Good afternoon. Thank you for joining Alpha and Omega Semiconductor's Fiscal Q1 2024 Earnings Call. My name is Cole, and I will be moderating today's call. I would now like to turn it over to our host, Yujia Zhai. Please proceed.

Good afternoon, everyone and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2024 first quarter financial results. I am Yujia Zhai, Investor Relations representative for AOS. With me today are Stephen Chang, our CEO; and Yifan Liang, our CFO. This call is being recorded and broadcast live over the web. A replay will be available for 7 days following the call via the link in the Investor Relations section of our website. Our call will proceed as follows today. Stephen will begin with business updates, including strategic highlights and a detailed segment report. After that, Yifan will review the financial results and provide guidance for the December quarter. Finally, we'll have the Q&A session. The earnings release was distributed over the wire today, November 6, 2023, after the markets close. The release is also posted on the company's website. Our earnings release and this presentation include non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the earnings release. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of the 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 filings with the SEC. We assume no obligation to update the information provided in today's call. With that, I will now turn the call over to our CEO, Stephen Chang.

Thank you, Yujia and good afternoon, everyone. I will begin today with a high-level overview of our results and then jump into segment details. We delivered fiscal Q1 results in line with our guidance. Revenue was $180.6 million. Non-GAAP gross margin was 28.8% and non-GAAP EPS was $0.33. These results were driven by strong shipments across notebooks, desktop computing, and smartphones for fall device launches and the Q4 holiday season. I am pleased that our team delivered solid execution amid macroeconomic headwinds and inventory corrections in some end markets. We have been managing our business through various cycles and coping with an ever-changing business environment, but our principle remains unchanged. AOS is committed to building towards long-term growth. We are steadily extending the reach of our business into future and new applications and broadening our product portfolio to address increasing global power trends. As an example, we are leveraging our core technology IP and strength in advanced computing, battery, motor, and power supply and continue to invest in new adjacent markets like data centers for AI, automotive, and energy generation. In addition, we are taking products deeper into our existing core markets with more integrated solutions that will drive higher BOM content. By investing in new adjacent markets as well as going deeper into our core markets, we believe we will be well positioned to emerge stronger than ever on the other side of this cycle. The rebound in PCs and smartphones is encouraging following multiple quarters of inventory correction. However, we remain cautious about a sustained broader recovery as we are seeing signs of demand constraints in other end markets which are feeling the effects of the persistent high interest rate environments and geopolitical uncertainties. Moreover, gaming, which has been a significant revenue driver for us is now going through an inventory correction as we indicated last quarter. While we cannot be immune to the macroeconomic headwinds, it is important to reiterate that our core fundamentals remain strong. Many of our strategic investments over the past years have better positioned us for sustainable growth. We are excited to have a record number of Tier 1 customer partnerships and growing market share in strategic applications across many of our end markets. We continue to expect to navigate the current environment better than the broader market that we serve. With that, let me now cover our segment results and provide some guidance by segment for the next quarter. Starting with computing. September quarter revenue was down 21.2% year-over-year but up 35.1% sequentially and represented 38.9% of total revenue. These results were driven by solid recovery in shipments across notebooks, tablets, and desktop computing applications. The recovery has been driven by high-end driver ICs and MOSFETs for powering CPUs. Looking forward into the December quarter, we expect this segment to be down low single digits following a strong September quarter. Turning to the consumer segment. September quarter revenue was down 31.3% year-over-year and down 28.9% sequentially and represented 17.2% of total revenue. As we indicated last quarter, gaming is going through an inventory correction after an extremely strong 12 months of shipments into the number one console manufacturer. Similar to what we saw in PCs and smartphones earlier this year, given the speed of the current correction, we believe demand will revert back to a new normal in a couple of quarters, factoring in that the console is now in its midlife part of the platform cycle. However, we do see opportunities to increase BOM content within the current console platform as part of its refresh next year. Longer term, our relationship with this customer is very strong and we are already engaged in discussions for their next model design. For the December quarter, we anticipate a further mid-20% decline in this segment. Next, let's discuss the communications segment. Revenue in the September quarter was down 1.3% year-over-year but up 8.2% sequentially and represented 17.2% of total revenue. These results were driven by strong shipments to the number one U.S. smartphone manufacturer for their fall phone launch and continued strong demand from Chinese smartphone OEMs for their high-end devices. Looking ahead, we anticipate this segment to remain at current healthy levels, driven by continued strong shipments to Chinese OEMs ahead of their winter and spring launches. Now let's talk about our last segment, power supply and industrial which accounted for 23.1% of total revenue. September quarter revenue was slightly below our prior expectations, increasing 2.1% year-over-year and 0.5% sequentially. These results were driven by strong shipments for quick chargers for peak season to our Tier 1 U.S. smartphone customer but offset by weakness in power tools. For the December quarter, we expect this segment to decline in the low teens sequentially mainly due to reduced quick chargers following the peak season and lower solar demand. In closing, we delivered a solid fiscal Q1. We are closely monitoring market dynamics and macro headwinds. However, our fundamentals are strong and we are focused on positioning the company towards growth beyond our $1 billion revenue target on the other side of the cycle, driven by our leading technology, more diversified product portfolio, Tier 1 customer base in all our business segments, and expanding manufacturing capability and supply chain. With that, I will now turn the call over to Yifan for a discussion of our fiscal first quarter financial results and our outlook for the next quarter.

