Alpha and Omega Semiconductor Limited

Thank you for standing by. Welcome to the Alpha and Omega Semiconductor Report's financial results for the fiscal third quarter of 2021 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your speaker today, Mr. Gary Dvorak, managing director of the Blue Shirt Group Asia.

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductors conference call to discuss fiscal 2021 third quarter financial results. I'm Gary Dvorak, investor relations representative for AOS. With me today are Dr. Mike Chang, our CEO, Stephen Chang, our president, and Yifan Liang, our CFO. This call is being recorded and broadcast live over the web. A replay will be available for seven days following the call via the link in the investor relations section of our website. The call will proceed as follows. Mike will begin with strategic highlights. Then Stephen will provide business updates and a detailed segment report. After that, Yifan will review the financial results and provide guidance for the June quarter. Finally, we will have the question and answer session. The earnings release is distributed over wire services today, May 5, 2021, after the close of the market. The release is also posted on the company's website. Our earnings release and this presentation include certain 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 that we provide. A reconciliation of these non-GAAP measures to 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 business 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 from such expectations. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the FCC. We assume no obligation to update the information provided in today's call. Now, I will turn the call over to our CEO, Mike, to provide strategic highlights. Mike?

thank you gary i would like to welcome everyone to today's call i am excited to be speaking with all of you again today and to report another strong quarter in the march quarter we experienced strong year-over-year performance in each of our market segments we saw robust shipments across most of our product categories leading to results ahead of expectations revenue of 169 million dollars reflected solid year over year and sequential growth we benefited from strong end market demand which enabled us to optimize our product mix In the meantime, we continued to take a disbranded approach to our spending. All of these resulted in non-GAAP gross margin of 31.9% and non-GAAP EPS of 77 cents, which increased by seven times year over year. Yifang will go into more details on our financial performance later. I remain encouraged by our team's solid execution. The operational controls and efficiency continue to positively impact our bottom line, resulting in significant profitability improvements. As I discussed on previous calls, Our mission is to be a trusted technology partner and a global supplier of a broad portfolio of power semiconductors. This mission continues to drive our strategic focus and the work we do at AOS. Our focused R&D effort is driven broader and deeper product innovation. Our strong engineering team and technical expertise enable us to develop a broader variety of our discrete and power IC technology platforms. This allows us to expand our product offerings and deliver complete power solutions for more target applications. As a solution provider, we have deepened our relationships with customers, become their trusted strategic partners. As a result, our newer products are driving growth, primarily by increasing our farm content in core applications. On the manufacturing front, we continue to ramp up our capacity our joint venture FAB in Chongqing, according to the plan. The semiconductor capacity remains tight globally, as end-market demand outlook continues to be studied across the board. With our expanded capacity at the JV FAB, we are thankful to be able to address additional customer demand from the Chongqing joint venture. The JVFAP is fulfilling its purpose and providing us with flexible capacity management, which is critical to supporting our growth. I'm very, very pleased with the progress and we are on track to approaching the phase one target runway in the September quarter. Yifan will update you on the progress of the JV Lab later on this call. While we have made tremendous progress as a company over the last several years, we are energized by the opportunity in front of us. We believe that our focus on innovation and unwavering commitment to developing strategic partnerships with tier one OEM customers will enable us to continue to capitalize on our core growth opportunities, as well as progressively penetrate other markets. Importantly, we are confident that we will surpass our target of $600 million annual revenue for calendar year 2021. Now I will turn the call over to Stephen for an update on our business and a detailed segment report. Stephen.

