October 30, 2020

Zacks Small-Cap Research Lisa Thompson

312-265-9517
Sponsored Impartial - Comprehensive [email protected]

scr.zacks.com 10 S. Riverside Plaza, Chicago, IL 60606

O2Micro International Ltd (NASDAQ: OIIM)

O2Micro Growth Accelerates as OUTLOOK

Backlighting and Power Management
Becomes Increasingly Important to the O2Micro International is a fabless semiconductor firm
that designs, develops and markets high
Market
performance integrated circuits primarily for power
management and battery management for TV
backlighting, LED lighting, and portable tools and
Using an industry average value to trailing 12-month
sales of 8.9 times and OIIM s $73 m trailing 12-month appliances. It had struggled to reach profitability and
revenue, we would calculate an enterprise value of cash flow breakeven but is now there. The company
$650 million, a market cap of $690 million and a price trades at an enterprise value of $114 million well
of $23.90 per share. below its peers. Its right-sizing efforts combined
with a surge in demand for high end TVs and battery-
operated devices is accelerating its growth and
producing higher and higher margins.
Current Price (10/29/20) $5.43
Valuation $23.90

SUMMARY DATA
52-Week High $6.23 Risk Level Above Average
52-Week Low $1.00 Type of Stock Small-Blend
One-Year Return (%) 338 Industry Elec Comp-Semis
Beta 1.0
Average Daily Volume (sh) 483,773
ZACKS ESTIMATES
Shares Outstanding (mil) 27
Market Capitalization ($mil) $154 Revenue
(in millions of $)
Short Interest Ratio (days) 1.0
Q1 Q2 Q3 Q4 Year
Institutional Ownership (%) 37
(Mar) (Jun) (Sep) (Dec) (Dec)
Insider Ownership (%) 8
2018 14.1 A 15.2 A 16.8 A 16.6 A 63 A
Annual Cash Dividend $0.00 2019 12.8 A 14.3 A 16.0 A 17.9 A 61 A
Dividend Yield (%) 0.00 2020 15.6 A 17.3 A 22.2 A 23.4 E 79 E
2021 94 E
5-Yr. Historical Growth Rates
Sales (%) 3.5 Earnings Per Share
(non-GAAP EPS before non-recurring items)
Earnings Per Share (%) N/A
Q1 Q2 Q3 Q4 Year
Dividend (%) N/A
(Mar) (Jun) (Sep) (Dec) (Dec)
2018 -$0.09 A -$0.05 A -$0.05 A -$0.05 A -$0.24 A
P/E using TTM EPS 27.4 2019 -$0.13 A -$0.08 A -$0.02 A $0.05 A -$0.18 A
P/E using 2020 Estimate 21.8 2020 -$0.00 A $0.03 A $0.12 A $0.13 E $0.24 E
P/E using 2021 Estimate 15.5 2021 $0.35 E

Zacks Projected EPS Growth Rate - Next 5 Years % 10

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 WHAT S NEW

Revenue Growth Hits 39% in Q3 and Yields a Record EBITDA of $4.6 million

Today O2Micro announced record quarterly revenues and expects to beat that number in Q4. As a result
we are raising estimates for Q4 and for both 2020 and 2021. For Q4 revenues O2Micro expects
revenues between $22.7 and $24.0 million or a midpoint of $23.4 million, which would be growth of 31%
year over year. Usually Q4 and Q3 are flat with each so an increase of over a million dollars is
meaningful sign. As a result our 2020 estimate is going to $78.4 million (up 29%) and a non-GAAP EPS
of $0.24. We are also raising 2021 estimates to 20% growth to $94 million in sales and $0.35 non-GAAP
fully diluted EPS.

EBITDA Surged as Costs Remained Flat

The restructuring benefits have kicked in and EBITDA surged to $4.6 million or 21% of sales. Although
the company burned $1.1 million, mostly funding accounts receivable, it expects to be adding to cash in
Q4 and beyond.

Demand Remains Strong

Demand across the board remains strong. We had been worried that during the shut down consumers
would have bought their fill of cordless tools and high end TVs and demand would pause, but orders
remain strong. In fact, rather than its typical sequentially down Q1, O2Micro expects sales to be flat with
Q4 as new customers come on board. The company sells to end user markets that are on fire. 4K and 8K
TVs, HDR monitors, lithium ion battery powered cordless everything and even medical monitors. In
addition to display backlighting, power management is being a more and more important part of device
design as batteries become cheaper and more powerful and devices more sophisticated. In Europe
nickel cadmium (Ni-Cd) batteries for power tools have been banned. Meanwhile lithium-ion batteries are
becoming more and more economical. What used to cost $1,183 per kWh in 2010 dropped 86% to $156
kWh by 2019. Lithium ion battery production grew from19 GWh in 2010 to 285 GWh this year and could
quadruple by 2030.

