Earnings Call Transcript - AOSL Q1 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to the Alpha and Omega Semiconductor Fiscal Q1 2021 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, Mr. Gary Dvorchak. Sir, you may begin.

Gary Dvorchak, Investor Relations Representative

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor conference call to discuss fiscal 2022 first quarter financial results. I'm Gary Dvorchak, Investor Relations representative for AOS. With me today are Dr. Mike Chang, our CEO; Stephen Chang, our President; and Yifan Liang, our CFO. This call is being recorded and broadcast live over the web. The 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: Mike will begin with strategic highlights. Then Stephen will provide business updates in the detailed segment report. After that, Yifan will review the financial results and provide guidance for the December quarter. Finally, we will have the question-and-answer session. The earnings release is distributed over wire services today, November 4, 2021, after the close of the market. The release is also posted on the company's website. Our earnings release and this presentation include certain non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of the business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligation to update the information provided in today's call. Now I will turn the call over to our CEO, Dr. Mike Chang, to provide strategic highlights. Mike?

Mike Chang, CEO

Thanks, Gary. I would like to welcome everyone to today's call. I am excited to be speaking with all of you again today. In a moment, I will review the operating highlights of the September quarter, which were strong. Before I do that, I want to highlight an important milestone in the history of AOS and what it means in the broader context. Today, we see that we earned over $1 per share on a non-GAAP basis. We believe this reflects the real economic earnings power of over $4 per share annually. Why do you think this earnings power is sustainable? Because of the early momentum we have demonstrated over the past two years, because of the shipment of this milestone and because of our prospects for growth in the years ahead. Yes, we are in a cyclical industry. So, our EPS on a quarterly basis will fluctuate, but in most quarters, we believe that a quarterly EPS of more than $1 is achievable. And when you levelize our earnings, we believe that $4 to $5 per share is the annual earnings power of the business we have built. Think about what we have achieved over the years. We have developed new silicon and packaging platforms to expand our stance and offer higher performance products. We broadened our DMOS technology to cover a full range of voltage applications and have established a strong Power IC portfolio in addition to a lineup of IGBT and module solutions. This has allowed us to diversify beyond our computing base into consumer, communications and industrial markets. This led to the success we see to date in smartphones, home appliances and next-generation computing applications. We have also engaged with our customers, strengthened the relationships, and have become their trusted strategic partner. We count among our expanding customer base some of the most well-known, sophisticated, and successful electronics companies in the world. Giants that are leaders in mobile phones, computing, and gaming; all this work translates not only into earnings, but into earnings power. Our product portfolio is outstanding, but our R&D capability is even more valuable because it will keep our product line competitive and relevant in the years ahead. Our design wins are wonderful, but our sales and marketing teams are even more valuable because they will drive more design wins in the years ahead. Our production capacity is state of the art, but our production teams are more to us because they will ensure we continue to be state-of-the-art a decade from now. That is the difference between earnings which can come and go in our industry and earnings power, which is a long-term source of value. When we look at our company, we see valuable earnings power of $4 to $5 a share annually. We intend to build an even better organization and grow the earnings power even more. With our stock price in the middle 30s range, the market is expanding and the multiple of only 7x to 9x are clearly demonstrated earnings power. Today, we celebrated this milestone of earning $1 a share in a single quarter. The joy our team has today is justified, but it is also just the beginning. Earnings power does not come on a single day or a quarter; it comes from a lifetime of work. This milestone has energized our team to serve our customers even better, make our product even more competitive, and create even more value for our shareholders. In this long-term effort, we thank all of you for your confidence in us and your support. Now let me turn to other important highlights of the quarter. First, fiscal quarter results were strong across the whole P&L. Revenue was $187 million. Non-GAAP gross margin was 35.3%, and non-GAAP earnings per share were $1.06. We delivered double-digit growth in each of our market segments with record quarterly revenue, excellent profitability, and outstanding bottom-line performance. Let me update you on a critical issue: how we are dealing with the supply chain constraint in the broader semiconductor industry. We are expanding our production capacity in our Oregon fab, ramping production in our joint venture fab in Chongqing, and leveraging our relationships with our foundry partners to secure wafer supply. Stephen will provide more details on our strategy later on this call. We believe we are doing an outstanding job in managing the industry-wide supply chain constraint. We want to be sure we minimize any interruptions to our customers. While our own supply is tight, we are in an excellent position to access both internal and external capacity to support our business. In summary, this strong quarter once again proved the strength of the team we have at AOS. I am very proud of and thankful for our team's execution and their tireless work. We continue to believe that we have the right foundation for long-term growth and the right technology in place to ensure that we are successful in scaling our business. More importantly, we have the people and the capabilities to ensure that our earnings power expands even more in the years ahead. We are on track to achieve our mission of being a trusted technology partner and global supplier of a broad portfolio of semiconductors. Now I will turn the call over to Stephen for an update on our business and a detailed segment report. Stephen?

