Alpha and Omega Semiconductor Limited

Good day and thank you for standing by. Welcome to the Alpha and Omega Semiconductor Fiscal Quarter 4 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star and then the number one on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to turn the conference over to your first speaker today, Mr. Gary Dvorak. Please go ahead.

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2021 fourth quarter and year-end financial results. I'm Gary Dvorak, investor relations representative for ALS. 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. The replay will be available for seven days following the call via the link in the Investor Relations section of our website. Our call will proceed as follows. Mike will begin with strategic highlights, then Stephen will provide business updates and the detailed segment report. After that, Yvonne will review the financial results and provide guidance for the September quarter. Finally, we will have the question and answer session. The earnings release was distributed over wire services today, August 11, 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 violence with the SEC. 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. We have been dealing with the COVID-19 pandemic for over one and a half years. And we continue to take strict precautions to ensure the safety and the well-being of all our employees and their families. Our fourth fiscal quarter continued the strength and the momentum we saw throughout the year. We once again delivered strong year-over-year performance in each of our market segments. with record revenue and excellent profitability. We've benefited from strong end-market demand, enabling us to optimize our product mix. Both quarter results demonstrate the strength of our market diversification strategy, broadening product portfolio, deepening customer relationships, and a growing production scale. Total revenue for the The fourth quarter grew 40% year-over-year to $177 million as we continued to see growth-based strength across our business. Non-GAAP growth margin was 34.9% up 300 basis points from last quarter and 740 basis points higher than the same quarter a year ago. Non-GAAP EPS for the fourth quarter was 95%, which more than tripled year over year. Yifang will go into more detail on our financial performance later. The strong fourth quarter kept an outstanding fiscal year 2021. revenue grew 41% year-over-year to $657 million. On the bottom line, we achieved non-GAAP EPS of $2.93 up from $0.88 last year. Previously, we had set a target of $600 million in annual revenues. revenue for Canada year 2021. And I am pleased that we successfully surpassed that target ahead of plan. While we are not immune to some of the supply chain constraints in the broader semiconductor industry, we are doing a good job managing them to mitigate any interruptions to our customers. First, We are making investments to expand capacity and further enhance our technological capability at our Oregon track. We believe the investments will strengthen our competitive advantage in our target market, and it is part of our long-term strategic plan for sustainable growth and continuous technology improvement. In the current business conditions and the shortage of capacity, it is increasingly important to have the ability to own and control our supply chain. Second, we continue to ramp up our capacity at our JV Fab in Chongqing according to plan. I am pleased with the progress we are making and we are on track approach the first one target runway in the september quarter third we continue to maintain close relationships with multiple foundry partners and are working with them for additional waiver supplies overall although our supply is tight i am thankful to be able to have both internal and external capacity to support our business and minimize the stress at our customers in this time of shortage. In summary, I am very proud and appreciative of our team's execution in fiscal year 2021. In addition to the traction we gained from the successful implementation of our strategy, we saw strong industrial tailwind during the present time. And as we enter fiscal year 2022, there are plenty of opportunities and much work to be done to continue to grow and scale our business. I am confident that we have the right leadership and the right product in place to ensure we are successful to capitalize on these opportunities. Our mission to be a trusted technology partner and a global supplier of a broad portfolio of power semiconductors remains on track. Looking ahead, we plan to grow our annual revenue to $1 billion in the next few years. 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 June quarter. As we have stated all along, the core of our business strategy is technology and volume. Technology and innovation in our business derives from repetitive volume manufacturing, which often inspires opportunity for improvement. This is the origin of technology development. We invest in core competencies of silicon, packaging, and ICs as the foundation of our product technology. Best-in-class technology leads to competitive advantage in our products and success in the markets we address. Our product strategy is to create advanced total solution products in close partnership with our customers. These products demonstrate our expertise in power and move beyond commodity parts into multi-socket optimized solutions that make our customer end products more reliable and efficient. We continue to accelerate growth by winning new customer engagements with an expanding pipeline of new products and increasing bond content with our application-specific solutions. An example of this is our intelligent power