Q3 Results

Revenues were $22.2 million compared with $16.0 million in Q3 a year ago, up 39%.
For Q3 the gross margin was 51.8% compared to 51.4% a year ago and 51.2% in Q2 2020. The
company said to expect the Q4 2020 gross margin to be in the range of 50-52%.

Revenue By Segment

Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020
Consumer 40-45% 42-44% 49-51% 43-45% 46-48% 43-45% 44-46% 43-45% 44-46 47-49 42-44
Computer 10-15 15-17 8-10 6-8 6-8 6-8 6-8 5-7 5-7 5-7 5-7
Industrial 40-45 40-42 40-42 47-49 45-47 47-49 47-49 48-50 48-50 45-47 50-52
Communications <5 0 0 0 0 0 0 0 0 0 0

Reported total operating expenses were again $8.4 million in the quarter compared to $9.4 million a year
ago. The company went from 370 employees in Q1 to 289 in Q2 and 298 in Q3.

R&D expense was down year over year in the quarter to $4.1 million from $4.7 million.

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 SG&A was $4.3 million and flat sequentially if the $200,000 in severance in Q2 is taken out of the Q2
number. It was down from $4.6 million a year ago.

Operating income in Q3 was $3.1 million versus a loss of $1.1 million last year. Adding back depreciation
and amortization ($913,000) and stock-based compensation ($326,000,) and adding the rental income,
the adjusted EBITDA looks to be a positive $4.6 million compared to $1.8 million in Q2 2020 and a
negative $110,000 in Q3 2019.

Total other income was $68,000 versus $1.2 million last year. This year included a $171,000 unrealized
loss on the company holding in Excelliance MOS stock while last year the holding showed a $715,000
gain. In Q3 O2Micro sold 155,000 shares of Excelliance MOS stock for proceeds of $658,000 at an
average price of $4.00 per share. It had a cost basis of $0.53 per share. It still holds 424,000 shares
(worth $1.8 million), and expects to sell more in Q4 2020.

The company reported a GAAP net income of $2.9 million versus last year s loss of $200,000 last year.
This yielded a fully diluted GAAP EPS of $0.10 versus a loss per share of $0.01 a year ago.
Non-GAAP income was $3.4 million, versus a loss of $542,000 last year. This yielded a non-GAAP EPS
of $0.12, versus a loss per share of $0.02 last year.

ADS outstanding were 27 million and fully diluted they stood at 28.9 million. In Q3 2020, the company
repurchased 14,933 ADS units at a cost of $44,000.

Balance Sheet

On September 30, 2020, the company had $40.8 million in cash and equivalents (or $1.51 per ADS),
down just $596,000 million sequentially. Net cash used by operating activities in the quarter was $1.1
million. Capital expenditures were $733,000 and depreciation and amortization was $913,000.
In Q1 the company streamlined operations for profitability; the company s cash breakeven point remains
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.

After the Quarter Ended

On Oct. 01, 2020 O2Micro announced it was granted of a patent for circuits that drive light sources, along
with a light source module. It was issued 21 claims under US patent US 10,757,770 B2 on Aug 25, 2020.
The module supports dual light sources, along with a current allocation unit. The allocation unit adjusts
the current through each light source based on the output. This light source driver fills the need for multi-
color lighting applications through our intelligent current-allocation technique providing color adjustments.
This technology will allow for light output temperature adjustment between Pure White Light and more
traditional Warm Light without changing bulbs.

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 VALUATION

Company Has Significant Upside If It Can End Cash Burn and Sustain a Profit

The company trades at an enterprise value of $114.0 million, up significantly since our last report as
investors begin to believe in sustainable profitability. At the end of Q3 2020, the company had $40.8
million (or $1.51 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 easily worth more than $9 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 424,000 shares of stock in Excelliance MOS (worth $1.8 million.) The
company has a high acquisition, value. Activists had 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.

Looking at O2 Micro from an M&A prospective we can look at other fabless semiconductor transactions.
In May 2018, Microchip Technology bought Microsemi for $10.15 billion, which was a valuation of 5.5
times its trailing twelve-month revenues of $1.845 billion. Two other comparable companies we had been
using, Intersil and Linear Technology, were acquired at very high valuations. Intersil was acquired by
Renesas for $3.2 billion at a valuation of 5.9xs the company s trailing $542.1 million in revenue. Analog
Devices acquired linear Technology for $14.8 billion. This was 9.9 times its trailing four quarters of
revenue of $1.5 billion.