Stephen Chang, President

Thank you, Mike, and good afternoon, everyone. I will start with an update on our business and then provide detailed segment highlights for the September quarter. As Mike noted in discussing our earnings power, our product revenue and market share today are but a point in time, but the capability we have built ensures that we can maintain and continue this leadership for years, if not decades, to come. Our technical expertise enables us to develop a broader variety of power discrete and Power IC technology platforms. We invest in core competencies of silicon packaging and ICs as a foundation of our product technology. This allows us to expand our product offerings and deliver complete power solutions for more target applications. Over the years, we have evolved from a component supplier to a solution provider. We have become a valued supplier to multiple Tier 1 customers. We sell into the number one global smartphone maker, number one gaming console manufacturer, number one global home appliance manufacturer, and number one power tool provider. In the September quarter, in several end markets, demand for our products was greater than we could fulfill. To manage these component shortages, we strategically shifted production to meet customer needs while driving growth in both revenue and gross margin. Furthermore, we are relentlessly focused on customer engagement. This focus on strategic customers enables us to leverage the current environment to stay closer to Tier 1 customers, optimize product mix and capacity allocation, and deliver strategic value to those customers. Like our industry peers, we are managing longer lead times and limited component availability, but we believe that our competitive market position, strong customer relationships, and supply chain responsiveness enable us to meet these commitments. We are taking a three-pronged approach to grow our capacity to meet the growing demand for our products. First, we are expanding capacity and enhancing the technological sophistication of our Oregon fab. We will invest approximately $100 million, including $20 million to upgrade our capabilities and $80 million to expand capacity. When complete, we believe this expansion will enable us to generate an additional $70 million in annual revenue. We expect the new capacity to come online in the December quarter of 2022. Importantly, we expect the investments to strengthen our competitive advantage in our target markets. With current challenges in the semiconductor industry, especially the global capacity shortages, we want to own and control our supply chain as much as possible. Second, the Phase 1 capacity ramp at our joint venture fab in Chongqing is complete. We reached the target run rate of $150 million of annualized revenue in the September quarter. The JV company is well into the process of determining how it will implement Phase 2. Third, we have close relationships with multiple foundry partners and are actively working with them for additional wafer supply. Now let me drill down into each of our business segments. Unless otherwise noted, the following figures refer to the September quarter of 2021. Let's start with Computing. Revenue was up 17.5% year-over-year and up 1.5% sequentially. This segment represented 42% of our total revenue. As expected, end demand for our products was strong. To best allocate capacity, we shifted resources and production to support the Computing segment, especially notebook, tablet, and desktop applications. On the other hand, the graphics card business