Alpha and Omega Semiconductor Limited

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2023 first quarter financial results. I am GSI, 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. A 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 today. 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 December quarter. Finally, we will have the Q&A session. The earnings release was distributed over the wire today, November 3, 2022, after the market closed. The release is also posted on the company's website. earnings release and this presentation will include non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information for 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 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 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 findings with the SEC. We assume no obligations to update information provided in today's call. Now, I will turn the call over to our CEO, Dr. Mike Chang, to provide strategic highlights. Mike? Thank you, Yujian.

I would like to welcome everyone to today's call. It is good to be speaking with all of you again. Our fiscal Q1 results were in line with our expectations. Revenue grew 11.5% year over year to a record high of $208.5 million. Non-GAAP gross margin was 35.4%, and the non-GAAP EPS was $1.20. We are pleased with this result. Looking forward, we expect to be impacted by industry inventory correction, particularly in PCs, and smartphones. As a result, we anticipate our calendar Q4 2022 results to be somewhat weaker than the historical seasonality that we typically experience during this period. Our data suggests that this process will occur over the next couple of quarters before orders begin to normalize and there will be more imbalance within consumer demand. While our near-term results will impact some points, I think it is important to highlight that our total PCE revenue for Canada 2022, including our December quarter outlook, will actually grow slightly year over year against a 20% decline in PCE units. according to Digitime. Our current 2022 smartphone revenue is also expected to be up 15% year-over-year, despite that the global smartphone shipment is forecast to decline 6.5% in 2022. This is due to our success in gaining share, increasing bomb content, and deliberately improving our product mix towards more premium-tier products. This also demonstrates the strength of our business underlying fundamentals and the traction we have gained in these two important markets. Even though PC and smartphone demand is slowing in the near term, these two markets will continue to the major components of consumer spending for a very long time. Another example of our solid fundamentals is that our partnerships with tier one customers and our share with them are the highest it's ever been in our history. We believe this will make us more resilient in recessionary periods. Since premium tier products are typically less expensive, to slow down in the economy. Moreover, these relationships with our Tier 1 customers make us more attractive to prospective customers. Seeing our chips in a Tier 1 flagship device is the best marketing and advertising for AOS because it provides the strongest testimony of the quality and capabilities of our products. and services. Over the last few years, this has been a noticeable trend for us as more new customers approach us proactively and initiate requests for product samples and meetings, instead of just our salespeople going to them. Another example is that we have a much more diverse product portfolio. that is serving a broader set of end markets across consumer, commercial, and industrial use cases with different business cycles. For example, one of our big growth areas over the past years has been gaming, where we have leading share with the number one gaming console manufacturer. This business for us more than doubled year over year and is now a major revenue contributor for AOS and is expected to continue to grow even in a weakening consumer demand environment. We are seeing similar growth trend in multiple other new applications that Steven will go into more detail in his section. Finally, our business is a lot more diversified in terms of geographies that we serve in the beginning when we were still small the majority of our business was in asia today our customers are much more globally distributed including tier one customers in europe and north america diversification and the proliferation of total solutions has been our strategy from day one and our execution has been paying Today, our business is more balanced with a stronger and more solid foundation. We just say, while these qualities enhance our resilience, we recognize that we are not immune to global slowdowns in demand. To help de-risk some of the top-line slowing slowdowns, we have already paused hiring of previously planned telecom growth and are taking active steps to reduce discretionary spending. In closing, the current market environment does not come to us as a surprise. Over our 22 years history, we have navigated many boom and bust cycles, surviving and thriving, even when we were far smaller than we are now. Today, our market position is stronger than ever, supported by our leading technology, more diverse product portfolio, tier one customer base in all of our business segments, expanding manufacturing capability and supply chain, dedicated and experienced management team, and a strong balance sheet. More importantly, the underlying trend for more power that's providing a tailwind to our business is here to stay. The electrification of everything is just getting started, and our power projects sit at the forefront of that trend. We are confident that we can navigate the current economic environment and achieve our $1 billion annual revenue target in the next couple of years. and are actively investing to position ourselves to achieve even more of that. Thank you. I will now turn the call over to Stephen for an update on our business and the detailed segment report.

