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Presentation

Alpha and Omega Semiconductor Limited beats earnings expectations. Reported EPS is $0.33, expectations were $0.32.

Operator: Good afternoon. Thank you for attending today’s Alpha and Omega Semiconductor Fiscal Q1 2024 Earnings Call. My name is Cole and I’ll be the moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to our host, Yujia Zhai. Please go ahead.

Yujia Zhai: Good afternoon, everyone and welcome to Alpha and Omega Semiconductor’s conference call to discuss fiscal 2024 first quarter financial results. I am Yujia Zhai, Investor Relations representative for AOS. With me today are Stephen Chang, our CEO; and Yifan Liang, our CFO. This call is being recorded and broadcast live over the web. A replay will be available for 7 days following the call via the link in the Investor Relations section of our website. Our call will proceed as follows today. Stephen will begin with business updates, including strategic highlights and a detailed segment report. After that, Yifan will review the financial results and provide guidance for the December quarter. Finally, we’ll have the Q&A session.

The earnings release was distributed over the wire today, November 6, 2023, after the markets close. The release is also posted on the company’s website. Our earnings release and this presentation include non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the earnings release. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of the bins outlook and financial projections. These forward-looking statements are based on management’s current expectations and involve risks and uncertainties that could cause our actual results to differ materially.

For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligation to update the information provided in today’s call. With that, I will now turn the call over to our CEO, Stephen Chang. Stephen?

Stephen Chang: Thank you, Yujia and good afternoon, everyone. I will begin today with a high-level overview of our results and then jump into segment details. We delivered fiscal Q1 results in line with our guidance. Revenue was $180.6 million. Non-GAAP gross margin was 28.8% and non-GAAP EPS was $0.33. These results were driven by strong shipments across notebooks, desktop computing and smartphones for fall device launches and the Q4 holiday season. I am pleased that our team delivered solid execution amid macroeconomic headwinds and inventory corrections in some end markets. We have been managing our business through various cycles and coping with an ever-changing business environment but our principle remains unchanged. AOS is committed to building towards long-term growth.

We are steadily extending the reach of our business into future and new applications and broadening our product portfolio to address increasing global power trends. As an example, we are leveraging our core technology IP and strength in advanced computing, battery, motor and power supply and continue to invest in new adjacent markets like data centers for AI, automotive and energy generation. In addition, we are taking products deeper into our existing core markets with more integrated solutions that will drive higher BOM content. By investing in new adjacent markets as well as going deeper into our core markets, we believe we will be well positioned to emerge stronger than ever on the other side of this cycle. The rebound in PCs and smartphones is encouraging following multiple quarters of inventory correction.

However, we remain cautious about a sustained broader recovery as we are seeing signs of demand constraints in other end markets which are feeling the effects of the persistent high interest rate environments and geopolitical uncertainties. Moreover, gaming which has been a significant revenue driver for us is now going through an inventory correction as we indicated last quarter. While we cannot be immune to the macroeconomic headwinds, it is important to reiterate that our core fundamentals remain strong. Many of our strategic investments over the past years have better positioned us for sustainable growth. We are excited to have a record number of Tier 1 customer partnerships and growing market share in strategic applications across many of our end markets.

We continue to expect to navigate the current environment better than the broader market that we serve. With that, let me now cover our segment results and provide some guidance by segment for the next quarter. Starting with computing. September quarter revenue was down 21.2% year-over-year but up 35.1% sequentially and represented 38.9% of total revenue. These results were driven by solid recovery in shipments across notebooks, tablets and desktop computing applications. The recovery has been driven by high-end driver ICs and MOSFETs for powering CPUs. Looking forward into the December quarter, we expect this segment to be down low single digits following a strong September quarter. Turning to the consumer segment. September quarter revenue was down 31.3% year-over-year and down 28.9% sequentially and represented 17.2% of total revenue.

As we indicated last quarter, gaming is going through an inventory correction after an extremely strong 12 months of shipments into the number one console manufacturer. Similar to what we saw in PCs and smartphones earlier this year, given the speed of the current correction, we believe demand will revert back to a new normal in a couple of quarters, factoring in that the console is now in its midlife part of the platform cycle. However, we do see opportunities to increase BOM content within the current console platform as part of its refresh next year. Longer term, our relationship with this customer is very strong. and we are already engaged in discussions for their next model design. For the December quarter, we anticipate a further mid-20% decline in this segment.