was temporarily down sequentially as we strategically shifted production capacity to support other segments in the face of component shortages. Looking ahead, we expect Computing revenue to be up modestly in the December quarter. We expect strong demand to continue at our ODM customers for desktop. In addition, we expect our graphics card business to rebound and grow significantly from the September quarter level. This will be partially offset by a slight decline in notebook as we allocate our resources to support growth in our desktop and graphic cards. Turning to the Consumer segment, which was 21.8% of total revenue, up 11.4% year-over-year and up 8.9% sequentially. This segment played out as expected. Gaming grew double digits due to both share gain and system growth at a major customer with both our MOSFET and Power IC products in multiple sockets. Our overall home appliance business also demonstrated solid growth across different geographies. We shipped higher volumes of module solutions to key home appliance customers in Korea, China, and Japan. Looking to the December quarter, we expect the Consumer segment to increase by a low single-digit percentage with strength in gaming and home appliances. Next, let's discuss the Communications segment, which was 13.8% of total revenue, up 26.8% year-over-year and up 13.9% sequentially. This segment played out as expected as demand for battery protection was strong at two of our global smartphone customers to support the launch of new models. That said, our shipments to China declined due to an inventory cleanup in the quarter. For the December quarter, we expect Communications segment sales to decrease by mid-single digits sequentially. While the major smartphone players in Korea and the U.S. are expected to reach peak production in the December quarter, we expect China smartphone shipments to decline as smartphone manufacturers are navigating the component shortage. We continue to believe we are in an excellent position for growth in battery protection over the next couple of quarters as we have secured designs at all the major global smartphone makers. Finally, let's talk about the Power Supply and Industrial segments, which accounted for 20.3% of total revenue. This segment was up 51.5% year-over-year and up 4.6% sequentially. The solid growth was due to a couple of factors. First, the demand for AC-DC power supplies for laptop adopters was strong with incremental medium voltage design engagement with major power supply customers in Taiwan; second, demand for our industrial solutions from a major power tool customer in the U.S. was strong. Power tools are an emerging application for us with great synergy, given our product strengths in low- and medium-voltage products targeting battery management and brushless DC motors. Looking ahead, we expect the Power Supply and Industrial segment to decrease slightly in the December quarter, due largely to the temporary slowdown in our AC-DC power supply business attributable to end system production shortages and offset by growth in solar power. In summary, we are off to a great start to fiscal year 2022. Our business momentum continues and we have the right strategy in place, which is generating strong results. Despite the ongoing industry-wide semiconductor component shortages, we are working diligently to deliver products to our customers. Our track record of consistent execution gives us confidence in our ability to capitalize on the many growth opportunities ahead of us. 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.