modules designed specifically to address motor drives used in home appliance applications. The modules combine the function of up to 17 discrete devices into a single solution to provide performance and ease of use to our customers. Another example is our series of driver MOS products, where we optimize the IC to bring the best out of the co-packaged MOSFETs to deliver high efficiency in vCore and graphics applications. Even our advanced discrete MOSFETs are built on specialized platforms that address the performance needs of target applications, such as battery protection and graphics. Supply remains tight in the marketplace, while demand continues to be strong across all our core market segments. In times like these, supporting customers through uninterrupted supply of our products is more important than ever. As such, we are sharpening our focus on customer engagement. Our continued focus on strategic customers enables us to take advantage of the current environment to stay closer to Tier 1 customers, optimize product mix and capacity allocation, and deliver strategic value to those customers. While we are managing longer lead times and component availability, our competitive market position, strong customer relationships, and supply chain responsiveness enable us to deliver on our commitments. Our backlog in the June quarter continued to far exceed our capacity. We have been actively allocating capacity to avoid interruptions to our customers' production lines. optimize our factory utilization, and support our strategic initiatives. At the same time, demand has been dynamic while not always following normal seasonality. Fortunately, the majority of our production is in-house, which allows us to better serve our customers in such severe shortage period. As a result, we are able to focus on our core market growth that follows our strategic business direction. Now let me drill down into each of the business segments. Let's start with computing. Revenue was up 57.3% year over year and up 10.2% sequentially outpacing the industry. This segment represented 43.7% of our total revenue and demand for our products remained strong with record revenue in the June quarter as our major customers were still facing component shortages. While we were on allocation, we elected to allocate more capacity and resources to support the computing segment, including the notebook, tablet, and motherboard applications. Conversely, the graphic card business was down double digits sequentially due to a customer's order pull-in from the June quarter to the March quarter. Looking ahead, we expect computing revenue to be flat to modestly down sequentially in the September quarter due to allocation, but up double digits on a year-over-year basis. We expect solid demand at our ODM customers for motherboards in our graphics card business to rebound following a customer's production trending upward to a more normal level. This will be offset by a temporary decline in Notebook as we allocate our production capacity to support growth in our motherboard and graphic cards. Turning to the consumer segment, which was 21.1% of total revenue in the June quarter, up 36% year over year, and up 4.4% sequentially. This segment played out better than expected. Gaming remained strong as we continued to gain share at a major customer with both our MOSFET and Power IC products in multiple sockets. Our overall home appliance business was slightly down due to a temporary allocation. That said, compared to the March quarter, we ship higher volumes of module solutions to key home appliance customers in Asia in the June quarter. And we intend to further increase shipments of module solutions in the next couple of quarters. Looking to the September quarter, we expect the consumer segment to increase by a high single-digit percentage with strength in gaming and home appliances. Now let's discuss the communication segment. which was 12.8% of total revenue in the quarter, up 14% year over year, and down 17.4% sequentially. This segment played out as expected, as smartphone business performed in line with normal seasonality. Having said that, demand for battery protection resumed at one of our global smartphone customers to support the upcoming launch of a new model. We expect our communication segment to increase by mid-double digits in the September quarter as all major smartphone players in China, Korea, and the U.S. are entering peak production. With that, we believe we are in an excellent position to resume battery protection growth in the September quarter with designs secured at our key global customers. Finally, let's talk about the power supply and industrial segments. which accounted for 20.4% of total revenue. The segment was up 53.1% year over year and up 11.5% sequentially. The solid growth was due to several factors. First, the demand for ACDC power supplies for laptop adapters was extremely robust with incremental design activity with major power supply customers in Taiwan. Second, momentum of our quick charger business remained solid driven by demand for travel adapters used in tablets, as well as quick charger solutions for smartphones. Third, demand for DC fans made sure fan manufacturers in Japan were strong. We expect this segment to grow by high single digits in the September quarter, driven largely by our ACDC power supply and power tool businesses. Overall, business momentum accelerated in the June quarter, and we are making solid progress towards our mission to position AOS as a leading global supplier of a broad portfolio of power semiconductors. With that, I will now turn the call over to Yvonne for a discussion of our fiscal fourth quarter financial results and our outlook for the next quarter.