Next, let’s discuss the communications segment. Revenue in the September quarter was down 1.3% year-over-year but up 8.2% sequentially and represented 17.2% of total revenue. These results were driven by strong shipments to the number one U.S. smartphone manufacturer for their fall phone launch and continued strong demand from Chinese smartphone OEMs for their high-end devices. Looking ahead, we anticipate this segment to remain at current healthy levels, driven by continued strong shipments to Chinese OEMs ahead of their winter and spring launches. Now let’s talk about our last segment, power supply and industrial which accounted for 23.1% of total revenue. September quarter revenue was slightly below our prior expectations, increasing 2.1% year-over-year and 0.5% sequentially.

These results were driven by strong shipments for quick chargers for peak season to our Tier 1 U.S. smartphone customer but offset by weakness in power tools. For the December quarter, we expect this segment to decline in the low teens sequentially mainly due to reduced quick chargers following the peak season and lower solar demand. In closing, we delivered a solid fiscal Q1. We are closely monitoring market dynamics and macro headwinds. However, our fundamentals are strong and we are focused on positioning the company towards growth beyond our $1 billion revenue target on the other side of the cycle, driven by our leading technology, more diversified product portfolio, Tier 1 customer base in all our business segments and expanding manufacturing capability and supply chain.

With that, I will now turn the call over to Yifan for a discussion of our fiscal first quarter financial results and our outlook for the next quarter.

Yifan Liang: Thank you, Stephen. Good afternoon, everyone and thank you for joining us. Revenue for the quarter was $180.6 million, up 11.8% sequentially and down 13.4% year-over-year. In terms of product mix, DMOS revenue was $121.5 million, up 27% sequentially and down 16% over last year. Power IC revenue was $52.7 million, down 10.5% from the prior quarter and 15.4% from a year ago. Assembly service revenue was $0.7 million as compared to $0.6 million last quarter and $1.6 million for the same quarter last year. License and engineering service revenue was $5.6 million for the quarter versus $6.3 million in the prior quarter. Non-GAAP gross margin was 28.8% compared to 28.5% in the prior quarter and 35.4% a year ago. The quarter-over-quarter increase in non-GAAP gross margin was mainly driven by the mix improvement.

Non-GAAP operating expenses were $40.8 million compared to $39.1 million for the prior quarter and $36.6 million last year. The quarter-over-quarter increase was primarily due to higher R&D engineering expenses and professional service fees. Non-GAAP quarterly EPS was $0.33 compared to $0.19 last quarter and $1.20 a year ago. Moving on to cash flow. Operating cash flow was $13.8 million, including $8.6 million of repayment of customer deposits. By comparison, operating cash flows was negative $28.2 million in the prior quarter and positive $36.7 million a year ago. EBITDAS for the quarter was $23.3 million compared to $17.7 million last quarter and $45.5 million for the same quarter last year. Now let me turn to our balance sheet. We completed September quarter with a cash balance of $193.6 million compared to $195.2 million at the end of last quarter.

Net trade receivables were $34.4 million compared to $22.4 million at the end of the prior quarter. Days sales outstanding were 18 days for the quarter versus 19 days for the prior quarter. Net inventory was $187.8 million at quarter end compared to $183.2 million at the end of the prior quarter. Average days in inventory were 129 days compared to 140 days in the prior quarter. CapEx for the quarter was $12.5 million compared to $19.2 million for the prior quarter. We expect CapEx for the December quarter to range from $10 million to $15 million. Now I would like to discuss December quarter guidance. We expect revenue to be approximately $165 million, plus or minus $10 million; GAAP gross margin to be 27.1% plus or minus 1%. We anticipate non-GAAP gross margin to be 28.5%, plus or minus 1%; GAAP operating expenses to be in the range of $48 million, plus or minus $1 million.

Non-GAAP operating expenses are expected to be in the range of $40.3 million, plus or minus $1 million; interest expense to be approximately $1.1 million and income tax expense to be in the range of $0.8 million to $1.2 million. With that, we will open up the call for questions. Operator, please start the Q&A session.

Operator: [Operator Instructions] Our first question is from Jeremy Kwan with Stifel.

Jeremy Kwan: Maybe a first question on the gaming market that you talked about maybe of potentially hitting a new normalized run rate. Can you just help us understand how big is gaming as a percent of the consumer revenue, what it was at the peak and maybe where you expect that to kind of settle out? And finally, where you might see this new normalized run rate, where could it go, I guess, as we push the mid- to end of this gaming cycle?