Yifan Liang, CFO

Thank you, Stephen. Good afternoon, everyone, and thank you for joining us. Unless otherwise noted, the following figures refer to the September quarter of 2021. Revenue was $187 million, up 5.5% from the prior quarter and up 23.4% from the same quarter last year. In terms of product mix, DMOS revenue was $130.7 million, up 2.7% sequentially and up 14.3% year-over-year. Power IC revenue was $52.3 million, up 12.5% from the prior quarter and up 51.9% from a year ago. Assembly service revenue was $4 million as compared to $3.6 million last quarter and $2.7 million for the same quarter last year. Non-GAAP gross margin was 35.3%, up from 34.9% in the prior quarter and up from 29% in the same quarter last year. The quarter-over-quarter increase in non-GAAP gross margin was mainly driven by better product mix. Non-GAAP gross margin excluded $0.8 million of amortization of purchased IP each for the September quarter, the prior quarter, and the same quarter last year. In addition, non-GAAP gross margin excluded $0.6 million of share-based compensation charges as compared to $0.6 million for the prior quarter and $0.4 million for the same quarter last year. Non-GAAP operating expenses were $35.1 million compared to $32.8 million for the prior quarter and $28.6 million for the same quarter last year. The quarter-over-quarter increase was primarily due to higher variable compensation accruals this quarter to reward our outstanding financial performance. Non-GAAP operating expenses excluded $4.1 million of share-based compensation charges and $0.4 million of legal expenses related to the government investigation. This compares to $4.8 million of share-based compensation charges and $0.6 million of legal expenses related to the investigation for the prior quarter as well as $2.5 million of share-based compensation charges and $1.1 million of legal expenses related to the investigation for the same quarter last year. Income tax expense was $1.3 million compared to $1.2 million for the prior quarter and $1 million for the same quarter last year. Non-GAAP EPS attributable to AOS was $1.06 per share as compared to $0.95 for the prior quarter and $0.55 for the same quarter last year. Now let's look at cash flow. On a standalone basis, not including the JV, AOS generated $84.4 million of GAAP operating cash flow, $44.2 million was from operations and $40.2 million was net customer deposits to secure capacity. The non-deposit operating cash flow grew nicely. In the June quarter, we generated $22.6 million announced deposit cash flow in the same quarter a year ago was $12.7 million. Looking to Chongqing, GAAP operating cash flow used by the JV Company was $3.8 million compared to $11.6 million of cash flow provided by the JV Company in the prior quarter and $2.9 million of cash flow used by the JV Company in the same quarter last year. Consolidated EBITDAS was $45.3 million compared to $40.9 million for the prior quarter and $27.6 million for the same quarter last year. EBITDAS attributable to AOS was $39.9 million as compared to $33.6 million for the prior quarter and $22.2 million for the same quarter last year. EBITDAS for the JV Company was $3.4 million as compared to $7.8 million for the prior quarter and $4.6 million for the same quarter last year. Now let's look at the balance sheet. We completed the September quarter with a cash balance of $252.5 million, including $231.6 million at AOS and $20.9 million at the JV Company. This compares to $202.4 million at the end of last quarter, which included $164.9 million at AOS and $37.5 million at the JV Company. Our cash balance a year ago was $154.7 million, including $112.7 million at AOS and $42 million at the JV Company. The bank borrowing balance was $159.2 million, including $22.2 million at AOS and $137 million at the JV Company. During the quarter, AOS and the JV Company repaid $2.1 million and $4.3 million of existing term loans, respectively. Net trade receivables were $39.3 million as compared to $35.8 million at the end of the prior quarter and $26.3 million for the same quarter last year. Day sales outstanding for the September quarter were 27 days compared to 26 days in the prior quarter. Net inventory was $163.4 million at quarter end, up from $154.3 million last quarter and up from $137.7 million in the prior year. Average days in inventory were 117 days for the quarter compared to 115 days in the prior quarter. Net property, plant and equipment was $441.3 million, slightly up from $437 million last quarter and up from $421.6 million last year. Capital expenditures were $23.9 million for the quarter, including $15.5 million at AOS and $8.4 million at the JV Company. Now I would like to discuss December quarter guidance. We expect revenue to be approximately $188 million, plus or minus $3 million. GAAP gross margin to be 34.8%, plus or minus 1%. We anticipate non-GAAP gross margin to be 35.5%, plus or minus 1%. Non-GAAP gross margin excludes $0.8 million amortization of acquired IP and $0.6 million of estimated share-based compensation charges. GAAP operating expenses to be in the range of $39.3 million, plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $34.5 million, plus or minus $1 million. Non-GAAP operating expenses exclude $4.3 million of estimated share-based compensation charges and $0.5 million of estimated legal expenses relating to the government investigation. Income tax expense to be approximately $1.2 million to $1.4 million. Loss attributable to non-controlling interest to be approximately $0.5 million.