Thank you, Stephen. Good afternoon, everyone, and thank you for joining us. Revenue for the June quarter was $177.3 million, up 4.8% from the prior quarter, and up 44.9% for the same quarter last year. In terms of product mix, DMOS revenue was $127.2 million, up 3.8% sequentially, and up 31.2% year over year. PowerIC revenue was $46.5 million, up 7.2% from the prior quarter and up 99.7% from a year ago. Assembly service revenue was $3.6 million as compared to $3.2 million last quarter and $2.1 million for the same quarter last year. For the fiscal year 2021, Revenue was $656.9 million, up 41.3% from last year. Non-GAAP gross margin for the June quarter was 34.9%, up from 31.9% 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 better product mix. Non-GAAP growth margin excluded $0.8 million of amortization of purchased IP for both the June quarter and the prior quarter, and $4.4 million of production ramp-up costs related to the JV company for the same quarter last year. In addition, non-GAAP gross margin excluded $0.6 million of share-based compensation charges for the June quarter as compared to $0.4 million for the prior quarter and $0.3 million for the same quarter last year. For the fiscal year 2021, non-GAAP gross margin was 31.9% as compared to 27.9% for the prior year. Non-GAAP operating expenses for the June quarter were $32.8 million compared to $30.9 million for the prior quarter and $25.3 million for the same quarter last year. The quarter-over-quarter increase was primarily due to higher variable compensation accrues this quarter. Non-GAAP operating expenses for the quarter excluded $4.8 million of share-based compensation charges and $0.6 million of legal expenses related to the government investigation. This compares to $3.4 million of share-based compensation charges and $0.6 million of legal expenses related to the investigation for the prior quarter. as well as $2.4 million of share-based compensation charges and $2.6 million of legal expenses related to the investigation for the same quarter last year. Non-GAAP operating expenses for the fiscal year 2021 was $123.8 million compared to $102.5 million for the prior year. Non-GAAP operating expenses excluded $13.6 million of share-based compensation charges and $3.1 million of legal expenses related to the investigation in the current fiscal year, as compared to $8.9 million of share-based compensation charges, $4.7 million of legal expenses related to the investigation, and $0.6 million for an impairment charge in the prior fiscal year. Income tax expense for the quarter was $1.2 million compared to $1 million for the prior quarter and $0.4 million for the same quarter last year. Income tax expense for the fiscal year was $3.9 million compared to $0.4 million for the prior fiscal year. Non-GAAP EPS attributable to AOS for the quarter was $95 cents per share as compared to 77 cents for the prior quarter and 29 cents for the same quarter last year. Non-GAAP EPS attributable to AOS for the fiscal year was $2.93 as compared to 88 cents for the prior fiscal year. AOS continued to generate positive operating cash flow AOS on a standalone basis generated $32.6 million of operating cash flow in the June quarter as compared to $33.3 million in the prior quarter and $20.2 million in the same quarter last year. In the June quarter and March quarters, we received $10 million and $20 million customer deposits for securing supply, respectively. The JV company generated positive operating cash flow of $11.6 million in the June quarter compared to $5.3 million in the prior quarter and $20.1 million in the same quarter last year. Cash flow from operations attributable to AOS for the fiscal year was $114.3 million as compared to $58 million for the prior year. cash flow provided by operations attributable to the JV company was $14.4 million for the