Stephen Chang: Sure, Jeremy. Yes, gaming is an important segment for us and we’re excited about the segment in general because there’s quite a bit of content going into these systems, pretty much like a specialized PC. So all the solutions we have going into PC also goes into gaming. The console that we sell into generally has a lifetime of up to about 7 years. And right now, we’re in about years 4 of that 7-year life cycle. And it’s about the time, if you look at the previous consoles, that annual shipments start to drop some. And that correction was taking in place now. And just like we saw a correction in some of the other markets that we’re in, even gaming has to go to that correction. But right now, it’s in the middle of that correction.

So when we see that it’s going to revert back, we believe that it’s going to — it will be above the current rate but below the peak from a few quarters ago. So I would say somewhere in between is probably about right. And we continue to work closely with this particular console maker with opportunities also to designing more content. But overall, I think in the peak, to answer your question, it was up to maybe about almost half of our total consumer segment. Right now, maybe it’s somewhere around 30% or something in that range, 20% and 30% of the consumer business. But that’s just during the correction. We do expect it to bounce back up again.

Operator: Our next question is from David Williams with Benchmark.

David Williams: Congrats on navigating the challenging environment. So a couple of quick things. You talked a little bit about the data center and AI opportunity there in your script. And I know this is an area you’ve been working on for some time. But just you talked about having good controllers and power stage to address this market. Just wondering if there’s anything new there that you can share or just generally how you’re seeing your opportunity in that market.

Stephen Chang: How we’re seeing it, we’re getting some business today. The type of applications in terms of the circuit topologies that AI addresses is very similar to that being used in graphics cards and actually any kind of point of load such as for the CPU but especially for graphics card because you’re basically powering a highly parallel processor. And we have good solutions from controller to the power stage that can address high computing applications, including artificial intelligence type of hardware. So for us, we do have some small business now. We do see the potential for a lot more going forward. But for us, we’re also working on transitioning from addressing client side to moving over to the data center AI side. So that and all those efforts are in process.

David Williams: Great, that helps. And then, maybe just on the PC side and the client side. Can you talk a little bit about the content increases between Raptor Lake and Metor Lake and if you should begin to see those benefits pull in during the December period as we get ready for that next release slated for the end of the year.

Stephen Chang: Generally, yes, we’re starting to see — as Intel is rolling out their platforms, we are seeing more opportunity for sure for more dollar content. And as you mentioned before, we are in the process of deploying our new controller solutions into the marketplace and that it will take some time to — for our customer base to adopt those. But once adopted, yes, we believe the dollar content, what used to be $2 or $3 is coming up to $3 to $4 and even on some certain BOMs going above $5 of content. And PCs themselves, they are — we are pleased to see the bump up in the September quarter. There will be seasonality at play as the ecosystem goes through another just seasonal pattern. But in general, we are excited about the additional BOM content that comes with these new platforms.

David Williams: Great. And then last one here for Yifan, if you could help me just a little bit on the gross margin side. And during the peak part of the cycle, margins had a nice lift from the optimization efforts that you had there. And is mix still the biggest driver of the margin? If we’re kind of looking back at last quarter, it seems like the discretes were lower in the power IC and were really the largest percentage of revenues we’ve seen in some time. But we saw a slight improvement this quarter and I guess we’ve had a kind of reversion where your power IC business is lower but your discretes came up. I’m just trying to understand and maybe square how the power discrete business compares to the power ICs in terms of margin and how we’re getting that lift kind of given the balance sequentially?

Yifan Liang: Sure. In general, the power IC products carry a higher margin for us. But given that, it doesn’t mean that we don’t have higher margins in products in the discrete segment. So in the September quarter, the product mix improved slightly in that I mean still basis points up. And then even though power IC revenue got hurt by the gaming drop. So — but on the other hand, we shipped more to Vcore in those areas in January which provided some higher margins for us. So I mean, overall that — I mean mix is a big portion of our gross margin improvement.

David Williams: Okay, great. Was utilization better this quarter? Was that a tailwind?

Yifan Liang: It’s in the similar range as last quarter because — for our internal productions, generally our Oregon fab is at a pretty good utilization level. Our back end is a little lower. So on the mix, overall, the utilization is at roughly same as last quarter.

Operator: Our next question is from Craig Ellis with B. Riley Securities.