Stephen Chang, President

Before we open the line for questions, I will turn the call back to Stephen. He will briefly discuss our shareholder proposal to be voted on at the upcoming Annual Shareholder Meeting. We want to call your attention to a proposal coming up for a vote at our Annual Shareholder Meeting next week. As described in the proxy statement for the annual meeting, Proposal #3 requests an additional 1 million shares to be authorized under our Equity Incentive Plan. We understand that ISS has recommended a vote against the proposal, primarily for certain technical reasons outlined in our proxy supplement filed with the SEC, we are encouraging our shareholders to vote for the proposal. As explained in our proxy statement and supplements, we expect to use these additional shares to incentivize our hard-working non-Executive employees. These additional shares will only be earned if the company achieves certain revenue growth criteria and stock price appreciation over a multiple-year period, which directly benefits shareholders despite the potential dilution. Our employees show up every day and work diligently to create and sustain the earnings power that Mike described at the start of our call. We want to motivate our people to stay and participate in the wealth creation they enable. Technology companies, like AOS, face intense competition for talent and therefore, equity incentive awards are critical for us to retain our best employees. All of us share a common interest in offering meaningful performance incentives to the broadest range of employees possible. You can learn more about our reasoning for the proposal in our proxy filing. We hope you agree and will vote for Proposal 3. With that, we will now open the call for questions. Operator, please start the Q&A session.

Operator, Operator

Your first question is from Craig Ellis from B. Riley Securities.

Craig Ellis, Analyst

Congratulations on the strong financial results and outlook, guys. I wanted to start with more of a longer-term question. So it looks like with the customer deposits that have come in, the company has now taken in enough customer deposits that essentially will fund the Oregon fab expansion. And the question was really on the visibility that you have into the tools that are needed and the other work that needs to be done so that, that can actually start producing wafers on shipments in the fourth quarter. So can you just provide some color on how that capacity expansion is coming and your confidence in getting wafers out and revenue generation in the fourth quarter of next year?

Yifan Liang, CFO

Sure. As we stated in our last earnings call, we are investing over $100 million in our Oregon fab. So the clean room construction has been started already. Most of the purchase orders have already been placed for the necessary tools. At this point, we are expecting we can get the additional capacity online in the December quarter of calendar year 2022. So that's our current expectation.

Craig Ellis, Analyst

That's real helpful, Yifan. The second question is more of a near-term question, maybe better directed to Stephen. So there have been some other chip companies this reporting season that have remarked that communications-related issues, more on the supply side with some Tier 1 ODMs were suppressing shipments in the calendar fourth quarter. Obviously, there's been news out there about softer lower-end smartphones in the Android supply chain in the fourth quarter. But there is a view that the first calendar quarter's Communications revenues could be above seasonal just on some catch-up demand and product cycle releases into Android. So can you talk a little bit about what you see as you look a little bit further out into the first quarter? And any color on gives and takes across the other segments for the first quarter would be helpful as well.

Stephen Chang, President

Sure. Great talking to you. Definitely, we are seeing that our customers in many of our segments are still facing shortages, and not only of power components, but other system components are necessary to produce their end systems. Specifically for smartphones, we did see softness in the China market for Android phones, which is strictly tied to lack of supply and lack of gaining the ability to get certain components. It's not due to laptop demand. It's possible that this demand will extend further than the typical season, just similar to last year, how we observed that the smartphone season kind of got prolonged due to some delays in the launches. But it's also tied to supply as well. So that is quite possible for us. More agreeably, yes, we do see, especially in the China market, a little bit of a slowdown, mainly due to the more challenging difficulty in procuring other components.

Craig Ellis, Analyst

Got it. And it sounds like from the commentary that for the most part, the company is still meaningfully on allocation, Stephen, and is just navigating the demand environment with its capacity to best serve the highest areas and highest margin opportunities. But if you look at the order book and the backlog that you have, do you think that allocation position is likely to persist through the fourth quarter and into next year? Or do you see that capacity for whatever reason or order activity being able to bring you back into equilibrium?

Stephen Chang, President

I believe that allocation will continue for a few more quarters. Currently, we are in a peak season typical of a regular year, driven by smartphone and PC demand among other factors. Normally, we would expect some seasonality heading into December and March. While some of that demand may decrease slightly, our customers are experiencing backlogs in their orders, so we anticipate that allocation will persist. When we engage with our customers, they often express that they cannot meet the demand they have, which they consider to be sustainable. Therefore, I expect that for at least the next few quarters, we will remain in some form of allocation in the midterm.