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

Our first question is from Jeremy Kwan with Stifel.

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

Sure, Jeremy. Yes, gaming is an important segment for us and we're excited about the segment in general because there's quite a bit of content going into these systems, pretty much like a specialized PC. So all the solutions we have going into PCs also goes into gaming. The console that we sell into generally has a lifetime of up to about 7 years. And right now, we're in about year 4 of that 7-year life cycle. And it's about the time, if you look at the previous consoles, that annual shipments start to drop some. And that correction is taking place now. And just like we saw a 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 see that it's going to revert back, we believe that it will be above the current rate but below the peak from a few quarters ago. So I would say somewhere in between is probably about right. And we continue to work closely with this particular console maker with opportunities also to design 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.

Congrats on navigating the challenging environment. So a couple of quick things. You talked a little bit about the data center and AI opportunity there in your script. And I know this is an area you've been working on for some time. But just you talked about having good controllers and power stages 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.

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 highly parallel processor. And we have good solutions from controller to the power stage that can address high computing applications, including artificial intelligence type of hardware. So for us, we do have some small business now. We do see the potential for a lot more going forward. But for us, we're also working on transitioning from addressing client side to moving over to the data center AI side. So that and all those efforts are in process.

Great, that helps. And then, maybe just on the PC side and the client side. Can you talk a little bit about the content increases between Raptor Lake and 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, we are beginning to notice that as Intel introduces their platforms, there are definitely more opportunities for increased dollar content. We are currently in the process of launching our new controller solutions into the market, and it will take some time for our customers to adopt them. However, once they do, we expect the dollar content to rise from what was previously $2 or $3 to between $3 and $4, with some specific bills of materials exceeding $5 in content. We are pleased to see that PCs experienced an uptick in the September quarter, although seasonality will affect the ecosystem as it goes through another seasonal cycle. Overall, we are excited about the additional bill of materials content that will come with these new platforms.

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

Sure. Generally, our power IC products have a higher margin. However, this doesn't mean that our discrete segment products lack higher margins as well. In the September quarter, our product mix improved slightly, with a modest increase. Despite a decline in power IC revenue due to a drop in gaming, we shipped more to Vcore in those areas in January, which helped boost our margins. Overall, the mix of products is a significant factor in the improvement of our gross margin.

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

It's about the same as last quarter because our internal productions, especially at our Oregon fab, are at a fairly high utilization level. Our back end utilization is somewhat lower. Overall, the utilization is roughly comparable to last quarter.

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

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

Sure. In terms of seasonality affecting the segments, it impacts PCs and smartphones more. The PC market had a strong quarter this September, and we noticed a rebound in orders for products, including ICs and other high-performance sockets that were lacking in the first half of the year. This suggests that the inventory correction is beginning to ease. While we're not completely out of the situation yet, it's encouraging to see new orders for some of our better products. Looking ahead to the March quarter, we do anticipate some seasonality. Historically, this quarter tends to be the weakest season for PCs. We expect some corrections, but nothing as significant as the substantial correction we experienced at the start of this calendar year. We believe that it will take a bit longer for PCs to fully recover, but the current situation is already much improved compared to one or two quarters ago. Looking ahead, while PCs will experience seasonality, we think they're moving back toward a more typical 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 would we see that and how big could it be?