year compared to $4.4 million in the prior year. Consolidated EBITDAs for the June quarter was $40.9 million compared to $36.2 million for the prior quarter and $14.9 million for the same quarter last year. EBITDAs attributable to AOS for the quarter was $33.6 million as compared to $30.6 million for the prior quarter and $12 million for the same quarter last year. EBITDAs for the JV company was $7.8 million in the June quarter as compared to $4.5 million for the prior quarter and $1.1 million for the same quarter last year. Consolidated EBITDAs for the fiscal year was $136.4 million as compared to $52 million in the prior fiscal year. EBITDAs attributable to AOS for the year was $111.7 million as compared to $44.8 million a year ago. Now let's look at the balance sheet. We completed the June quarter with cash balance of $202.4 million, including $164.9 million at AOS and $37.5 million at the JV company. This compares to $192.1 million at the end of last quarter, which included $158.3 million at AOS and $33.8 million at the JV company. Our cash balance a year ago was $158.5 million, including $110.3 million at AOS and $48.2 million at the JV company. The bank borrowing balance at the end of June was $165.4 million, including $24.3 million at AOS and $141.1 million at the JV company. During the quarter, AOS and the JV company repaid $2.1 million and $4.2 million of existing term loans, respectively. Net trade receivables were $35.8 million at the end of the June quarter as compared to $33.7 million at the end of the prior quarter and $13.3 million for the same quarter last year. Days sales outstanding for the June quarter were 26 days compared to 22 days in the prior quarter. Net inventory was $154.3 million at the quarter end, up from $145.1 million last quarter, and up from $135.5 million in the prior year. Average days in inventory were 115 days for the quarter compared to 112 days in the prior quarter. Net property, plant, and equipment was $437 million, slightly up from $432.6 million last quarter and up from $412.3 million last year. Capital expenditures were $32.2 million for the quarter, including $25.1 million at AOS and $7.1 million at a JV company. In the June quarter, AOS commenced a plan to expand our Oregon FAB with an investment of approximately $100 million, including $20 million to advance our capability and $80 million to expand capacity. We believe this expansion, when fully completed, will enable us to generate an additional $70 million in annual revenue. We expect the capacity to come online in the December quarter of 2022. During the June quarter, the JV company continued to run its 12-inch FAB. It's on track to achieve the phase one target run rate in the September quarter, as discussed The JV company is in the process of pursuing additional financing for its Phase II capacity expansion. We will provide more details when available. With that, now I would like to discuss the guidance for the September quarter. We expect revenue to be approximately $180 million, plus or minus $3 million. growth margin to be 33.7% plus or minus 1%. We anticipate non-GAAP growth margin to be 34.5% plus or minus 1%. Non-GAAP growth margin excluded $0.8 million amortization of acquired IP and $0.6 million of estimated share-based compensation charges. Gap operating expenses to be in the range of $37.7 million plus or minus $1 million. Non-gap operating expenses are expected to be in the range of $33.5 million plus or minus $1 million. Non-GAAP operating expenses exclude $3.9 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 $1 million to $1.4 million. Loss attributable to non-controlling interest to be approximately $.5 million. As part of our normal practice, we are not obligated to update this information. With that, we will open the call for questions. Operator, please start the Q&A session.