Thank you, Mike, and good afternoon, everyone. I will start with an update on our business and then provide detailed segment highlights for the March quarter. As Mike discussed earlier, industry-wide supply remains tight while demand continues to be strong across all our core market segments. In the midst of worldwide shortage, we continue to optimize our operations, product mix, and capacity allocation to support our key customers and maximize revenue. We are working diligently with our strategic customers to meet their procurement needs In particular, we have been ramping production at the JV Fab in Songjin. Supply from the JV Fab has enabled us to address growing demand. Our business momentum in recent quarters reflects our broad product portfolio, go-to-market strategy, and expanding production capacity. More and more, our products offer a comprehensive solution to our customers, leveraging our expertise in power. This expands beyond commodity parts into multi-socket optimized solutions, enabling our customer products to become more reliable and efficient. We are celebrating growth by winning new customer engagements with an expanding pipeline of new products and increasing BOM content with our application-specific solutions. For example, we are designing in more and more PowerIC products into notebook applications. We are also expanding our compact module solutions to address additional home appliance applications like washing machines and room air conditioners. Now let me drill down into each of the business segments. Let's start with computing. Revenue was up 48.6% year over year and up 8.6% sequentially as anticipated. This segment represented 41.5% of our total revenue. and demand for our products remained strong even going into the March quarter as our major customers were still facing shortages. While we were on allocation, we actively managed our capacity to support customer demand and resume sequential growth in the quarter. During the quarter, we were able to improve product mix by selling more higher ASP products for both MOSFETs and Power ICs. We allocated more resources to support the computing segment, especially the notebook application. The graphic card business was strong in the March quarter and is expected to remain strong, driven by cryptocurrency mining. Looking ahead, we expect overall computing revenue to grow by mid-single digits in the June quarter. We expect solid demand at our ODM customers for both notebooks and motherboards, offset by a temporary drop in graphic card business due to production delays. Moving on, the consumer segment, which was 21.2% of total revenue in the March quarter, up 79.1% year-over-year and up 1.3% sequentially. TV business was down seasonally, offset by the strength in home appliances. We shipped high volumes of module solutions to important home appliance customers in Korea and China. Gaming resumed growth in the March quarter, and we expect momentum to continue in the coming quarters. We continue to grow our gaming business with both our MOSFET and Power IC products in multiple sockets. Looking to the June quarter, we expect the consumer segment to be flat with continued strength in home appliances and gaming offset by a decline in our TV business. Next, let's move to the communication segment, which was 16.2% of total revenue in the quarter, up 42.2% year-over-year, and up 1.8% sequentially. This segment played out better than expected as smartphone business performed better than normal seasonality. Demand for some phone models extended into the March quarter, particularly in the China market. We expect our communication segment to decrease low double digits in the smartphone low season for the June quarter. We are well positioned to resume battery protection growth in the September quarter with designs secured at our key global customers. Finally, let's discuss the power supply and industrial segment, which accounted for 19.2% of total revenue. This segment was up 70.5% year over year and up 12.5% sequentially. The solid growth was due to several factors. First, quick chargers were strong due to demand for travel adapters used for tablets, as well as quick charger solutions for smartphones. Second, The demand for AC-DC power supplies for laptop adapters was robust, with incremental design activity with major power customers in Taiwan. Third, demand from our power tool customers remained strong with our low-voltage motor drive solutions. We have been growing this overall segment due to support from our JV fab. We expect this segment to grow by high single digits in the June quarter, driven largely by robust quick target business for both U.S. and China markets. I am excited by the momentum we are seeing in our business. With nine months of fiscal 2021 now under our belt, we are executing well and on track with the roadmap we've laid out for the investment community in terms of our key growth drivers across the various business segments. With that, I will now turn the call over to Yvonne for a discussion of our fiscal third quarter financial results and our outlook for the next quarter. Yvonne?