Operator, Operator

We anticipate that the backlog will gradually ease, but since our customers are still experiencing delays in fulfilling their orders, we expect that allocation will continue. When we engage with our customers, they frequently express that they are struggling to meet demand. They are unable to satisfy the demand they have, which they believe is sustainable. Therefore, I expect that for the next few quarters, we will likely remain in some form of allocation, at least in the medium-term outlook.

David Williams, Analyst

I also wanted to congratulate you on the milestone of EPS over $1, but another one about nearly $1 billion in market cap, I think, when the market opened. So congratulations on all fronts there.

Mike Chang, CEO

Thank you.

Stephen Chang, President

Thanks, David.

David Williams, Analyst

You guys are doing a good job executing, driving the gross margin and you've been on allocation for some time, they need help there. But I guess as you think about your longer-term plans and your capacity additions, do you feel like you're building to demand that you have? Or do you think you're still going to be short on your capacity front? And just kind of thinking about what other opportunities are there available to you outside of what maybe we've discussed already in terms of capacity, especially given the newfound growth that you've experienced this year?

Stephen Chang, President

Yes. We've talked about this in the past. Our capacity expansion going forward is a three-pronged approach. We talked about in the last quarter that we are investing in-house in our 8-inch Oregon fab to grow capacity there, and that will be coming on through the latter half of next year. We're also continuing to work with our joint venture to continue to grow with them, but we're also, at the same time, working with foundry partners to bring in additional capacity as well. So we plan to have a more balanced approach, and we believe that our demand is quite strong, and we do need to establish more sources of supply in order to keep up with that business.

David Williams, Analyst

Okay. Very good. And maybe anything around the JV in the second phase? You said you're currently planning that. Has there been any updates there? And what could we expect in terms of that second phase of JV in terms of the growth planning efforts? What are you thinking about that?

Stephen Chang, President

Sure. The JV Company is well into the process of determining how it will implement its next phase of growth and expansion. The process takes some time, and I mean, like the last time, it took 2 or 3 years to establish a joint venture agreement. I don’t believe this time it will take as long, but they need to be some patience. Good things come to those who wait, right? So we will disclose more when it comes.

David Williams, Analyst

Okay. Perfect. And then maybe just kind of on the geographies. Is there anything specific, maybe in China, just kind of given your manufacturing footprint there and the breadth of your product exposure, are you seeing the softer consumer trends? And have you been impacted by maybe some of the COVID infections that seem to be spreading or maybe even the power issues or raw materials? Anything from a geographic standpoint in China that you're seeing?

Stephen Chang, President

Well, right now, I can't provide further clarity on that.

Yifan Liang, CFO

Go ahead.

Stephen Chang, President

So far, on our factories in Shanghai and joint ventures in Chongqing, we have not encountered any supply issues there. So far, we have not seen some supply issues there, but negating power outage continues. It may start impacting us soon. That's why we are increasing some headroom; for example, in the September quarter, we intentionally built up some raw materials and spare parts and increased some inventory on hand, just in case.

Operator, Operator

So far, on our factories in Shanghai and joint ventures in Chongqing, we have not encountered any supply issues. However, the ongoing power outages may start to affect us soon. That’s why we are increasing some headroom; for example, in the September quarter, we intentionally built up some raw materials and spare parts and increased our inventory on hand, just in case.

Jeremy Kwan, Analyst

Let me add my congratulations to the team on very strong execution. Just a question first, I guess, in terms of your growth experience in the recent quarters. How much of that is share gains versus new socket? It seems like everyone is going to retain the portfolios, and sometimes competitors are exiting certain product lines. Is this something that you're seeing as you have insight into?

Stephen Chang, President

For us, I'm trying to... It's a little bit hard to hear the question, but I think you're asking if it is a share gain or is it new sockets? Is that the gist of it?

Jeremy Kwan, Analyst

Yes, that's right.

