again.

Bottom line, OIIM trades way below the proposed acquisition price of $5.50. Anyone who is long at this point can expect to profit, assuming the proposal goes through. In the event the proposed acquisition fails to go through for whatever reason, OIIM is still a good buy with valuations where they are and an expected recovery in growth next year. OIIM is worth it either way. Long OIIM is the way to go.