Were we to use the current average enterprise value to trailing twelve-month sales of 8.9 times and apply
it to OIIM s trailing 12-month $73 million revenues, we would calculate an enterprise value of $650
million. Adding to it $40.8 million in cash and equivalents gives us a market cap of $690 million or $23.90
per share using fully diluted shares. We believe that once the company shows sustainable revenue
growth and cash generation, the market should afford it a valuation closer to this price. It is certainly on
the path to do this.

As it moves to profits, we can even look at the stock on a PE basis. Currently trades at 15.5 times 2021
estimated EPS.

Competitors EV TTM Sales EV/Sales

Monolithic Power Systems MPWR 13,000 688 18.9
Cree Inc. CREE 6,750 904 7.5
Microchip Technology MCHP 35,000 5,260 6.7
Maxim MXIM 17,800 2,280 7.8
Texas Instruments TXN 132,000 13,740 9.6
Cirrus Logic CRUS 3,720 1,290 2.9

Average 8.9

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 OWNERSHIP

Grandeur Peak Global

Advisors

DNB Asset Management

Renaissance Technologies

White Pine Capital

BofA Global Research

Invenomic Capital
Management

Balter Capital
Management

Other

RISKS

O2Micro has high exposure to the global demand for TVs, particularly those sold in China. It is
depending on free dimming and high power LED lighting, 4K and 8K and other high end TVs and
monitors, lithium ion battery powered tools and appliances, and IoT to give it revenue and margin
growth.

In 2019, two customers accounted for 26% of revenues and their loss could cause a meaningful
decline in revenues. 86% of revenues were from China. Without the FEIT license fee, we believe
that number would be 89%.

The company is currently being affected by the proliferation of the coronavirus in China as their
production and most of their customers are located in China and sell to the Chinese market. Right
now is unknown how restrictions and health concerns will affect commerce in both the short and long
term.

The firm has had only two profitable GAAP quarter since 2011, and although probable, it remains to
be seen if positive results will be truly sustainable.

Given its large number of patents, litigation risk is a possibility as the company enforces its patents.

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 INCOME STATEMENT

March June Sept Dec March June Sept Dec

Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20E 2018 2019 2020E 2021E
REVENUE
Net Revenue 12.8 14.3 16.0 17.9 15.6 17.3 22.2 23.4 62.7 60.9 78.5 94.1
Yr-to-yr Gr. -10% -6% -5% 8% 22% 21% 39% 31% 4% -3% 29% 20%
OPERATING EXPENSES
Cost of goods sold 6.3 7.1 7.8 7.7 7.5 8.4 10.7 11.2 30.7 29.0 37.9 46.1
Gross Margin 6.4 7.1 8.2 10.1 8.1 8.9 11.5 12.1 32.0 32.0 40.6 48.0
% of Sales 50.5% 50.1% 51.4% 56.7% 51.9% 51.2% 51.8% 51.9% 51.0% 52.5% 51.7% 51.0%

R&D 5.1 4.8 4.7 4.4 4.1 4.1 4.1 4.3 19.8 19.1 16.6 18.4
SG&A 5.0 4.9 4.6 4.8 4.5 4.3 4.3 4.5 20.3 19.3 17.6 20.8
One-time expenses & Adj. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.0) 0.0 0.0 0.0

Tot Operating Exp. 10.0 9.7 9.4 9.2 8.7 8.4 8.4 8.8 40.1 38.4 34.2 39.2

Operating Income (3.6) (2.6) (1.1) 0.9 (0.6) 0.5 3.1 3.3 (8.1) (6.4) 6.4 8.8
Operating margin -28% -18% -7% 5% -4% 3% 14% 14% -13% -10% 8% 9%

Interest income 0.1 0.1 0.2 0.2 0.2 0.2 0.1 0.1 0.4 0.5 0.5 0.4
Unrealized fair value on LT Investments 0.0 (0.2) 0.7 0.2 (1.1) 1.1 (0.2) 0.0 9.8 0.8 (0.2) 0.0
Foreign exchange loss (0.1) 0.1 0.0 (0.1) 0.0 (0.1) (0.1) 0.0 0.1 (0.2) (0.2) 0.0
Gain on sale of real estate 0.0 0.0 0.0 0.5 0.0 0.0 0.0 0.0 0.0 0.5 0.0 0.0
Other (rent) - net 0.1 0.1 0.4 0.2 0.1 0.2 0.3 0.2 1.0 0.8 0.7 1.1
One-time charge 0.0 0.0 0.0 0.0 0.0 (1.2) 0.0 0.0 0.0 0.0 (1.2) 0.0
Total other Income 0.1 0.1 1.2 1.1 (0.8) 0.2 0.1 0.3 11.4 2.5 (0.3) 1.5