Thank you, Stephen. Good afternoon, everyone, and thank you for joining us. Revenue for the March quarter was $169.2 million, up 6.5% from the prior quarter, and up 58.4% from the same quarter last year. In terms of product mix, DMOS revenue was $122.6 million, up 3.5% sequentially, and up 40.1% year over year. RIC revenue was $43.4 million, up 16.1% from the prior quarter and up 139.5% from a year ago. Assembly service revenue was $3.2 million as compared to $2.9 million in last quarter and $1.2 million for the same quarter last year. Non-GAAP growth margin for the March quarter was 31.9%, up from 31.4% in the prior quarter, and up from 27.5% in the same quarter last year. The quarter-over-quarter increase in non-GAAP growth margin was mainly driven by the better product mix, partially offset by the lower utilization at some of our factories due to the Lunar New Year holiday and one-week shutdown at our Oregon FAB near the end of March for annual maintenance. Non-GAAP gross margin excluded $0.8 million of amortization of purchased IP for both the March quarter and the prior quarter. In addition, non-GAAP gross margin excluded $0.4 million of share-based compensation charges for the March quarter and for the prior quarter, as well as the same quarter last year, respectively. Non-GAF operating expenses for the March quarter were $30.9 million compared to $31.5 million for the prior quarter and $25.8 million for the same quarter last year. The quarter-over-quarter decrease was primarily due to the higher variable compensation accrues last quarter. Non-GAAP operating expenses for the quarter excluded $3.4 million of share-based compensation charges and $.6 million of legal expenses related to the government investigation. This compares to $2.8 million of share-based compensation charges and $0.8 million of legal expenses related to the investigation for the prior quarter, as well as $2.5 million of share-based compensation charges, $2.1 million of legal expenses related to the investigation, and $0.6 million of impairment charge related to an investment in a startup company for the same quarter last year. Income tax expense for the quarter was $1 million compared to $0.7 million for the par quarter and $1 million income tax benefit for the same quarter last year. Non-GAAP EPS attributable to AOS for the quarter was $0.77 per share as compared to $0.65 for the par quarter and $0.11 for the same quarter last year. AOS continued to generate positive operating cash flow. AOS on a standalone basis generated $33.3 million of operating cash flow in the March quarter as compared to $35.7 million in the prior quarter and $29.5 million in the same quarter last year. In the March quarter, we received $20 million customer deposits for securing supply. The JV company generated a positive operating cash flow of $5.3 million in the March quarter, compared to $0.4 million in the part quarter, and $15.2 million of cash flow used by the JV company in the same quarter. Consolidated EBITDAs for the March quarter was $36.2 million compared to $31.6 million for the prior quarter and $8.8 million for the same quarter last year. EBITDAs attributable to AOS for the quarter was $30.6 million as compared to $25.3 million for the prior quarter and $6.5 million for the same quarter last year. EBITDAs for the JV company was $4.5 million in the March quarter, as compared to $6 million for the par quarter, and negative $1.1 million for the same quarter last year. Now let's look at the balance sheet. We completed the March quarter with cash balance of $192.1 million, including $158.3 million at AOS, and 33.8 million dollars at the jv company this compares to 181 million dollars at the end of last quarter which included 142.3 million dollars at aos and 38.7 million dollars at the jv company our Cash balance a year ago was $110.2 million, including $99.5 million at AOS and $10.7 million at the JV company. The bank borrowing balance at the end of March was $167.2 million, including $26.4 million at AOS and $140.8 million at the JV company. During the quarter, AOS and the JV company repaid $2.1 million and $4.4 million of existing loans, respectively. Net trade receivables were $33.7 million at the end of the March quarter, as compared to $24.9 million at the end of the prior quarter, and $17.5 million for the same quarter last year. Day sales outstanding for the March quarter was 22 days compared to 21 days in the prior quarter. Nightly inventory was $145.1 million at the quarter end, slightly up from $144.3 million last quarter and up from $127.4 million in the prior year. Average days in inventory were 112 days for the quarter compared to 115 days in the prior quarter. Net property plant and equipment was $432.6 million, up from $430.8 million last quarter, and up from $412.3 million last year. Capital expenditures were $15.8 million for the quarter, including $10.1 million at AWS and $5.7 million at the JV company. The JV company continued to ramp its 12-inch FAB during the March quarter. It's on track to achieve the Phase 1 target run rate in the September quarter this year. The JV company is in the process of additional financing to further expand its capacity. We will provide more details when available. With that, now I would like to discuss the guidance for the June quarter. We expect revenue to be approximately $170 million plus or minus $3 million. Gap gross margin to be 31.7% plus or minus 1%. We anticipate the non-GAAP gross margin to be 32.5% plus or minus 1%. Non-GAAP gross margin excludes $0.8 million amortization of acquired IP and $0.6 million of estimated share-based compensation charges. GAAP operating expenses to be in the range of $36.2 million plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $31 million, plus or minus $1 million. Non-GAAP operating expenses exclude $4.7 million of estimated share-based compensation charges and $.5 million of estimated legal expenses relating to the government investigation. Income tax expense to be approximately $0.9 million to $1.1 million. Loss attributable to non-controlling interests to be approximately $0.2 million. As part of our normal practice, we're not obligated to update this information. With that, we will open the call for questions. Operator, please start the Q&A session.