Stephen Chang, President

Definitely, I think part of our growth and surge in revenue this year was because we were very well positioned in our core markets. Our biggest markets are still PC, smartphone, and home appliances, and these have grown because of the design wins that we have secured. So some of it is our existing business and gaining more share, and they are choosing to allocate more to a more strategic business. Also, there are new designs that are ramping up even further. The home appliances are a great example of this. With our IGBT, our module solutions, these were designed in about 1.5 years ago into a big customer in Korea. It takes time for them to roll out from one project to other projects. Part of the growth we see for applications in the home appliance area is because of our existing solutions in new applications within that customer. Right now, in this shortage time, it is actually a great time for us to not only grow existing business but also to design new sockets where we want to be because our customers are very much seeing supply issues. So they are very receptive to getting new parts designed in.

Jeremy Kwan, Analyst

That's very helpful. I have another question about the Oregon fab. With the joint venture running at full capacity and achieving a $150 million annual revenue run rate, the expansion at your Oregon facility won't be operational until December next year. Do you anticipate any challenges in maintaining growth from now until December 2022, or will there be obstacles that you could encounter while waiting for the Oregon fab expansion to begin? Can you provide some clarity on this situation?

Stephen Chang, President

Sure. We do plan to continue growing, and we are currently on allocation. However, there is a lot we can do within this allocation. We are working on ways to improve efficiency and increase output from our supply sources. As mentioned earlier, we are focusing on expanding our supply capacity, particularly in Oregon, but also in the other two areas. During this period of shortage, we have been streamlining and optimizing our product mix, achieving success in newer segments such as graphics cards and gaming consoles. We are emphasizing higher-value products, including Power ICs, module solutions, and our high-end MOSFET solutions. With the right product mix, improved allocation, and a focus on strategic accounts, we believe we can still achieve some growth in the upcoming quarters.

Mike Chang, CEO

This is Mike Chang. Can I add to the Q&A?

Jeremy Kwan, Analyst

Yes, please.

Mike Chang, CEO

AOS, from the very beginning, pays a lot of attention to how to create a strong partnership with our customers, and we care very much about the loyalty, trust, and credibility. In this shortage period since last year, many of our customers recognize the value of our sincere sales efforts. You can see from the deposit statistics, symbolic of their attitude. They are right now asking to work with AOS for a long time, multiple years of collaboration. This further secures our business growth. This is something I'd like to share with our investors. Thank you, Jeremy.

Jeremy Kwan, Analyst

You have done an excellent job attracting those top-tier customers who are leaders in your industry. This certainly validates your execution and strategy. Regarding the third aspect you mentioned, Stephen, could you provide more details on the foundry? Is this specifically for your Power IC business, or are you also considering MOSFET if that becomes a limitation?

Stephen Chang, President

We're observing strong growth across all our product lines. It's essential for us to plan for the future to support this growth, so we are focusing on several initiatives for both MOSFET and IC.

Jeremy Kwan, Analyst

And so will there be any impact in terms of the gross margin dynamics there? Because we're hearing foundry prices are going up everywhere and especially for the lagging generation type nodes. And presumably, they're pretty tight in terms of capacity as well. Can you give us some insight into what your thoughts are on that going forward?

Stephen Chang, President

I believe that as we expand, we have to account for profit margins. However, this tends to balance out since we are working with various products, including IC and MOSFET products. I don’t think there will be a significant difference between in-house production and external sourcing. It's important to note that our in-house supply costs are rising as well. Foundries are increasing their prices due to higher raw material costs, and we are experiencing similar increases. We strive to keep our pricing at a reasonable level. However, I do think that as we secure more supply, it will positively impact our bottom line.

Mike Chang, CEO

Those big foundries, they are also extremely professional and mature. They also like to have long-term partnerships. They will reflect their increase in raw material and other costs, but I would say we thank very much to all of them. They are fairly reasonable. That's why we can maintain our price at a reasonable level. Thank you, Jeremy.