Thank you, Mike, and good afternoon, everyone. Before I give a detailed overview of our segment, I want to expand on what Mike discussed around our new growth areas. As Mike already mentioned, Gaming has been a major success story for us, and we continue to expect very strong demand over the next year as our number one gaming console manufacturer ramps up production. Looking under the hood a bit, over the last year, we built a strong partnership with this customer through our great service and support on shipments during challenging times. Further, our products are significantly more differentiated at the higher-end performance bands. And since gaming consoles are essentially high-end performance PCs, our solutions provide significant competitive advantages against alternative products. Because of these factors, we have won multiple sockets across multiple products, including high-performance MOSFETs, as well as advanced power ICs, such as driver MOS and smart load switch products. Another growth area that I want to highlight has been the success of our MOSFETs for quick chargers. AOS has a long history of providing high performance, medium voltage MOSFETs to address secondary side rectification in this fast charging application, particularly as charging power has increased over time. As a result of our focus on product performance and customer support, we have become a leading supplier in the number one US smartphone OEM. Recently, we expanded our BOM footprint at this key customer to now also supplying the high voltage MOSFET for primary side rectification, thereby effectively tripling our BOM content with this customer application. All of this has been made possible by our investment in R&D and new product programs that focus on the ability to offer our customers a total solutions portfolio that enables cross-selling and leverage the relationship and success of our existing customers. I will now cover our segment results and provide some guidance for the next quarter, starting with computing. Revenue was up 13.6% year over year, flat sequentially, and represented 42.8% of total revenue. The year over year growth was driven by strong demand across several different applications but particularly data centers, as this area showed significant growth year over year with the adoption of our high-performance low and medium voltage MOSFETs by leading cloud providers. In addition, graphics cards, tablets, and notebooks continued to show strength. Looking ahead, in the December quarter, we expect computing segment revenue to be down over 20% sequentially, driven largely by the inventory correction in PCs, and to a smaller degree, seasonality. However, our total 2022 PC revenue is actually still expected to be up slightly year over year against the 20% annual decline in global PC volumes as a result of share gains and higher device BOM content. I think our investors should keep this in mind when analyzing these results as the fundamentals of our PC business has never been stronger. data centers, and tablets are expected to remain strong next quarter, which helps dampen some of the softness in PCs. AOS offers performance mosfets with an elevated safe operating area designed to deliver high reliability for data center infrastructure. Turning to this consumer segment, revenue was up 11% year-over-year and 23% sequentially and represented 21.7% of total revenue. These results were in line with our expectations driven by record gaming volumes, which grew 122.7% year-over-year and 70.2% sequentially. Looking ahead, we anticipate our consumer segment to remain strong with low double-digit growth sequentially driven by continued record gaming shipments, particularly from the number one gaming console manufacturer where we have leading share. Next, let's discuss the communications segment, which was up 21.8% year over year and 5.1% sequentially and represented 15.1% of total revenue. This segment delivered strong growth as the September quarter is typically our peak season for smartphone shipments, especially as our number one U.S. smartphone customer normally refreshes their devices during this quarter. Our growth was also driven by share gains at this customer in the premium tier. In fact, we have strong share in high-end models in all three of our markets in the U.S., Korea, and China. This is due to our ability to serve the high-end market with our high-performance battery protection products, as well as strong partnerships with our customers. In the December quarter, we expect this segment to decrease high single digits as a result of industry smartphone inventory correction, particularly in China. Our business in the U.S. market is still expected to be strong, with Korea about flat. Offsetting lower smartphone demand somewhat is growth in telecom 5G infrastructure. Now let's talk about our last segment, power supply and industrial, which accounted for 19.6% of total revenue. This segment was up 8% year over year and 14.3% sequentially. The increase was mainly due to share gains in quick chargers at the leading U.S. phone maker and growth in power tools. For the December quarter, we anticipate this segment to grow high single digits sequentially, mostly from continued growth of quick chargers as we expand our designs in multiple devices with the leading U.S. phone maker. In closing, we are not immune to the overall market and inventory correction. However, we believe our business is a lot more resilient than the old ALS as we have a much more diversified product portfolio servicing multiple end markets and a record number of Tier 1 customers and market share. Further, we continue to execute our product and technology roadmaps, enhancing our diversified manufacturing capability and deepening strategic customer relationships, which should result in growth as the market recovers. 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.

Thank you, Stephen. Good afternoon, everyone, and thank you for joining us. Revenue for the quarter was $208.5 million, up 7.5% sequentially, and up 11.5% year over year. In terms of product mix, both product lines continue to grow. DMOS revenue was $145.1 million, up 4.5% sequentially, and up 11.1% over last year. PowerIC revenue was $61.8 million, up 16.3% from the prior quarter, and up 18% from a year ago. Assembly service revenue was $1.6 million as compared to $2 million last quarter and $4 million for the same quarter last year. As Mike mentioned, non-GAAP growth margin was 35.4% compared to 33.8% in the prior quarter and 35.3% a year ago. The quarter-over-quarter increase in non-GAAP growth margin was mainly driven by better production absorption at our assembly and test facility in Shanghai. In the June quarter, our Shanghai factory was partially shut down due to the citywide COVID lockdown. Since July, our Shanghai facility has been operating at a normal capacity. Non-GAAP operating expenses were $36.6 million compared to $36.7 million for the prior quarter and $35.1 million last year. Holding our non-GAAP operating expenses flat reflects our measures to control discretionary expenses and costs. As such, non-GAAP quarterly EPS was $1.20 per share compared to $0.95 last quarter and $1.06 a year ago. Moving on to the cash flow, we continue to generate healthy cash flow. GAAP operating cash flow was $36.7 million, which included $3.3 million net refund of customer deposits. By comparison, operating cash flow in the prior quarter was $25.7 million, which included $3.4 million net customer deposits. Operating cash flow on a standalone basis for AOS a year ago was $84.4 million, which included $40.2 million customer deposits. Consolidated EBITDAs was $45.5 million compared to $36.9 million last quarter and $45.3 million last year. Let me turn to our balance sheet. We completed the September quarter with a cash balance of $316.1 million compared to $314.4 million at the end of last quarter. The cash balance a year ago was $231.5 million excluding $20.9 million at the JV Company. Net traded receivables were reduced to $55.8 million from $65.7 million at the end of prior quarter. The quarter-over-quarter decrease was due to the higher balance in the prior quarter caused by uneven shipments toward the second half of the June quarter as our Shanghai facility was partially shut down due to COVID. Day sales outstanding for the September quarter were 30 days compared to 26 days last quarter. Net inventory was up slightly to $164.9 million at the quarter end versus $158 million last quarter. and $163.4 million last year. The quarter-over-quarter increase was mainly in raw materials. Average days in inventory were 106 days compared to 104 days in the prior quarter. Finally, property, plant, and equipment was $339.5 million, up from $318.7 million last quarter. The fixed assets balance a year ago was $175.1 million excluding $266.2 million at the JV company. CapEx for the quarter was $40.3 million. We expect the CapEx to drop to a $30 million level in the December quarter. To update you, Our Oregon Fab Expansion Project continues to make progress in equipment installation and qualification, and we anticipate additional capacity to come online in the March quarter of 2023. Now I would like to discuss December quarter guidance. We expect revenue to be approximately $195 million, plus or minus $3 million. gap gross margin to be 30% plus or minus 1%. We anticipate the non-gap gross margin to be 31% plus or minus 1%. The quarter-over-quarter decrease mainly reflects the impact of expected product mix changes and lower factory production absorption due to the inventory correction. In addition, This guidance also reflects normal seasonality for the December quarter. Gap operating expenses to be in the range of $43.5 million plus or minus $1 million. Non-gap operating expenses are expected to be in the range of $34.5 million plus or minus $1 million. interest expense to be approximately $1 million, and income tax expense to be in the range of $1.2 million to $1.4 million. With that, we will now open the call for questions. Operator, please start the Q&A session.

Of course. Thank you. We will now begin the Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, that's star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from David Williams with Benchmark. David, your line is now open.

Hey, good afternoon. Thanks for letting me ask the question and congrats on the resiliency for the quarter. I guess the first one for me even is kind of just thinking about the margin profile here. Obviously, you've got some utilization charges that will come in next quarter, but if I look back into your fourth quarter, fiscal fourth quarter, similar revenue level, and I realize that Mix has a lot to do with this as well, but it looks like there's about a $5.5 million differential just in that margin, and I'm just kind of curious what your utilization charges should be as you kind of think about that, and then also what we should expect maybe if we're seeing lower levels of demand into the March quarter, where that margin profile could potentially go to.

Sure. David, this December quarter's margin guidance mainly reflects the effect of current inventory correction, particularly in PC and smartphone areas. This inventory correction we expect to result in less favorable product mix for us, which Basically, we are expecting to ship higher margin products in the December quarter, and relatively speaking, shipping more lower margin products. So basically, the product mix resulted from this inventory. correction, so the cost of quite a bit of product mix changes, you know, changing unfavorably. So that's the major impact for the December quarter's guidance.

Okay, so most of this is just product mix and less on the utilization charges? Do you have maybe a baseline of what those charges are expected to be?

Well, yeah, I mean, the mixed impact kind of is a larger effect. Then to the less effect extended is the utilization, I mean, factory utilization absorptions.

Okay, okay, very good. And then maybe just touching on the script, you noted that there was about a $3.5 million customer deposit refund. Just kind of curious how you're seeing customer behavior and maybe talk about your order cancellations and backlog, just how that's kind of trending, especially as we've kind of gotten into October and November here.

Okay, sure. Yes, I mean, we incurred about $3.3 million in net refund of customer deposits. As you recall, I mean, we first... received some customer deposits probably back to about a year ago or so. Those customer deposits normally require each year we refund one-fifth or one-fourth of the deposits after they ordered a certain amount from us. So this September quarter, we started refunding some. And at the same time, actually in the September quarter, we also received some customer deposits. I mean, the net effect, was $3.3 million. In terms of backlog, recently customers have been adjusting orders in backlog. Some products decreased and some increased. Overall, the total backlog has been adjusted downwards. Also, the mix dynamic changed quite a bit, which in turn caused us to shift our production schedules quite a bit. So our December quarters guidance reflects those mix dynamic changes.

Okay. Very helpful. Thanks for the color. And then one just last one for me, if you don't mind. I guess on the visibility into the channel, as you think about just kind of across the board, you had a lot to go through DISTY. How comfortable are you kind of with the level of inventory out there and how confident are you in your visibility there?

For ourselves, our DISTY inventory is still at kind of a lean position, so actually our DST inventory is still below our targeted range of two to three months. So this inventory correction is mainly occurred at an ODM, OEM, or even at a retail level. So for our own DST inventory, it's still relatively at a comfortable level.

OK, very good. Thanks so much. I'll jump back in the queue.

Thank you, David. Thank you.

Thank you. Our next question comes from the line of Craig Ellis with B Reilly Securities. Craig, your line is now open.

Thanks for taking the question, team, and nice job navigating a tough environment in that fiscal first quarter. I wanted to get into a little bit more detail on that last question regarding inventory and maybe take a look at it on a segment basis. Can you just characterize how you see inventory downstream, whether it's in the channel or maybe at some of your direct ship customers and not asking for customer names, but the question, but just trying to get a sense for what the gives and takes are and where inventory might be relatively higher or lower across compute consumer communications, and industrial and power supply.

Sure. Hi, Craig, and good talk to you. So we see inventory correction particularly affecting consumer-facing applications, specifically PCs. I mean, this is sort of the bigger inventory correction we see taking place, and at least for the current outlooks. So it's throughout the supply chain and we are also controlling the, you know, the inventory but there's also inventory at the ODM and at the OEM that they are working through. So over there it's probably a little more pronounced. On the smartphone side, there also is some impact there. But in general, you know, we're doing fairly well at the US phone makers, especially in the premium models. So in those areas, we're still supporting and shifting our support to grow with them. So I think PC is part of the bigger area of inventory correction. Some small degree in the smartphones, especially the low to mid-tier, is more affected. And those have been the main ones.

Got it. And as we look ahead beyond the fiscal second quarter to the fiscal third quarter, one of the dynamics that always impacts things is the timing of Lunar New Year and some of the product builds around that. And it's a pretty early occurrence this year in the third week of February. So, you know, the question is this, you know, to what extent are your customers saying that some of the build demand related to that would be pulled into fiscal 2Q? And to the extent that it is, how does that impact the way you're starting to think about fiscal 3Q. Do you think that fiscal 3Q would behave seasonally, or would the timing on some of that component pull give it more of a sub-seasonal bias?

I think at this point, you know, first of all, the seasonality is back. We haven't seen that term, heard that term too much in the past couple years. And, you know, we're expecting the the third fiscal quarter to be a lower season in general, just as it normally is. Whether there's a pull-in, I think, you know, we'll see more towards the end of this current quarter in terms of, you know, whether there'll be a pull-in for there. But normally, you know, the third fiscal quarter is a shorter quarter, not only for our customers, but also for us, too. We also plan to have maintenance and And February is a shorter month, so typically that is a lower season for us. But in terms of the actual dynamics with, you know, whether your customers will pull in, we'll see closer to the end of this quarter.

Yeah, and you typically will do FAB shutdowns or maintenance activity during Lunar New Year's. Isn't that correct, Stephen?

Yes, we usually try to time it around then.

It makes sense to do that. Yeah. And then lastly, and I don't know if this is one more for you or for Yvonne, can you just characterize the pricing environment that you're seeing out there and that's starting to come in to backlog? Is it holding up as firmly as what we saw in mid to late 2021 and early 2022? Or are we starting to see some of the tier two players out there get more price competitive? And to what extent may or may not that be impacting the pricing that AOSL is realizing in its portfolio?

Well, yeah, I mean, in the September quarter, yeah, our pricing was relatively stable. I mean, we're expecting December quarter is in the same, similar situation. But having said that, and, you know, given the current situation, you know, the inventory correction and, you know, the slowdown of the overall demand and, I mean, some other factors like stronger dollars. And then, I mean, all those things, you know, could expect the environment to turn to more competitive, you know, I would expect.

Got it. That's helpful, Yifan. And then lastly, Um, I appreciate that, uh, having invested a hundred million in the Oregon fab, um, expansion that, uh, the company and customers were going to light things up, but given that we are in a pretty meaningful inventory correction, I am a little bit surprised that the company plans to start production in the fiscal third quarter. So, uh, can you just walk through, you know, some of the considerations around firing up that capacity given the demand backdrop that we have and the extent to which the output that you're considering now has changed up or down versus what you might have been thinking about three or six months ago. Thanks, guys.

Sure. We are still going full steam ahead with our expansion of our 8-inch valve. And just remember that our 8-inch fab is our internal fab, and we actually developed, you know, most of our new technologies do originate in that fab. And so even as of today, that fab is still fully utilized. And some of our foundries, you know, we aren't running to the full capacity, but our current fab is, you know, still running at full capacity. And we can and we will be using the additional capacity once it comes online. So it can directly help and immediately help our output in the short term. So I think this capacity is very much needed. It is geared towards our more high-performance products in general. The products that are hot now are coming from that.

Yep, Ben, I appreciate the point on doing some foundry and sourcing when you get that capacity. Okay, thanks, guys. I'll hop back in.

Thank you. Thank you.

Thank you. Our next question comes from Jeremy Quan with Stifel. Jeremy, your line is now open.

Yes, good afternoon, and thank you. A question on the pricing questions from earlier. Can you give us maybe more detail or color on what you're seeing in terms of pricing on the discrete side versus the PowerICs? I know PowerICs probably tend to be a bit more stable. And not just on the ESPs due to new products coming out, but maybe on a like-for-like basis. And along with that, I think last quarter you mentioned some emerging local competitors. Can you just give us an update there on how much impact they're having on pricing? Thank you.

Yeah, so in terms of pricing, it does depend on the product. Of course, the more differentiated a product is, the more leverage we have in pricing negotiations. So for the higher performance products, including much of the power ICs, it's a little bit less pressure, but it's not mean either, too. Power ICs are still used largely also in our PC business, which is seeing the inventory correction. So even there, we still have to be competitive, but it's less competitive pressure in general relative to more standardized products. Discretes also have their own spectrum of performance versus kind of standard products, too. So the higher end, we can differentiate more. There's less competitors to compete against. But at the lower end, that's where the local players are starting to come in to be more aggressive and you see more pressure at the end. So it depends on the product.

Great. Thank you. I guess maybe on the gross margin side, you know, it sounds like the mix is having a larger effect than utilization. Is this a function of, you know, in the past when you've had customers on allocation, you've optimized the mix for margin. Is this a situation where you're now reallocating for utilization?

Yes, in the past, when we had supply constraints in the short term, we allocated more toward higher margin products. In the December quarter, because of the inventory correction, we are seeing some product mix changes, so the change is unfavorable at this point. Right now, it is more impacted. Our margin is more impacted by the product mix.

Fair enough. And can you, I guess, help us understand maybe with the utilization question here? It sounds like you're able to keep that relatively high. With the new capacity ads you're seeing there, is I guess, does it change anything in terms of maybe your longer term gross margin outlook? Maybe not your targets per se, but maybe I know what kind of trends we might expect over the next couple of quarters here as you kind of look out ahead and balance utilization with mixed.

Okay, sure. I mean, as Stephen just mentioned, our Oregon FAPS expansion is more for those high-performance products. And so those products are still in high demand. So we've been confident that we can fill up the additional capacity quite well. In terms of a margin uh impact and you know at this point and we would expect and you know similar margins and you know those products would produce so um you know overall margin impact probably uh more toward neutral at this point got it and one one last question if i could before i jump back um can you just give us an update on you know the chum chain jv um

you know, how much flexibility do you have in maybe reallocating from the JV to Oregon if things, you know, is that a lever that you can pull in terms of the margin and utilization as you look out on the impact of the image correction?

Yeah, the CQJV is still providing, you know, similar, you know, wafers and assembly equipment. and test services to us. They are in the process of raising additional capital from outside investors. In terms of pullback and anything back to our Oregon FAB, right now our Oregon FAB is full, so we don't have room to take on more So right now, JV is still producing at their previous level.

Great. Thank you very much.

Thank you. Thank you.

Thank you. There are currently no further questions in queue, so again, to submit for a question, that's star one on your telephone keypad. As there are currently no further questions in queue, I will pass the conference back over to the management team for any additional or closing remarks.

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. Thank you.

This concludes today's Alpha and Omega Semiconductor Fiscal First Quarter 2022 Earnings Call. Thank you for your participation. You may now disconnect your line.