Thank you. Ladies and gentlemen, if you would like to ask a question, you may press star, then the number 1 on your telephone keypad. Once again, you may press star 1 to ask a question. Please stand by while we compile the Q&A roster. Your first question comes from the line of Craig Ellis from the Riley Securities. Your line is open.

for taking the question, and to the entire team, congratulations on just very robust execution and a breakthrough performance. Mike, you and I have known each other for at least 10 years now, and you've always had an unwavering vision for where you wanted to take the company, and this is certainly a very significant milestone, so good for you. A hat tip. You're welcome. And maybe the first question should be to you with J.B. Babbe's two through four still ahead of us? Is the Vesper AOSL still ahead? And if so, you know, can you just comment on some of the things that you see when you look out over the next couple of years for the company? You talk about specifically on this joint venture? Not necessarily just the joint venture, but that as well as some of the things that's happening with Things like the tier one OEM wins that you talked about, the increased diversification that you're getting across different end markets and the strong revenue and earnings growth that you see in the business. It was more of a general question on the company's evolution over the next two to three years.

Well, thank you very much. Actually, no, the company has a very one core decommissioned belief. And no matter what, we always want to grow. So we work hard all these years. We believe once we grow, our infrastructure will be stronger, our quality will be better, our product will be stronger, and our relationship with the customer will be deeper because they will recognize the value. And that's exactly what we're doing. Of course, before today, you need to cross over certain critical mass or threshold. Before that, you're really not adequate. So as of right now, we start to gain enough mass, right? So the technology still stands. Maybe it will accelerate because of our capabilities right now, also because of our infrastructure, everything. I don't know whether that's your question. So we are actively looking for a billion dollars and more.

No, that helps. And certainly large companies with big businesses, product programs want companies that can scale with them. And I think one of the things that you're saying is you now have the ability to do that and to be a trusted partner to tier ones. So thanks for that. Let me take that line of thinking a little bit into the near term and flip it over to you, Stephen. So we had stellar fulfillment execution in the quarter, $170 million in revenues with growth across, I believe, three or four end markets. As we look at the end market profile, we would typically expect to see revenues increase sequentially from 2Q to 3Q, just given seasonal dynamics and things like smartphones and gaming cards and notebooks. The question is, do you have that kind of flexibility in the business, or as we look at calendar 2Q, fiscal 4Q revenues, are we really fully optimized in terms of our output relative to end demand?

Sure.

During this time, we are a beneficiary of being able to grow our use times. We're thankful that we have a lot of in-house production that helps to support our growth. But even with that, we had to make some decisions about what kind of business to support and how to grow, how do we move to support our key customers while also maximizing ALS revenue as well. So that has been a careful but I would say deliberate decisions that we've been making to grow our business. So in the short term, we definitely saw – In computing, we've taken the chance to improve the ASPs by selling higher value sockets for both MOSFETs and power ICs. And we're getting into some more advanced applications, too, in terms of higher power sockets, including getting into the graphics. Of course, the power station for the CPUs is still big as well, too. We also continue to deepen our home appliance business. And this is an area that we entered into the market a few years ago and have been consistently growing that business. And I think during this time of shortage, it's a great time to improve our ability to serve some of these tier one customers. And smartphone is going to be big and it's still going to be coming back. So we're talking about looking a little further out. we are preparing for a, you know, the normal peak in the September quarter because we are well positioned with the key smartphone makers there. So, you know, I think seasonality is a little bit different this year, but I think, you know, in some ways it's still the same as well, too. So I think smartphone is an example of that.