Thank you. As a reminder, to ask a question, just press star and then the number one on your telephone keypad. Again, just press star and then the number one on your telephone keypad. And to withdraw your question, just press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Craig Ellis from BRID Securities. Sir, your line is open.

Yeah, thanks for taking the question, and congratulations on the very robust results and outlook. I wanted to ask a two-part question, in part based on a comment that you made, Mike. And so as I look at the first quarter's guidance, it annualizes to $720 million in revenues. And down the line items would imply EPS that would annualize near $3.88. So you had indicated, Mike, that you were shooting for a billion in sales in the next few years. I know that's historically been the calendar 24 target, but Does my decoder ring mean that a few years is really two years or three years? Because it seems like you've been on a very aggressive growth trajectory. Maybe we are pulling in that billion-dollar target. And then the second half of the question, given the profitability levels that we're achieving this far below the $1 billion target, if we've got, call it, 40 percent upside to target revenues, Is it fair to think there is another 40% upside in earnings coming if we can grow revenues from $720 million to a billion dollars over the next few years?

Well, thank you for the question. Thank you for your kind words. Billion dollar is for sure we are pursuing, whether three years or somebody will be there. I think the I would rather have Yifan give the answer. Yifan, can you do it? Oh, sure, sure.

Yeah, our target, Craig, right now for $1 billion remains at around 2024, 2025 timeframe at this point. In terms of profitability, yeah, you know, we have been pleased with our gross margin improvement and the bottom line even more significant improvement. Our overall business model is to grow our business and grow top line with reasonable margins. We leverage our scales to to grow bottom line EPS even faster. So I mean, yes, I would expect as we grow our top line toward $1 billion and then our bottom line would continue to improve. This is our business model for the near term, mid term, and long term. I think we can continue to grow our profitability. I mean, our boom quarters results, you know, already demonstrated in this business model.

Yep, that's very helpful. My next question is regarding gross margins. So great to see the surge in gross margins in the quarter. And in the outlook, they're guided down, I believe, by 50 basis points sequentially. So the question is this. given that there's been a very strong new product contribution to gross margins over the last few quarters, is that still expected? Or is there something about mix that's changing sequentially that would leave gross margins a little bit lower? Or is it more just the mix of the end markets and some of the things that are happening there that's causing the change in gross margin? And if we look at gross margin just beyond the current quarter, can you talk about some of the things that are – that are happening with gross margins and the degree to which current levels are sustainable or could even be expanded upon, can we now think about 35% gross margins or even higher given that we're so close to that level?

Oh, sure. We are pleased with our gross margin improvement, you know, which was mainly driven by the better mix, you know, A couple factors contributed to the mix improvement. One is since we are on allocation right now, so we are optimizing on the mix, product mix as well as customer mix. Another contributing factor was the growth from our new products. For example, you saw our PowerIC products grew quite a bit, almost 100% year over year in the June quarter. Those new products generally carry at a higher margin for us. So fundamentally, we are selling more and more higher margin products. So I would expect that our margin stay around this level for the near term. Of course, it may fluctuate, and I would expect that at this point, we will be, even if it's fluctuating, probably around this level.

That's helpful, Yvonne. And then I'll ask one to Stephen so I don't ignore him before I jump back into the queue. So I just wanted to follow up on the company's decision to add capacity at the Oregon FAB. So the $70 million seems like it might give you an incremental 10% to 15% of incremental output there. But the question is really about why you're adding capacity in Oregon and versus doing something more at a quicker pace in CQ? And are the drivers related to some of the deposits that you've taken in, which I think now total 30 million over the last two quarters? Is it a mixed issue? I think Oregon does more of the power ICs versus MOSFETs. Or what are the reasons you're moving ahead with an expansion of that versus being more reliant on CQ?

Sure. For us, we've been growing fairly quickly in the last year and a half. And it's pretty obvious that we are out of capacity in this shortage time. And we want to make sure that our supply can keep up with our demand. So that includes expanding in-house at our organ staff. It also includes working with our joint venture as well as other foundries to expand capacity. So our decision to expand in Oregon is not just a decision only for Oregon. We are expanding on all those fronts to make sure that we can keep up with demand. So it's not necessarily due to mix. And we have a demand that's growing in several of our segments. So it does make sense for us to continue to expand where we can.

Okay, that's helpful, Steve. And just a clarification related to capacity and capacity planning. I know you set the expectation that auto should be an end market that doesn't have a material ramp for a couple of years. It's just the nature of that application area. But can you talk a little bit about, of the three sources that you mentioned, where you'd expect to be sourcing supply for that initiative?