Craig Ellis: Stephen, I wanted to go back to a comment in the prepared remarks regarding demand. It sounds like you retained a pretty — a cautious stance overall and I understand it’s a really challenging macro. But what I was hoping you could do is talk a little bit about the environment that you see. As you look into the first quarter calendar, fiscal third quarter, qualitatively, where are things looking more encouraging, were more challenging? And can you talk about where you’re more confident that inventories are now back to normal levels versus being in excess outside of maybe gaming which is going through a pretty visible correction?

Stephen Chang: Sure. Seasonality, I think, in terms of affecting the segments more — impacts the PCs and smartphones a little more. The PC market, as we mentioned, this September quarter was a strong quarter and we saw a resumption of orders for products, including ICs and other higher performance sockets that we didn’t see in the first half of the year. And so that’s kind of clear signs that the inventory correction is starting to die down. I can’t say that we’re out of the woods yet. But it’s great and very encouraging to see the fresh orders for some of our good products. And going into the — looking 2 quarters out, as you’re suggesting, into the March quarter, yes, we do expect to see some seasonality at play. Typically, that March quarter is the lowest season for PCs in any kind of year.

And we do believe that there will be some correction but nothing like the big correction that we saw at the beginning of this calendar year. We believe that PCs will take a little longer overall to get back to a fuller recovery but we’re already in a much better state than what it was just a quarter — or especially 2 quarters ago. So going forward, PCs will go through seasonality but we believe that it’s getting ahead — heading back towards a little more of a normal seasonal pattern.

Craig Ellis: And it sounds like you’re starting to see some encouraging signs of life in the Android smartphone market within communications. And obviously, great to see your lead customer from the U.S. performing well. But can you talk about the potential for next year to see better growth if you get more of a recovery out of the Android market? And when would we see that and how big could it be?

Stephen Chang: Sure. And the great thing about our smartphone business is that we are in multiple — and all the big end customers here in the U.S., in Korea and in most of the China customer base as well, too. And right now, it’s launch season on the U.S. side. On the Korea side, they’re preparing for a launch for February. And even in China, there’s still been quite a bit of decent demand for the high-end phones which we are participating in. So it’s — I think it’s good to see the diversification at play. Overall, smartphones are still — system shipments are still in the recovery mode. But overall, we do play fairly well in all of these high-end phones. So that helps to give us some, I guess, momentum at least going into the March quarter. Again, it’s just like PCs, there will be some seasonality at play but at the same time, right now, we do see a strong demand or decent demand, I would say, coming from the China base.

Craig Ellis: For my last question before hopping back in the queue, I’ll just direct it to Yifan. Yifan, oftentimes in the first quarter, we see either Lunar New Year or I think annual maintenance impacts to fab utilization, therefore, gross margin. As we look ahead to calendar 1Q, would those historic dynamics be in play? Or for some reason, would things potentially play out differently early next year?

Yifan Liang: Sure, great. I would expect that, yes and I mean the March quarter is a typical lunar New Year season and then — and also we also arrange some maintenance around it, so that I would expect utilization will be a little bit lower than the September, even lower than the December quarter.

Craig Ellis: That’s helpful. And then maybe I could sneak in one more that relates to gross margin. TI seemed to indicate that pricing was normalizing, so picking up a little bit but not getting aggressive. How would you characterize the pricing environment that’s out there right now guys?

Yifan Liang: Yes. This calendar year, I would say, yes, the pricing environment returned to historical normal trends, I would say, after last couple of years, favorable environment. I would characterize it as traditional pricing environment.

Operator: We have a follow-up question from Jeremy Kwan with Stifel.

Jeremy Kwan: Maybe a quick follow-up to that pricing question. Just wondering a couple of things. First, I guess, a couple of quarters ago, I think maybe even a year ago now, you mentioned increased local competition from Chinese suppliers on your load of mid end of your portfolio. I was wondering if you could give us an update on that and kind of how that — has that — how much of that has impacted pricing? And secondly, how often do you and your customers renegotiate pricing? Is this something that is set at the beginning of the year? Or is it kind of an ongoing basis? Any insight you can offer would be helpful.

Stephen Chang: Sure. Pricing is always ongoing and it’s always up to where we are in the balance of supply versus demand in the overall global economy. So certain customers will negotiate every quarter. Certain ones we can negotiate once for the whole year but it really just depends on how the overall industry is faring. In terms of competition, it’s really good to see again the resumption of some of the high performance sockets and that kind of gives us a lot more room in terms of leverage in the face of competition. There’s basically less competition for our high performance products. So that helps to kind of normalize the situation. I would say competition, local competition is fierce. So when we engage with them, we also have to be aggressive as well which we are but they’re not also — they’re not everywhere. And we will adjust our pricing based on where we need to be to be competitive.