That's really helpful. And then clarifying the gaming card production delay issue. Is that related to AOSL components, or is that related to components away from AOSL, but it impacts your shipment intensity into the application?

Well, it's a little bit of both. I think right now, when things are so tight, and especially with power high-speed products, there's more things that you have to procure or to have, I guess, allocation for. But we believe that this is a short-term thing, and behind us, it's just a temporary thing. and it should be resolved quickly.

Yep, that's helpful. And then, Yvonne, a couple for you, if I could, please. The first question is nice to see the guidance for a gross margin increase, but I thought that three months ago when the company initially guided to gross margin, it indicated that the Lunar New Year one-week shutdown and the Oregon FAB shutdown would negatively impact gross margin by about 190 basis points. So is it possible that the gross margin improvement would actually be greater than what I think is a 60 basis point increase? as you get the full month benefit from that higher level of utilization versus really the absence of a week in each of your two internal tabs? Sure. And if not, what would the offsets be that would preclude that?

OK. We are pleased with our margin improvement. In the March quarter, it was primarily driven by the better product mix. Yes, I mean, originally, you know, we estimated some reductions on the operators in China for Lunar New Year. Actually, it turned out better than expected. And also, the Oregon FAB's annual maintenance mostly got pushed toward the end of the March quarter. So the impact on the March quarter was relatively smaller. So overall, I mean, we think this product mix and then we can continue to improve some there. And then one factor is the current Titan demand-supply environment where we're in now, provided some opportunities for us to optimize the mix. Another contributing factor is the growth of from our new products. For example, you saw our PowerIC products grew quite a bit, almost 140% year-over-year growth. Those newer products generally carry a higher margin for us. Fundamentally, we expect to gradually improve our margin with new products.

Got it. And then in the prepared remarks, there was mention of a $20 million advance payment, I believe related to capacity. Can you talk a little bit more about what that relates to and when the fulfillment would be executed for that payment?

Sure. In the March quarter, we received $20 million in customer support. deposits for securing supply for the next few years. And I mean, each year we have some numbers we guarantee. In the quarter before, in the December quarter, we also received $10 million, I think, back then. Those deposits, I think, indicate our relationship with our customers and getting deeper and deeper. So they recognize AOS products and the value and our supply. So we were happy to see that.

That's helpful. And then lastly, before I hop in the queue, nice to see the JVFAB EBITDA motoring along around the big single digits for another quarter. At these revenue levels, is that a reasonable level, or are there some gives and takes either way coming in the next couple of quarters that would shift FAB EBITDA either materially up or down?

um i would expect and i mean stay around this level and i mean for a couple quarters and then i mean this uh relatively um you know the room quarters revenue guidance slightly higher than the uh march quarter so that would be at a similar production level for the jv company so now overall yeah it is a marching toward their target run rate and uh in the september quarter so got it thanks everybody i'll get back to you all right thank you thank you greg

Your next question comes from the line of David Williams from Duke Capital. Your line is open.

Hey, good afternoon, and congrats on the incredible quarter here. It's great to see the progress. Thank you. Thank you. So I wanted to maybe think a little bit about the, from the solution standpoint, maybe the modules that you've talked about. Obviously, you've been growing the IC business, but do you think that over time it becomes more as a solution provider, maybe modules, and less like a discrete, maybe silicon provider?