Right now, we're not restricting automotive to any particular facility yet. And I think we will be using whichever outlet we have that we can count on for the long term. Of course, automotive, they are looking for suppliers that will not change in the next 10 years, right? And that will not change the materials. that they can count on that they don't have to go through requalification. So for us, you know, we're not fixed that an automotive can only come from certain areas. Yes, you know, for each of those things, we'll plan specifically. Some may be in-house, some may be outside, but it's not fixed that way. It's only JFAP or automotive, for example.

Got it. Great results, guys. I'll get back to you. Thank you, Craig. Thank you.

Thank you. Your next question comes from the line of David Williams from Benchmark. Sir, your line is open.

Hey, good afternoon. Thanks for taking my questions, and congrats on the solid quarter.

Thank you.

I guess first I wanted to ask around the gross margin, and some of this has already been asked, but I wanted to ask it maybe a little bit different way and just kind of thinking about the higher IC business that's clearly been a part of the business that's been expanding and has been a nice contributor. But how do you think about that mix over time? And what do you think is the right percentage of IC business versus your other business? And how do you think maybe about the margin differential between those two different segments there?

Sure. For us, we're happy to see, as Yifan was mentioning just now, that our power IC business is definitely growing, along with our module solutions. Our module solutions are the ones that we're selling into the home appliance market. So this is a great way for us to sell more, to sell a better product that addresses the customer needs and locks it in a little bit more tightly. We will continue to expand in those areas, but at the same time, our discrete business isn't going to stand still either, too. Just a reminder that many of our PowerIC products and our module solutions they still have discrete inside. We use co-packaging, and it's built on top of our silicon technology platforms. So we will still continue to see growth in our discrete business simply because we need good discrete nets or RGBTs in order to make good power IC and module solutions. So in terms of mix, I would say the percentage of ICs and modules will certainly grow over time. First, I think... So a rough target that we're looking at is about one-third from high-season modules and two-thirds still going from discrete business.

Okay, great color there. Thanks so much. And this may be another one for you, but on the $20 million of optics that you talked about in expanding the technology in Oregon, how much of that, I guess, is there any process, no bear expansion, or maybe if you could give us any color about what that is, But I also just want to say it speaks to the confidence that you have and the demand sustainability. And so I guess if you look out in the next year when this capacity comes online, I guess to what level is your confidence that your demand that you're seeing today is not necessarily being pulled in by the macro but more sustainable and can continue long term and that we're not overbuilding here capacity that could fall off as we get into next year?

Sure, of course. And certainly, you know, we do need capacity now, and it's not just, you know, definitely we benefited from some of the work from home and the shorter situation. But, you know, our fundamental growth areas are certainly continuing to move forward. You know, both PCs is kind of the given in today's environment, but also smartphones and home appliances. Our business is pretty solid in making, you know, business company-specific growth that continues to move forward. And addressing the expanding capacity We are doing this definitely for capacity, but also for capability as well. It is going to give us more advanced equipment that allows us to improve our technology further. So much of the technology, for example, our low voltage is probably on the fifth or sixth generation of technology platform. And we do need newer equipment in order to keep that engine going and to continue to come up with leading platforms that we can base both our discrete and as well as our IC products on top of.

Okay, okay. And then maybe one just last one for me here. Anything unusual in the inventory build you saw this quarter, obviously up a bit? How much of that was just the inventory build that you put, and how much of that are you seeing anything in any particular markets? Are you seeing slowdowns or maybe anything unusual there?

David, inventory increased a little bit, yeah, compared to last quarter. But the Partially, it was because the joint venture continued to ramp up, and so then they have some inventory materials and, you know, some WIP there. Another thing is, you know, for AOS side, we also increased the sum on the materials, raw materials like those substrate and leaf frame in those areas. So given the uncertainty of COVID, As you know, there are some countries that started lockdown again, so we kind of intentionally increased some purchases. Actually, our finished goods inventory actually went down.