Pretax Income (3.5) (2.5) 0.1 2.0 (1.3) 0.6 3.2 3.6 3.3 (3.9) 6.1 10.3
Pretax margin -27.6% -17.4% 0.8% 11.3% -8.6% 3.7% 14.3% 15.3% 5.2% -6.3% 7.7% 10.9%
Taxes 0.3 0.3 0.3 0.3 0.2 0.3 0.3 0.3 1.1 1.2 1.0 1.5
Tax Rate -8.5% -11.6% 251.5% 12.4% -15.4% 40.8% 8.0% 7.8% 34.9% -30.3% 16.5% 14.3%

GAAP Net Income (3.8) (2.8) (0.2) 1.8 (1.5) 0.4 2.9 3.3 2.1 (5.0) 5.1 8.8
Non-GAAP Net Income (3.5) (2.2) (0.5) 1.4 (0.0) 0.8 3.4 3.6 (6.3) (4.8) 6.7 10.3

GAAP EPS-Basic ($0.15) ($0.11) ($0.01) $0.07 ($0.06) $0.01 $0.11 $0.12 $0.08 ($0.19) $0.19 $0.33
GAAP EPS-Fully dil. ($0.14) ($0.11) ($0.01) $0.07 ($0.06) $0.01 $0.10 $0.11 $0.08 ($0.19) $0.19 $0.33
Non-GAAP ($0.13) ($0.08) ($0.02) $0.05 ($0.00) $0.03 $0.12 $0.13 ($0.24) ($0.18) $0.24 $0.35

Share Out 26.3 26.4 26.3 26.3 26.7 27.0 27.0 27.0 26.0 26.3 26.9 27.0
Fully diluted shares 26.9 26.4 26.3 27.1 26.7 27.7 28.9 28.9 26.6 26.3 28.1 28.9
Yr-to-yr Gr. 2% 0% 0% 2% -1% 5% 10% 7% 3% -1% 7% 3%

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 BALANCE SHEET

June 30, March 31, Qtr-to-Qtr June 30, Yr-to-Yr

2019 2020 % Change 2019 % Change
CURRENT ASSETS
Cash and cash equivalents $12,676 $16,108 -21.3% $12,955 -2.2%
Restricted cash 36 35 2.9% 34 5.9%
Short-term investments 28,684 28,595 0.3% 21,950 30.7%
Accounts receivable, net 11,730 11,016 6.5% 11,143 5.3%
Inventories 12,416 9,876 25.7% 9,910 25.3%
Prepaid expenses and other current assets 1,505 1,361 10.6% 2,360 -36.2%
Total current assets 67,047 66,991 0.1% 58,352 14.9%

LONG-TERM INVESTMENTS 3,327 3,020 10.2% 6,463 -48.5%

PROPERTY AND EQUIPMENT, NET 15,150 15,222 -0.5% 17,365 -12.8%
OTHER ASSETS 5,484 2,662 106.0% 2,321 136.3%
Total other assets 23,961 20,904 14.6% 26,149 -8.4%
TOTAL ASSETS 91,008 87,895 3.5% 84,501 7.7%

CURRENT LIABILITIES
Notes and accounts payable 7,834 6,596 18.8% 2,839 175.9%
Income tax payable 318 702 -54.7% 384 -17.2%
Lease liabilities 644 714 -9.8% 975 -33.9%
Accrued expenses and other current liabilities 5,090 3,540 43.8% 4,420 15.2%
Total current liabilities 13,886 11,552 20.2% 8,618 61.1%

OTHER LONG-TERM LIABILITIES

Accrued pension liabilities 193 207 -6.8% 295 -34.6%
Deferred tax liabilities 629 651 -3.4% 673 -6.5%
Lease liabilities 1,752 1,829 -4.2% 2,124 -17.5%
Other liabilities 66 65 1.5% 86 -23.3%
Total long-term liabilities 2,640 2,752 -4.1% 3,178 -16.9%
Total liabilities 16,526 14,304 15.5% 11,796 40.1%