I think from our perspective, you know, definitely moving to modules and IC is something that we have been doing and is part of our strategy going forward. And our view of total solutions is actually, it's a total set, right? When you're talking about individual sockets, then yes, you're talking about ICs and modules. But what we want to be is the solution provider to our customers. So, you know, usually when they're looking, you know, when a customer is designing a board, they have multiple sockets and they need to work together in order for the application to, you know, to perform at its best. So it's best when we can provide a total solution to help the customer and say, hey, these parts work together and they know how to perform at best without leaving too much on the table. And basically, we can get the best performance by having the parts operate together. So for us, I think we will continue to grow our portfolio of products, certainly. But it's not going to be moving away from discreets or anything. And also just want to make a point that our IC products and our module products, a lot of them have discrete solution, a discrete silicon device inside. And that's what powers the device. But of course, coupled with the IC, it can really bring out the performance.

Sure. Thank you. And thinking about that, do you think that this is kind of an organic approach longer term, or do you think there's an opportunity maybe for an acquisition or something that might come in to perhaps supplement that?

In general, we always are on the lookout for M&A opportunities, especially if there's something that complements what we're trying to do that can help us to really move forward in one area or maybe compensate every week. But I think we definitely have an organic plan for it, but it's not strictly restricted to that.

Okay, great. And then maybe on the booking side, obviously strong quarter and a good guide. Can you talk maybe a little bit about the velocity of bookings through the quarter and how that's maybe trended into April?

Sure. Backlog has been strong and steady throughout the quarter. not uh so much uh fluctuation there um it's reflecting the strong and and market demand and our company specific business growth and then and and our design units and wins so um we we monitor the market changes and uh dynamics very closely so that we will adjust our plans accordingly.

Okay, that's fair. And maybe in terms of the JV, you've talked about it reaching the run rate in the September quarter and the planning phase or the second phase there of the JV. When do you think, in maybe realistic times, could you have capacity, if we continue to see the strength that we're seeing in the market now, when could you reasonably have the phase two, at least in a rampage?

Certainly, we understand in the current market demand and supply situation. Our JV company also understands it. As I said in my prepared remarks, the JV company is in the process of additional financing to further expand their phase two. I don't want to jump it down here. We will provide more details when available.

Okay, great. And then just one more from me, if I can. On the margin improvement, is there any way really to size maybe what the prioritization of the higher margin products versus maybe what the volume benefit would have been in the quarter?

In the March quarter, pretty much entirely the margin improvement came from the better product mix. In this tight supply-demand environment, we have opportunities to optimize our mix. And also, it reflected in some newer products which are carrying which are carrying at a higher margin for us. So yeah, it's primarily from the product mix. Great. Thanks so much. Thank you.

Thank you. Your next question comes from the line of Jeremy Kwan from Spiegel Nikolaus. Your line is open.

Yes, thank you. And let me add my congratulations on the strong execution and results. Yvonne, I wanted to follow up on the capacity question because my understanding is that combined with the JV and your Oregon FAB, the quarterly revenue that it could support, the total company could support with Phase 1 was $150 million or so on quarterly revenue. Obviously, you're well above that. Can you give us an idea of where the utilization stands both in Oregon and also in the JV? you know, how that, you know, and to kind of follow on with some of the earlier questions, how quickly can you add, you know, additional capacity to expand your headroom?

Sure. Overall, you know, last year or a year, year and a half ago, I guided that, you know, yeah, combined capacity probably can support us to $150 million revenue. per quarter level. During the last year or two or so, you know, our product mix improved quite a bit. So, you know, when we rolled out our newer products and, you know, newer products and carriers generally, carries at higher ASP, higher margin. And then also at the same time, The new products generally have the shrinking die size, which is like equivalent to giving us additional capacity. So that's the delta right now, the $170 million quarterly revenue versus $150 million quality revenue and that pretty much contributed to our newer products. So, you know, right now our organ fab is at full capacity and the JV 12-inch fab is ramping up and it's fairly close to the to their target run rate. So they still have some room to go. So overall, yeah, I was happy with JV's progress.