Jeremy Kwan: Great. And maybe if we could just look at China again with the JV there. Can you tell us what insight you may have in terms of your — I guess, your — how much capacity you have at the JV available to you? Maybe talk about some of your — the pricing trends that you’re seeing from them? Any insight you can offer would be very helpful and also funding requirement.

Yifan Liang: Okay, sure. JV they have already ramped up their production a year — a couple of years ago. So right now, they’re in the process of raising additional funds to further expand their capacity. They — on the EBITDA level, they already achieved breakeven. So even though in the September quarter, we recorded our portion of their June quarter’s loss. But on the cash side, right now, they are self-funded. In terms of capacity, yes, we still have same capacity as before, so nothing changed there.

Jeremy Kwan: Got it. And I guess if we could look at your CapEx, I know you guided for $10 million to $15 million for the December quarter. Can you — I think this is most of your enhanced, I guess, CapEx funding that you talked about, about a year ago. Can you just give us a quick update where we are in that process? How much more do you still have left and maybe even what guidance you can offer for fiscal ’25?

Yifan Liang: Okay, sure. I mean CapEx-wise, I mean, right now, I would — as we were in a normal CapEx spending period and then I mean normally, we would target 6% to 8% of our revenue. Our Oregon fab expansion had completed. So right now, not a whole lot of CapEx payment remaining. So right now, we don’t have major project for any factory expansions at this point.

Jeremy Kwan: Great. And just one last question. The licensing revenue, it’s nice to see that come in pretty steadily here. How much — can you give us like — how much is baked into the guidance for the December quarter? And also, if you could help walk us through the impact on gross margin? Is there engineering costs associated with the license revenue? And how that just kind of flows through the financial scheme, that would be great.

Yifan Liang: Okay, sure. Listen, revenue recognition for the licensing and engineering service is more — depends on the actual engineering hours our teams spend versus expected total hours for this 24-month period. So it’s fluctuating from quarter to quarter. So it’s hard to say. Right now for the December quarter guidance, we estimated a similar level of licensing and engineering revenue.

Jeremy Kwan: And the impact to gross margin?

Yifan Liang: Sure. Yes, the margin for the licensing and engineering service, yes, it is definitely at a higher margin than our product margins. We don’t breakdown by specific in the product line or product elements here.

Operator: We have a follow-up question from David Williams with Benchmark.

David Williams: Just curious on the appliance side. Stephen, I know you’ve talked about that being an area of opportunity for you. And — but it’s largely greenfield today. Just kind of curious what you’re seeing in the appliance market. Has that improved or worse or anything in particular there you should — you’d be optimistic about?

Stephen Chang: Right now, it’s still a bit slow because it’s tied to the overall housing and real estate market globally and that slowed down quite a bit in the past year or so. So overall, we’re not expecting too much in the shorter term. Overall in the longer term, this is still a core part of the business. Again, the key thing here is we’re selling our IGBTs as well as our modules based on those IGBTs. We can do it. We have a solution that is smaller than the competition. But it does have to contend with overall macro, at least for that subsegment. So in the shorter term, I don’t see too much — too exciting in the shorter term. But in the longer term, this is a $2 billion-plus market and we’re just scratching the surface.

David Williams: Okay. All right. Great. And then just the last one for me here, just the cadence of orders through the quarter, was there any change maybe between the beginning and the end of the quarter of the order?

Yifan Liang: Backlog I think this quarter has been steady and I mean. Some fresh orders came in after a period of time of inventory correction. And I mean, by and large, order positions has been reflected in our December quarter guidance.

Operator: We have an additional follow-up from Jeremy Kwan with Stifel.

Jeremy Kwan: Just one last follow-up. On the operating cash flow, it included the customer deposit repayment — so if we exclude this, would it be $22.4 million operating cash flow for the quarter?

Yifan Liang: Correct.

Jeremy Kwan: Got it. And how much remaining is in your customer deposits at this point?

Yifan Liang: We still have about a $75 million-ish in customer deposits at this point. We would expect the next calendar year, we’ll probably return around $30 million or so.

Operator: There are no additional questions waiting at this time. So I’ll pass the conference back to the management team for any closing remarks.

Yifan Liang: This concludes our earnings call today. Thank you for your interest in AOS and we look forward to talking to you again next quarter. Thank you.

Stephen Chang: Thank you.

Operator: That concludes today’s conference call. Thank you for your participation. You may now disconnect your line.