Earnings Call Transcript - AOSL Q4 2022

Operator, Operator

Good morning and good afternoon, and thank you for attending today's Alpha and Omega Semiconductor Conference Call. My name is Austin, and I will be your moderator for today. I would now like to pass the conference over to our host Gary Dvorchak, Investor Relations representative of Alpha and Omega Semiconductor. Gary, you may proceed.

Gary Dvorchak, Investor Relations

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2022 fourth 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. 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: Mike will begin with strategic highlights. Then, Stephen will provide business updates in a detailed segment report. After that, Yifan will review the financial results and provide guidance for the September quarter. Finally, we'll have a question-and-answer session. The earnings release was distributed over wire services today, August 10, 2022, after the market closed. 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'll 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

Thank you, Gary. I would like to welcome everyone to today's call. It is good to be speaking with all of you again. Our fiscal Q4 was another strong quarter despite the challenges posed by the COVID lockdown in Shanghai. Once again, we outperformed our guidance report. Revenue was $194 million, growing 9% year-over-year. Non-GAAP gross margin was 33.8%, and non-GAAP EPS was $0.95. I'm very proud of our people's ability and determination; they executed this quarter despite the uncertainty and challenges. As you may remember, in early April, our Shanghai packaging and testing facilities were forced to shut down due to a wide COVID lockdown. Our ability to assemble and ship products was severely limited from those days in April. While the lockdown eased and we were able to restart operations at the end of April, it took time for our assembly lines to return to full utilization. It also took time for logistics support and the supply chain to ramp up to full functional capacity. Our Shanghai facilities are mostly back to normal and are currently operating at full capacity. We are taking careful steps to reduce the risk of new COVID disruptions in compliance with local guidelines. I am most proud of and grateful for the great collaboration and unwavering dedication that our people, especially our Shanghai team, demonstrated during this challenging time. All employees worked as one team, relentlessly pressing on our mission and values, which is to help our customers succeed. I want to thank all employees once again for their selfless devotion, loyalty, and support. Looking into the rest of 2022, we are seeing inventory corrections occurring in certain consumer markets. While we are not immune to current global market conditions, as of today, our demand and backlog are still higher than our overall capacity. Whether we are in an upcycle or downcycle, we always focus on the basics and strengthening the foundation to speed up future growth. I founded AOS in September 2000, just as the Internet bubble crashed and led to a recession. This happened to be the best timing for a startup. Over our 22 years of history, the AOS team has navigated through many semiconductor cycles, surviving and thriving, even when we were far less knowledgeable than we are now. Today, we are stronger than ever in terms of our leading technology, a more diversified product portfolio, a Tier 1 customer base in all our business segments, extended manufacturing capability and supply chain, a strong balance sheet, and a dedicated and experienced management team. We are confident that we can navigate the current economic environment. More importantly, we are confident that near-term cyclical fluctuations will not overshadow substantial long-term opportunities for our business. The electrification of everything is just getting started, and our power products sit at the forefront of that trend. I believe our strategic position within our sector is resilient, and our customer service and market share with Tier 1 customers is the highest it has ever been. We are confident we can keep our $1 billion annual revenue target for the next quarter of years and are actively investing to position ourselves to achieve even more. Thank you. I will now 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 color on our segment results. As a reminder, in the June quarter, demand for our products was higher than our total capacity. The modest slowdown in our growth was caused by the very limited operations at our Shanghai packaging and assembly facilities due to the government post-COVID lockdown in the month of April. However, we still delivered solid results, which highlights our strong execution and the benefits of our diversified manufacturing capacity. In the September quarter, as Mike mentioned, we are seeing some softness in consumer end markets due to inventory corrections. However, as of now, our backlog remains higher than our capacity, so our customers remain on allocation. Moreover, we believe a few aspects of our business make us more resilient in this type of environment, which we are highly proud of. First, since we own the majority of our own manufacturing, we are able to quickly shift wafer capacity to other parts of the business where demand remains strong and, therefore, are at lower risk of costly inventory buildups that may result in write-offs or sales at discounted prices. Second, another trend that is worth mentioning is that most of our Tier 1 customers have remained resilient thus far. This benefits us as our share at our Tier 1 customers is the highest level ever in our history. Third, AOS has been upgrading our products to address higher performance sockets with differentiated solutions. These are the types of products that remain on allocation now. For the coming September quarter, with our Shanghai facility back in full operation, we expect high single-digit sequential growth. We expect September quarter revenue to be at $210 million at the midpoint. Now, let me drill down into each of our business segments. Unless otherwise noted, the following figures refer to the June quarter of 2022. Starting with computing, revenue was up 15.6% year-over-year, down 0.5% sequentially, and represented 46% of total revenue. The year-over-year growth was driven by the continued strong demand in notebooks, particularly from OEM customers that have a higher concentration of their businesses serving commercial laptop applications. In addition, high-end PCs and gaming desktops were also strong. The sequential decline was mainly due to the shutdown of our facilities in Shanghai. Looking ahead in the September quarter, we expect computing to be flat to slightly down sequentially as our customers rebalance their inventories for a weaker end market. Our total revenue won't be affected, however, as we are able to quickly shift wafer capacity to other parts of the business. Turning to the consumer segment, revenue declined 1.7% year-over-year and 15.9% sequentially, and represented 90% of total revenue. Nearly all of the revenue decline was attributable to the Shanghai lockdown, as the largest end market applications in this segment, such as home appliances and gaming, are sourced fully from our Shanghai factory. Looking ahead, we expect the consumer segment to recover double digits sequentially, driven by strong demand in gaming and catch-up shipments. We are expecting record gaming volumes, particularly from the number one gaming console manufacturer, where we have leading share. Home appliances are also expected to recover sequentially on catch-up shipments, but in general, it is softer as overall demand has weakened, driven by inflation and slowdowns in real estate and consumer spending. Next, let's discuss the communication segment, which was up 32% year-over-year and 2.9% sequentially and represented 15% of total revenue. This segment delivered strong year-over-year growth due to share gains at major Chinese smartphone OEMs, particularly in their premium tier models, which are still in shortage. These share gains more than offset an overall softening of the smartphone market in the quarter, due to our ability to serve the high-end market with our high-performance battery protection products, as well as strong partnerships with our customers. In the September quarter, we expect mid-single-digit revenue growth as we prepare for our launch from one of our major smartphone OEMs. We maintain high share in high-end models in all three of our markets: the U.S., Korea, and China. Now let's talk about our last segment, power supply and industrial, which accounted for 18% of total revenue. This segment was down 1.1% year-over-year and 4.8% sequentially. The decline was mainly due to our intentional decision to deprioritize shipping quick charger parts to our distributors. With the slowing smartphone market, we want to manage channel inventory levels. Shipments for solar applications and power tools remained steady. For the September quarter, we anticipate this segment to grow low double digits sequentially, mostly from share gains in quick chargers at a major phone maker and growth in power tools. In closing, we are aware of the growing uncertainty in the macroeconomic environment. However, we still expect to grow as we focus on our long-term plan. We continue to execute our product and technology roadmaps, enhance our diversified manufacturing stability, and deepen strategic customer relationships, which should result in share gains and expansion. Our $210 million September revenue guidance puts us well over an $800 million annual revenue run rate. We remain confident in our target of $1 billion of annual revenue in 2024. With that, I will now turn the call over to Yifan for a discussion of our fiscal fourth quarter financial results and our outlook for the next quarter. Yifan?