Maybe if I can kind of push a little further on that, can you give us an idea of how much room you have left to go and how much of a runway you need to keep growing? Because, you know, from what I understand, the equipment market is, you know, there's very long lead times. It takes time to install equipment and get things up and running. So is there a period where you might be a little bit capacity limited at some point and can you give us an idea of what that could be, what that limit might be?

Okay, sure. As I said, you know, the JV FAB can still run problems. a little bit. I would say probably a few million dollars per quarter contribution to our revenue range. Then, yeah, we recognize, you know, the semi-equipment and lead time is getting longer. Yeah. And the JV is also, you know, doing their part of the work to Expand their capacity. We don't have to do the whole phase of phase two all together. Beyond the phase one, um you know over there then actually um you know the current phase one clean room still has some space uh so that they can squeeze in some uh equipment to lift up some bottleneck areas and so so that they can produce a more wafer uh fundamentally yeah let's know where they are in the

process of additional financing for the full phase of phase two expansion yes then we will provide more information uh later on great thank you that's that's very helpful um and a question on the 20 million dollar deposit um i guess two two questions there one is is this included in the operating cash flow for um for aos uh yes yes okay and and is this um received is this for securing capacity at the oregon tab or at the uh at the jv uh it's the supply from aos you know did not spell out in the wherever we manufacturing that got it okay um and is this um something that's recognized it sounds like it's going to be recognized over the next couple of years, securing capacity for the next couple of years? And is it kind of against potential revenue?

Incremental, you know, isn't guaranteed them for certain dollar amount of incremental supply for next multiple years.

So is it something that gets converted into revenue at some point, or is it just kind of a deposit that you hold for now and then return later?

Deposit, and then, yeah, return later.

Return later.

Got it.

Yeah. And then when that happens, will you be counted as like a – how do you record that on the cash flow statement?

Well, that would be – reduction of operating cash flow at the time when we returned the deposit. Got it.

Okay. Thank you. And a question for Mike. On the power ICs, it's very nice to see that, you know, increased so substantially as a percent of sales, I think 15%-ish last year, 25% or more this year. Two questions. First part is, you know, is this fabbed externally? And if so, you know, what kind of, You know, waiver requirements, are you seeing, are there any shortages, things that can impact your needs from that level? And then longer term, you know, when you mentioned that one billion target eventually, you know, where could power ICs be once you hit that kind of revenue run rate?

Stephen, maybe I'll address some of this first, and then Monday, Mike can definitely give the overall picture. Power ICs, just like any product, everything does need to be sourced. Some of our products are monolithic. Some of our products are multi-chip, especially when it's taking advantage of our silicon. To some degree, it's internal, but to some degree, we also depend on outside sources. And in general, I think ICs for any kind of foundry business is tight these days, whether it's a MOSFET or whether it's something that IC. So, yes, I think that we are facing some constraints there, just like any other business. Power IC definitely is something that we are investing to grow in, and it will become proportionalized. It will start to become a bigger portion going forward. especially when you look out to the plan for a billion dollars and beyond. But at the same time, I also expect the discrete business to grow as well, too. And fundamentally, discrete is still underpinning a lot of the PowerIC strength. So in the bigger picture, we still expect discrete to be a bigger majority of the business still. But at the same time, PowerIC is going to grow both percentage of business-wise as well as total absolute dollars. Great.

Thank you, Steven. Actually, Steven speaks, I would like to say anyway, so it's a complete yeah.

Yes, that was very thorough. Thank you, Steven. One last question on the communication segment. It looks like you're doing very well there. I think the prepared remarks, you talked about Chinese OEMs doing quite well. Can you talk about the dynamics you see? I understand there's There's market dynamics going on with Huawei and non-Huawei Chinese OEMs going after that market share. Can you talk about what you're seeing in terms of how that settles out and if there's a chance for a pause as people take stock of where their market share gains actually were?

Sure. I mean, I don't want to speculate in terms of like, well, who's going to win out at the end. But in general, yes, certainly other attorneys, vendors, they're all jockeying for market share starting from last year. But part of it also is we have more increased ability to serve that market. Actually, these Chinese customers, phone makers, they were one of our first early customers for PCM, battery protection products, before we engaged with the Tier 1s. And we had to put them on allocation for a bit. But now because of Chongqing, Chongqing gave us increased ability to supply. So we actually have been working on winning some of this business and supporting some of this business. So going forward, I believe that we will have a strong business from all the global markets, U.S., Korea, as well as China.

Great. Thank you. And sorry, one last question. Some of your semiconductor peers have talked about you know first half versus second half um maybe first half kind of being strong in the second half can you do you have any kind of early lead on that you know giving your backlog levels and your visibility any expectations from from their end well this one and i mean the right now the um the march quarter

was definitely above a normal seasonality um you know the room quarters that we guided already so right now our backlog uh is still strong and um healthy so uh we are closely monitored at the market dynamics um our channel inventory actually is is below our target range right now. Can you quantify that for us, please?

The channel inventory specifically?

Channel inventory, we normally target two to three months. And channel inventory right now is below the low end of the target.

Great. Thank you very much. OK. Thank you.

Once again, ladies and gentlemen, if you would like to ask a question, you may press star 1 on your telephone keypad. I think we have a follow-up question from the line of Craig Ellis from the Riley Securities. Your line is open.

Thanks for taking the follow-up. Just two quick ones. The first is either for Stephen or Ethan. Guys, if I rebound the clock six months, I think when we were talking about some wiggle room on fab capacity, one of the things that we were talking about is the potential for an incremental tool here or there to yield some debottlenecking benefits and give some incremental supply. And in today's discussion, it sounds like the variance 150 to 170 is really new product. So did I misinterpret what the company was conveying six months ago or not? is the the d bottlenecking benefit just a small minority of the overall uh gain that we're seeing from 150 to 170 with the majority being the new product help yes you're right okay and then the second question is really um a bigger picture question uh just on how we look at how the the joint feds for fab is being optimized from phase one through phase four. My understanding was, and has been for the last few years that we were going to optimize phases one through three for volume and, and scaling. And we're certainly doing that. But we really weren't going to optimize for gross margin until phase four, but with your strong fulfillment execution, good industry dynamics, and some other things, we're getting very good gross margin. So is it possible going forward that we can actually optimize for both through phase two through four, where we're optimizing for both strong gross margin and getting the volume ramp that Mike talked about as being so important for the longer-term evolution of the company?

Sure. I mean, yeah. I mean, it can... help both ends. But, you know, for us, the first thing is to expand their capacity, provide the volume support to us. So, I mean, yeah, I would expect in Phase 2 and 3, the margin on the front probably can also benefit to some extent.

That's great. Thanks, guys. Thank you. Thank you. Thank you.

Thank you. We have a follow-up question from the line of Jeremy Kwan from CPL Nicholas. Your line is open.

Yes, thank you. Just a quick question on the pricing. I think, you know, last quarter you mentioned adjusting the pricing to reflect cost increases but being very selective about it. Can you give us, you know, maybe an update about, you know, where you see things now in terms of your own input costs, things that you're doing to mitigate that and any kind of, you know, pricing that you're benefiting from?

Yes. So I think in this current climate, we are seeing cost increases just like anybody else. We are putting and implementing what we said last time in terms of implementing price up at some of our customers in order to absorb and share that pain and pass along that cost. Again, we're being selective about that. We need to support our customers and their business, but we also understand the nature of this industry-wide situation, too. So that is something that we are implementing now.

Great. Thank you.

Thank you. There are no other audio questions as of this moment. I would like to turn the call back to the management for the closing remarks.

Sure. 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.

Thank you so much, speakers. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.