Okay, very good. And now that I have you on the line, let me ask one more there. Just in terms of the OPEX, it kind of bumped up a little more than we would have expected in the June quarter. Anything unusual there that we should be thinking about, and does that kind of carry forward? Is this a good base to kind of grow from?

Yeah.

Go ahead. If you don't mind, I'll just add some color. Now, this year, everybody knows it's a shortage year. Anything you produce, it will be hard to sell. That's why If I mentioned to you very clearly that we can take advantage of that to have a product mix. However, everyone knows such kind of thing will last forever. So eventually, it still depends on your competitive leverage. So why this year we invest in the capital equipment area to further enhance our evolving capability so that we'll keep or enhance our competitive leverage just in case the time goes back to normal.

Okay, thank you. All right, David. Regarding the OPEX yen, in the June quarter, the increase was primarily due to the increased variable compensation, of course, because of the better-than-expected financial results. So I would expect the yen going forward probably – it will stay around that level.

Great. Thanks so much, guys. I certainly appreciate the time and best of luck on the quarter.

Thank you.

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

Yes, good afternoon, and let me add my congratulations on the higher gross margin and seeing the JV turn to cash flow positive. I guess our first question on the, you know, the backlog you mentioned was very strong. Can you give us an idea of where your lead times have gone and, you know, where they were maybe 12 months ago and where they are today?

Lead time, I mean, right now it is a little bit longer than 12 months ago, yes. And, I mean, our backlog, I would say, stronger than yesterday. 12 months ago as well. And I mean, for us, I mean, this, you know, we saw some customers placing more POs for the longer range. And I mean, so we are closely monitored activities and work, communicate closely with our customers. So we know that So we know their true demand. And then for us, we also triangulate with our own design wins at customers. And then we monitor our shipment. So overall, I mean, If we cannot fulfill customer orders, then we'll tell them up front. So we don't want to drag them out.

Got it. So you're not doing anything like your other significant peers where you're trying to get customers to place longer lead time orders or things like that, any non-cancellable or non-refundable type? arrangements? No, that's been pretty much the same throughout the years. Okay, great. And then I guess, can you give us any indication of where you see pricing both in terms of your own products? You know, given the tightness in the whole supply chain, it seems like, you know, I know you've been pretty judicious about raising prices on your customers, but I was wondering what, you know, maybe competitors are doing and what you're also seeing in terms of the input prices, you know, if those are going up and if you're planning to pass any of these along to your customers.

Sure. I mean, yes, and then, you know, we do see some annual cost increases. Input cost increases, yes. In terms of our own pricing, there is no formula in this area. There are several factors we consider. The relationship with customers and the strategic, initiatives and we want to push and then a product mix and I mean capacity and I mean optimize revenue or margin for us and I mean overall when we selectively increase some ASPs so that we don't want to gouge customers. So overall, we want to use this opportunity to deepen our relationship with key customers and then promote our new products.

Got it. Okay. And if I could just turn to some comments that, Stephen, you made on the graphics market that it seemed like there were, you know, a large customer pulled in some orders from the June quarter into the March quarter. And so, you know, it seems like that, you know, can you help us square that with it seems like everything's in shortage and, you know, particularly graphics cards, you know, everything is flying off the shelves. Can you help us understand a little bit what's going on? Thanks.

Sure. It all has to do with allocation also, too, and finding ways to support our customers in their time of need. For graphics, we're talking about selling in PowerIC, DriverMOS products, and they had a need in the March quarter for more support, so we helped the customer out, but that was pulling in from the June quarter. We are expecting that to rebound as we go into the September quarter. But overall, we are on allocation also too. Similar type of products, Gregor Moss products, are also being sold into gaming as well as computing applications. So it's been a challenge for us to choose and to figure out who to support, what's the best interest for us, what's the best interest for the customer. So, you know, overall, you see that the overall power IT business has grown pretty tremendously year over year. But, you know, we do have to move things around from quarter to quarter to support the customers as well as support our own strategic initiatives.