SHAREHOLDERS EQUITY

Ordinary shares 33 33 0.0% 33 0.0%

Additional paid-in capital 142,928 142,853 0.1% 142,775 0.1%
Accumulated deficits (53,987) (54,087) -0.2% (53,282) 1.3%
Accumulated other comprehensive income 4,573 4,408 3.7% 4,544 0.6%
Treasury stock (19,063) (19,616) -2.8% (21,365) -10.8%
Total shareholders equity 74,484 73,591 1.2% 72,705 2.4%
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY 91,008 87,895 3.5% 84,501 7.7%

Cash and equivalents $41,360 $44,703 -7.5% $34,905 18.5%

Change in cash and equivalents (3,343) (1,686) 98.3% 6,455 -151.8%
Market value 62,383,500 40,614,400 53.6% 37,161,960 67.9%
Enterprise value 20,987,500 (4,123,600) -609.0% 2,222,960 844.1%
DSO 59 62 -4.8% 62 -4.8%
Inventory Days 119 112 6.3% 130 -8.5%

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 ANNUAL CASH FLOW
2019 2018 2017 2016 2015
OPERATING ACTIVITIES
Net loss $ (5,039) $ 2,088 $ (6,145) $ (2,986) $ (21,095)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,780 1,641 1,667 1,682 2,446
Stock-based compensation 1,462 1,421 1,589 1,606 1,912
Loss on asset write-off 0 0 0 0 0
Inventory write-downs 1,359 1,328 642 1,527 913
Net gain recognized on LT investments (788) (9,916) 0 0 0
Gain on sale of long-term investments (500) 0 (20) (948) (8)
Impairment loss on long-term investments 0 0 0 0 4,953
Gain on disposal of property & eqt, net 2 (6) (137) (1,726) (738)
Deferred income taxes (133) (155) 40 (1,231) 1,989
Other, net 0 0 0 0 0

Changes in operating assets and liabilities:

Accounts receivable, net 1,053 (2,204) (1,979) (2,008) 1,592
Inventories 133 (2,286) (697) (1,140) (1,933)
Prepaid expenses and other current assets 981 (1,031) (139) (6) 191
Deferred charges (571) (983) (553) (375) (416)
Operating lease right of use assets (1,477) 0 0 0 0
Notes and accounts payable 285 2,122 (1,869) 996 1,202
Income tax payable 198 72 161 (2,065) 1,595
Accrued expenses and other current liabilities 661 (105) 186 (1,064) (1,039)
Operating lease liabilities 1,494 0 0 0 0
Accrued pension liabilities (42) (20) 13 (4) (11)
Other liabilities 3 (1) 3 (56) (168)
Net cash used in operating activities 861 (8,035) (7,238) (7,798) (8,615)

Acquisition of:
Short-term investments (34,649) (11,197) (8,505) (28,797) (7,128)
Long-term investments 0 0 0 0 0
Property and equipment (1,672) (1,272) (704) (673) (724)
Decrease (increase) in:
Restricted assets 0 0 0 0 0
Restricted cash 0 0 0 0 132
Other assets 6 (12) 22 40 82

Proceeds from:
Sale of short-term investments 4,953 22,540 12,635 18,331 16,755
Sale of long-term investments 7,061 2,582 0 5,982 167
Return of capital from LT investment 0 0 1,163 17 370
Sale of real estate 2,169
Disposal of property and equipment 1 16 145 3,837 3,205
Net cash provided by investing activities (22,131) 12,657 4,756 (1,263) 12,859

FINANCING ACTIVITIES
Acquisition of treasury stock (510) (451) (708) (619) (3,233)

Proceeds from:
Exercise of stock options 7 10 29 2 31
Issuance of ordinary shares under the ESP Plan 109 86 84 73 180
Net cash used in financing activities (394) (355) (595) (544) (3,022)

EFFECTS OF CHANGES IN FOREIGN EXCHANGE (53) (374) 268 (261) (1,092)

RATE
NET INCREASE (DECREASE) IN CASH AND CASH (21,717) 3,893 (2,809) (9,866) 130
EQUIV.
CASH & CASH EQUIV. AT BEGINNING OF YR 32,448 28,555 31,364 41,230 41,069
CASH & CASH EQUIVALENTS AT END OF YR 10,731 32,448 28,555 31,364 41,199

Cash paid for tax $ 1,171 $ 1,218 $ 818 $ 4,349 $ 1,068

Cash Flow (1,857) (3,599) (2,364) (2,076) (9,628)

Free cash flow (3,529) (4,871) (3,068) (2,749) (10,352)

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 HISTORICAL STOCK PRICE

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 DISCLOSURES

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