Jeremy Kwan, Analyst

If I could ask one more question, could you provide some insight into the overall situation? You have the joint venture with the shell built out that has been waiting on Phase 2 for a couple of quarters. Why not accelerate that project before starting the Oregon factory? Are there specific products that are better suited for the Oregon facility? It seems like the China joint venture is likely to reach its maximum capacity for a while until financing is secured. Could you also discuss the financing discussions taking place? It appears there's a gap between when the joint venture reaches its limits and when you may need to utilize additional capacity.

Yifan Liang, CFO

Jeremy, as Stephen just emphasized, we've taken a three-pronged approach, and the different locations and the different fabs are producing different products. For our Oregon fab, we saw the needs, and we need to expand; then we invest there. The JV company is in the process of doing their financing for further expansion. We are working at all fronts to support our continued growth.

Jeremy Kwan, Analyst

That's very fair. And Yifan, just one last question on the joint venture since I have you here. With the negative cash flow in the quarter, I understood that it would be free cash flow neutral at full utilization. We have negative operating cash flow, plus the $8 million in capital expenditures. Can you clarify if this is a one-time timing issue, or are there other dynamics affecting the joint venture, like rising energy prices? This would help us understand the situation better.

Yifan Liang, CFO

Sure. Our target originally for Phase 1 was to gather the 12-inch wafer costs on a per day basis on par with our 8-inch wafer costs. That was the target. In terms of free cash flow, this thing is impacted by the working capital changes, and the CapEx payments. From time to time, by and large, that's why they are in the process of doing the financing for further expansion.

Operator, Operator

We have a follow-up question from David Williams.

David Williams, Analyst

I have a follow-up question. I wanted to check if you have any updates on your automotive efforts and any insights on design activity or progress you've made there. Additionally, although we are still some time away, I'm curious about how the practice has been going so far.

Stephen Chang, President

We're still in the early phase for automotive. We released products a few quarters ago and are still introducing our automotive portfolio. Currently, there isn't any engagement, and I don't expect to have updates in the short term. As you know, the design cycles for automotive take three to four years or even longer from design to when the vehicle is produced. It will take time to achieve revenue, but we are definitely involved in this area. It's a significant part of the market that we previously overlooked, but we are beginning to address it now.

Operator, Operator

And we have a follow-up from Jeremy Kwan.

Jeremy Kwan, Analyst

Regarding the ramp-up for the Oregon fab expansion, is the initial revenue expected in the December quarter? Can you provide insight on the timeline for reaching the $70 million run rate?

Yifan Liang, CFO

From 0 to a $70 million run rate, that will take a couple of quarters. But in the December quarter, we expect the Oregon fab can start producing at a higher level.

Jeremy Kwan, Analyst

Got it. And then can you talk about any impact to gross margin as you ramp, looking at all the inputs and takes between equipment being more expensive and ramp-up costs? And also do you have any insight into where the shape of gross margins might look like as we move throughout the next year, looking at your own cost, looking at your foundry agreements and things like that?

Yifan Liang, CFO

Sure. When we expanded Oregon fab, I would say, at this point, you can assume it will have a neutral impact on our gross margin. When we get to the point, we will discuss more. In terms of gross margin for the near term or longer term, we saw our gross margin growth in the last few quarters. This mainly reflected a better product mix. We are selling more products with higher margins. We are optimizing product mix and customer mix. We do have some company-specific growth drivers. For example, you saw our Power IC product line grew over 50% year-over-year in the September quarter. Right now, Power IC product line accounts for almost 30% of our overall revenue. We believe that with product mix and upstream supply improvements, we can maintain mid-30% gross margin on a non-GAAP basis.

Operator, Operator

And I'm showing no further questions at this time. I would now like to turn the call back to management for any additional or closing comments.

Yifan Liang, CFO

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.

Mike Chang, CEO

Thank you.

Operator, Operator

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a great day.