Sure. The positive aspect of our smartphone business is that we have strong relationships with major customers in the U.S., Korea, and a significant portion of the Chinese market as well. Currently, we are in the launch season in the U.S., while in Korea, preparations for a February launch are underway. In China, there is still substantial demand for high-end phones, in which we are involved. This diversification is encouraging. Overall, smartphone system shipments are recovering, and we perform well within the high-end segment, giving us some momentum heading into the March quarter. Similar to PCs, we expect some seasonal fluctuations, but we are currently observing solid demand, particularly from the Chinese market.

For my last question before hopping back in the queue, I'll just direct it to Yifan. Yifan, oftentimes in the first quarter, we see either Lunar New Year or I think annual maintenance impacts to fab utilization, therefore, gross margin. As we look ahead to calendar Q1, would those historic dynamics be in play? Or for some reason, would things potentially play out differently early next year?

I would expect that the March quarter will reflect the typical lunar New Year season, and we also have some maintenance scheduled during that time. Therefore, I anticipate that utilization will be somewhat lower than in September and even lower than in December.

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

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

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

I have a quick follow-up regarding the pricing question. A couple of quarters ago, or perhaps even a year ago, you mentioned increased local competition from Chinese suppliers in the lower mid-range of your portfolio. Could you provide an update on that and its impact on pricing? Additionally, how frequently do you and your customers renegotiate pricing? Is this something established at the beginning of the year, or is it more of an ongoing process? Any insights you can share would be appreciated.

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

Great. Can you provide any insights regarding your capacity at the joint venture in China? It would also be helpful to hear about the pricing trends you're experiencing from them, as well as any information on funding requirements.

Certainly. The joint venture has already increased their production a couple of years ago, and they are currently seeking additional funds to further expand their capacity. They have reached breakeven at the EBITDA level, although we recorded our share of their losses for the June quarter in the September quarter. However, they are currently self-funded in terms of cash. In regards to capacity, it remains unchanged from before.

Got it. I know you guided for $10 million to $15 million for the December quarter regarding your capital expenditures. Can you provide a quick update on where we are in that process? How much more do you have left, and what guidance can you offer for fiscal '25?

Currently, we are in a standard CapEx spending phase, typically aimed at 6% to 8% of our revenue. Our Oregon fab expansion has been completed, so there isn't much CapEx spending left for major factory projects at this time.

Great. And just one last question. The licensing revenue has been coming in steadily, which is nice to see. Could you tell us how much is included in the guidance for the December quarter? Also, could you explain how this impacts gross margin? Are there engineering costs tied to the license revenue? It would be helpful to understand how this flows through the financial framework.

Sure. Revenue recognition for licensing and engineering services depends on the actual engineering hours our teams work compared to the expected total hours for this 24-month period. It can vary from quarter to quarter, so it's difficult to predict. For the December quarter, we are projecting a similar level of licensing and engineering revenue.

I'm curious about the appliance sector. Stephen, you've mentioned that it's an area of opportunity for you, but it seems to be largely untapped at the moment. I'm wondering what you are observing in the appliance market. Has the situation improved, worsened, or is there anything specific that makes you feel optimistic?

Currently, the market is somewhat sluggish due to global trends in the housing and real estate sectors, which have slowed considerably over the past year. As a result, we do not anticipate significant short-term growth. However, in the long term, this sector remains a fundamental part of our business. Our focus continues to be on selling our IGBTs and the modules that use them. Our solution is more compact than our competitors’. Nevertheless, we must navigate the broader macroeconomic conditions affecting this specific segment. In the short term, I do not foresee much excitement. Yet, looking ahead, this market is valued at over $2 billion, and we are only beginning to tap into its potential.

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

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

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

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

Correct.

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

We still have about $75 millionish in customer deposits at this point. We would expect the next calendar year, we'll probably return around $30 million or so.

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

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