Yifan Liang, CFO

Thank you, Stephen. Good afternoon, everyone, and thank you for joining us. Revenue for the quarter was $194 million, up 9.4% year-over-year and down 4.6% sequentially. Given the COVID restrictions in Shanghai, we're pleased that we achieved better than our guidance midpoint. Please recall that the March quarter was a record-setting quarter, and we expect another record quarter in September. In terms of product mix, DMOS revenue was $138.9 million, up 9.2% year-over-year and down 1.2% sequentially. Power IC revenue was $53.1 million, up 14.2% from a year ago and down 12% from the prior quarter. Assembly service revenue was $2 million as compared to $2.2 million last quarter and $3.6 million for the same quarter last year. Non-GAAP gross margin was 33.8%, compared to 34.9% a year ago and 36.7% in the prior quarter. Again, the decrease in non-GAAP gross margin was primarily impacted by the production shutdown at our Shanghai assembly and test facilities in April. Non-GAAP operating expenses were $36.7 million, compared to $34 million for the prior quarter and $32.8 million last year. The quarter-over-quarter increase in non-GAAP operating expenses was largely due to higher R&D engineering expenses and the addition of headcount. We continue to invest in R&D to fuel our future growth. In some non-GAAP quarterly EPS was $0.95 per share, compared to $1.34 for the last quarter and $0.95 a year ago. On a fiscal year basis, revenue for the year 2022 was $777.6 million, up 18.4% year-over-year. Non-GAAP gross margin was 35.6%, representing a year-over-year improvement of 370 basis points. Non-GAAP operating expenses were $139.3 million, up 12.5% from last year. Non-GAAP EPS for the year was $4.56, as compared to last year's $2.93, an increase of 56%. Moving on to cash flow. GAAP operating cash flow was $25.7 million, which included $3.4 million of net customer deposits. By comparison, operating cash flow in the prior quarter was $61.8 million, which included $6.4 million of net customer deposits. Operating cash flow on a standalone basis a year ago was $32.6 million, which included $10 million of customer deposits. Consolidated EBITDAS was $36.9 million compared to $48.4 million last quarter and $40.9 million a year ago. For the fiscal year, cash flow from operations was $203.4 million as compared to $114.3 million for the prior year. