Alpha and Omega Semiconductor Limited

Good afternoon. Thank you for attending today's Alpha and Omega Semiconductor Fiscal Q1 2024 Earnings Call. My name is Cole, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Yuzhe Zai.

Please go ahead.

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductors Conference Call to Discuss Cisco 2024 First Quarter Financial Results. I am Gia Zai, Investor Relations Representative for AOS. With me today are Stephen Chang, our CEO, and Yifan Liang, our CFO. This call is being recorded and broadcast live over the web. A replay will be available for seven days following the call via the link in the Investor Relations section of our website. Our call will proceed as follows today. Stephen will begin with business updates, including strategic highlights, and a detailed segment report. After that, Yifan will review the financial results and provide guidance for the December quarter. Finally, we'll have the Q&A session. The earnings release was distributed over the YPA November 6, 2023, after the market closed. The release is also posted on the company's website. Our earnings release and this presentation include non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the gap measures. The reconciliation of these non-gap measures with the comparable gap measures is included in the earnings service. 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. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent findings with SEC. We assume no obligations to update the information provided in today's call. With that, I will now turn the call over to our CEO, Stephen Chang.

Stephen? Thank you, Yujia, and good afternoon, everyone. I will begin today with a high-level overview of our results and then jump into segment details. We delivered fiscal Q1 results in line with our guidance. Revenue was $180.6 million, Non-GAAP growth margin was 28.8%, and non-GAAP EPS was $0.33. These results were driven by strong shipments across notebooks, desktop computing, and smartphones for fall device launches and the Q4 holiday season. I am pleased that our team delivered solid execution amid macroeconomic headwinds and inventory corrections in some end markets. We have been managing our business through various cycles and coping with an ever-changing business environment, but our principle remains unchanged. AOS is committed to building towards long-term growth. We are steadily extending the reach of our business into future and new applications and broadening our product portfolio to address increasing global power trends. As an example, we are leveraging our core technology IP and strengths in advanced computing, battery, motor, and power supply and continue to invest in new adjacent markets like data centers for AI, automotive, and energy generation. In addition, we are taking products deeper into our existing core markets with more integrated solutions that will drive higher BOM content. By investing in new adjacent markets, as well as going deeper into our core markets, we believe we will be well positioned to emerge stronger than ever on the other side of this cycle. The rebound in PCs and smartphones is encouraging, following multiple quarters of inventory correction. However, we remain cautious about a sustained, broader recovery as we are seeing signs of demand constraints in other end markets, which are feeling the effects of the persistent high interest rate environment and geopolitical uncertainties. Moreover, gaming, which has been a significant revenue driver for us, is now going through an inventory correction, as we indicated last quarter. While we cannot be immune to the macroeconomic headwinds, it is important to reiterate that our core fundamentals remain strong. Many of our strategic investments over the past years have better positioned us for sustainable growth. We are excited to have a record number of Tier 1 customer partnerships and growing market share in strategic applications across many of our end markets. We continue to expect to navigate the current environment better than the broader market that we serve. With that, Let me now cover our segment results and provide some guidance by segment for the next quarter. Starting with computing, September quarter revenue was down 21.2% year over year, but up 35.1% sequentially and represented 38.9% of total revenue. These results were driven by solid recovery in shipments across notebook, tablets, and desktop computing applications. The recovery has been driven by high-end driver ICs, and MOSFETs for powering CPUs. Looking forward into the December quarter, we expect this segment to be down low single digits following a strong September quarter. Turning to the consumer segment, September quarter revenue was down 31.3% year over year and down 28.9% sequentially and represented 17.2% of total revenue. As we indicated last quarter, gaming is going through an inventory correction after an extremely strong 12 months of shipments into the number one console manufacturer. Similar to what we saw in PCs and smartphones earlier this year, given the speed of the current correction, we believe demand will revert back to a new normal in a couple of quarters, factoring in that the console is now in its midlife part of the platform cycle. However, we do see opportunities to increase BOM content within the current console platform as part of its refresh next year. Longer term, our relationship with this customer is very strong, and we are already engaged in discussions for their next model design. For the December quarter, we anticipate a further mid-20% decline in this segment. Next, let's discuss the communications segment. Revenue in the September quarter was down 1.3% year over year, but up 80.2% sequentially, and represented 17.2% of total revenue. These results were driven by strong shipments to the number one U.S. smartphone manufacturer for their phone launch and continued strong demand from Chinese smartphone OEMs for their high-end devices. Looking ahead, we anticipate this segment to remain at current healthy levels, driven by continued strong shipments to Chinese OEMs ahead of their winter and spring launches. Now let's talk about our last segment, power supply and industrial, which accounted for 23.1% of total revenue. September quarter revenue was slightly below our prior expectations, increasing 2.1% year over year and 0.5% sequentially. These results were driven by strong shipments for quick chargers for peak season to our tier one U.S. smartphone customer, but offset by weakness in power tools. For the December quarter, we expect this segment to decline in the low teens sequentially, mainly due to reduced quickchargers following the peak season and lower solar demand. In closing, we delivered a solid fiscal Q1. We are closely monitoring market dynamics and macro headwinds. However, our fundamentals are strong, and we are focused on positioning the company towards growth beyond our $1 billion revenue target on the other side of the cycle. driven by our leading technology, more diversified product portfolio, tier one customer base in all our business segments, and expanding manufacturing capability and supply chain. With that, I will now turn the call over to Yifan for a discussion of our fiscal first quarter financial results and our outlook for the next quarter.

Thank you, Stephen. Good afternoon, everyone, and thank you for joining us. Revenue for the quarter was $180.6 million, up 11.8% sequentially, and down 13.4% year-over-year. In terms of product mix, DMOS revenue was $121.5 million, up 27% sequentially, and down 16% over last year. Power SE revenue was $52.7 million, down 10.5% from the prior quarter, and 15.4% from a year ago. Assembly service revenue was $0.7 million as compared to $0.6 million last quarter and $1.6 million for the same quarter last year. License and engineering service revenue was $5.6 million for the quarter versus $6.3 million in the prior quarter. Non-GAAP growth margin was 28.8% compared to 28.5% in the prior quarter and 35.4% a year ago. The quarter-by-quarter increase in non-GAAP growth margin was mainly driven by the mixed improvement. Non-GAAP operating expenses were $40.8 million compared to $39.1 million for the prior quarter and $36.6 million last year. The quarter-over-quarter increase was primarily due to higher R&D engineering expenses and professional service fees. Non-GAAP quarterly EPS was $0.33 compared to $0.19 last quarter and $1.20 a year ago. Moving on to cash flow. Operating cash flow was $13.8 million, including $8.6 million of repayment of customer deposits. By comparison, operating cash flows was negative $28.2 million in the prior quarter and positive $36.7 million a year ago. EBITDAs for the quarter was $23.3 million compared to $17.7 million last quarter and $45.5 million for the same quarter last year. Now let me turn to our balance sheet. We completed September quarter with a cash balance of $193.6 million compared to $195.2 million at the end of last quarter. Net trade receivables were $34.4 million compared to $22.4 million at the end of the prior quarter. Day sales outstanding were 18 days for the quarter versus 19 days for the prior quarter. Net inventory was $187.8 million at the quarter end compared to $183.2 million at the end of the prior quarter. Average days in inventory were 129 days compared to 140 days in the prior quarter. CapEx for the quarter was $12.5 million compared to $19.2 million for the prior quarter. We expect CapEx for the December quarter to range from $10 to $15 million. Now I would like to discuss December quarter guidance. We expect revenue to be approximately $165 million plus or minus $10 million. Gap growth margin to be 27.1% plus or minus 1%. We anticipate the non-gap growth margin to be 28.5% plus or minus 1%. GAAP operating expenses to be in the range of $48 million plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $40.3 million plus or minus $1 million. Interest expense to be approximately $1.1 million and income tax expense to be in the range of $0.8 million to $1.2 million. With that, we will open the call for questions. Operator, please start Q&A session.

Thank you. We will now begin the Q&A session. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to queue for a question, please press star one. We'll pause here briefly as questions are registered.

Our first question is from Jeremy Kwan with Stifel. Your line is now open.

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

Sure, Jeremy. Yes, gaming is an important segment for us. And, you know, we're excited about the segment in general because there's quite a bit of content going into these systems and pretty much like a, you know, specialized PC. So all the solutions we have going into PC also goes into gaming. The console that we sell into generally has a lifetime of up to about seven years. And right now, we're in about year four of that seven-year lifecycle. And it's about the time, if you look at the previous consoles, that the annual shouldn't start to drop some. And that correction was taking place now. And just like we saw correction in some of the other markets that we're in, even gaming has to go through that correction. But right now, it's in the middle of that correction. So when we say that it's going to revert back, we believe that it's going to be above the current rate but below the peak from a few quarters ago. So I would say somewhere in between is probably about right. And we continue to work closely with this particular console maker and with opportunities also to design in more content. But overall, I think at the peak, to answer your question, it was up to maybe about almost half of our total consumer segment. Right now, maybe it's somewhere around 30% or something in that range, 20% and 30% of the consumer business. But that's just during the correction. We do expect it to bounce back up again.

Our next question is from David Williams with Benchmark.

Your line is now open.

Hey, good afternoon. Thanks for taking the question and congrats on navigating this challenging environment.

Thanks, David.

Yeah, so a couple of quick things. You talked a little bit about the data center and AI opportunity there in your script. And I know this is an area you've been working on for some time, but just you've talked about having good controllers and PowerStage to address this market. Just wondering if there's anything new there that you can share or just generally how you're seeing your opportunity in that market.

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

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

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

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

Sure. Yeah, in general, the power IC products carry at a higher margin for us, but given that and It doesn't mean we don't have higher margins in the products in the discrete segment. So in the September quarter, the product mix improved slightly. And then a few basis points up, and then even though Power C revenue got hurt by the gaming drop. So, but on the other hand, we shipped more to vCore, you know, in those areas. And so, generally, which provided some higher margin for us. So, I mean, overall, I mean, yeah, I mean, Mixon is a big, portion of our gross margin improvement.

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

It's in a similar range as the last quarter, because for our internal productions and, you know, generally, you know, then our organ fab and pretty good utilization level. Our back end is a little bit lower. So, you know, on the mix, overall, I mean, the utilization is roughly the same as last quarter.

Thank you.

Our next question is from Craig Ellis with B Reilly Securities.

Your line is now open.

Yeah, thanks for taking the question, guys. Steven, I wanted to go back to a comment in the prepared remarks regarding demand. It sounds like you retain a pretty cautious stance overall and understand it's a really challenging macro, but what I was hoping you could do is talk a little bit about the environment that you see as you look into the first quarter calendar fiscal third quarter, you know, qualitatively, where are things looking more encouraging, more, more challenging. And, and can you talk about where you're more confident that inventories are now back to normal levels versus being an excess, uh, outside of maybe gaming, which is going through a pretty visible correction.

Sure. Uh, you know, seasonality, I think in terms of, uh, you know, affecting the segments, you know, more. impacts the PCs and smartphones a little more. The PC market, as we mentioned, this September quarter was a strong quarter and we saw a resumption of orders for products including ICs and other higher performance sockets that we didn't see in the first half of the year. And so that's kind of clear signs that the inventory correction is starting to die down. I can't say that we're out of the woods yet, But it's great and very encouraging to see the fresh orders for some of our good products. And going into the, you know, looking two quarters out, as you're suggesting, into the March quarter, yes, you know, we do expect to see some seasonality at play. Typically that March quarter is, you know, the lowest season for PCs in any kind of year. And we do believe that there will be some correction, but nothing like the big correction that we saw at the beginning of this calendar year. So we believe that BC will take a little longer overall to get back to a full recovery, but we're already in a much better state than what it was just a quarter or especially two quarters ago. So going forward, PCs will go through seasonality, but we believe it's heading back towards a little more of a normal seasonal pattern.