Great. Thanks, Stephen. And just one last question before I jump back in. Yvonne, in terms of the $100 million spend, is the $25 million that you spent this quarter, is that part of that $100 million or is that? in addition to the $25 million? And also, if you can give us a rough timeframe of when you expect this $100 million to be phased in.

Okay, sure. The $25 million CapEx spent in the June quarter, that was including some down payment for this $100 million down payment. project. I mean, we already placed an order and then some of them required a down payment. But the majority of it, it was not related to this $100 million project. So this $100 million project It probably will spread out throughout this fiscal year 2022. So from now on, pretty much to the first half of the calendar year 2022. So in order to get machines in, get facilities up. Great. Thank you. Thank you.

Thank you. Once again, as a reminder, if you wish to ask a question, just press star and then the number one on your telephone keypad. Our next question comes from the line of Peter Vogel from J&K Securities. Your line is open.

Thanks for taking my question. I want to kind of ask about the environment and understand, obviously, things are tight. You're taking deposits, but then you're also trying to get more capacity. So how are you thinking about the potential for overordering? Because everybody seems to be jockeying. for position right now. And so I would think that you guys are trying to scrub your books a little bit, make sure orders are real. I'd love to just understand how you're thinking about that conceptually, please.

Certainly, when we look at the orders and the backlog, it is definitely much stronger and more than we can handle. And we don't doubt that there are double orders in there. But there are real orders. So if we can supply, they will take them. And the best thing for us to do is to do our homework. So we work, you know, very closely with our customers. Keep in mind that most of our designs and revenues comes from design in that our team actually personally, you know, designs in. So we have close contact with their procurement and we know what their actual needs are. We know when it goes above and beyond and when things are abnormal. So we will question also, too, because we want to make sure that the supply goes into products that are actually being produced and not just being hoarded somewhere. So we are working in close partnership with our customers. This is a great opportunity for us to draw closer to them understand their demand, understand what's going on, as well as position us for future growth with these customers. So it comes down to just talking to them.

Right. And to that, you know, on the design, how much of your business is going through the distribution channel versus direct to customers? And forgive me for not knowing this, but is the use of the channel, is that really just for fulfillment, or is there some part of that that's actually, you know, used for, you know, sales as opposed to fulfillment.

Yeah. I mean, our Disney business right now is about two-thirds of our business, or 70% range. But, Peter, you are right. I mean, Disney for us are pretty much uh serve as uh like a logistic and you know fulfillment uh purposes and then you know um our uh people you know our engineers and and sales people that they they work directly with them our key customers and so for design years um so basically in you know we we no matter is it uh channel business or direct business, and we pretty much serve all the key customers directly.

That's helpful. And maybe the last question, I know this has been asked a few times, and you guys have done a good job of not answering it directly, but, you know, it's a tight environment. You don't have capacity. You're an allocation. Mix is helping your margins, and you've given out a billion-dollar sales target. Help us understand what would be the new operating model, gross margins, operating margins at a billion dollars in sales, and then how much of that is going to be due to a different mix that you can envision versus just normal revenue and utilization rates.

Before our longer-term business model, you know, um we put out in there you know we shoot for billion dollar uh revenue uh in the 2024 2025 time frame um uh for the gross margin non-gap gross margin was targeting uh over 30 percent again that was what we put in out there um right now i would expect again that we can uh maintain the gross margins in this current range. So our goal is to grow top line and drop down to bottom line EPS. So EPS would imply, you know, that model would imply four or five dollars in EPS.

Thank you.

Thank you.

Thank you. There are no further questions on queue. I will now turn the call back to Ethan. Please go ahead.

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.

This concludes today's conference call. Thank you for participating. You may now disconnect.