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

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

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

Sure, Craig. I would expect, yeah, I mean, the March quarter is a typical Lunar New Year season, and then we also arrange some events maintenance around it. So I would expect utilization will be a little bit lower than the September or even lower than the December quarter.

That's helpful. Maybe I could sneak in one more that relates to gross margin. TI seemed to indicate that pricing was normalizing, so picking up a little bit but not getting aggressive, how would you characterize the pricing environment that's out there right now, guys?

Yeah, this calendar year, I would say, yeah, the pricing environment returned to historical, normal trends, I would say, after last couple years, favorable environment. Yeah, I would characterize as a traditional pricing environment.

Thank you, Ethan. Thanks, Stephen.

All right. Thank you. Thank you.

We have a follow-up question from Jeremy Kwan with Stifel. Your line is now open.

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

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

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

Okay, sure. Yeah. CQJV, you know, they have already ramped up their production, you know, a year, a couple of years ago. So right now they are in the process of raising. additional funds to further expand their capacity. On the EBITDA level, they already achieved breakeven, so even though in the September quarter we recorded our portion of their June quarter's loss, but on the cash side, right now they are self-funded. In terms of capacity, yeah, we still have the same capacity as before. So nothing changed there.

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

Okay, sure. I mean, CapEx-wise, I mean, right now, I would characterize as, you know, we're in the normal CapEx spending I mean, normally we would target 6% to 8% of our revenue. Our Oregon fab expansion had completed, so right now not a whole lot of capex payment remaining. So right now we don't have a major project for any factory expansions at this point.

Great, and just one last question. The licensing revenue, it's nice to see that come in, you know, pretty steadily here. How much of, can you give us like a, you know, how much is baked into the guidance for the December quarter? And also, if you could help walk us through, you know, the impact on gross margins. You know, is there engineering costs associated with the license revenue and how, you know, that just kind of flows through the financial scene? That would be great.

Okay, sure. Revenue recognition for the license thing and engineering service is more depends on the actual engineering hours and our teams spend versus expected the total hours for this 24 month period so that it's. It's fluctuating from quarter to quarter, so it's hard to say owner Right now, for the December quarter guidance, we estimated a similar level of licensing and engineering revenue.

And the impacted gross margin?

Oh, sure. Yeah. The margin for the Licensing and engineering service, yeah, it is definitely at a higher margin than our product margins. We don't break down the specific product line or product elements here.

Got it. Thank you.

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

Your line is now open.

Hey, thanks for letting me get back in here. Just curious on the appliance side, Stephen, I know you've talked about that being an area of opportunity for you, but it's largely Greenfield today. Just kind of curious what you're seeing in the appliance market. Is that improved or worse or anything in particular there you'd be optimistic about?

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

Okay, all right, great. And then just the last one for me here is just the cadence of orders through the quarter. Was there any change maybe between the beginning and the end of the quarter of the order?

Backlog, I think, this quarter has been steady. I mean, some fresh orders came in, you know, after a period of time of inventory. I mean, by and large, you know, other positions has been reflected in our December quarter guidance.

Okay, great. Thanks again for the time.

Thank you. Thanks.

We have an additional follow-up from Jeremy Kwan with Stifel. Your line is now open.

Thank you. Just one last follow-up. On the operating cash flow, it included the customer deposit repayment. So if we exclude this, would it be $22.4 million operating cash flow for the quarter? Correct. Got it. And how much remaining is in your customer deposits at this point?

We still have about $75 million-ish in customer deposits. deposit at this point, then we would expect the next calendar year will probably return around $30 million also.

Great. Thank you.

All right. Thank you.

There are no additional questions waiting at this time, so I'll pass the conference back to the management team for any closing remarks.

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.

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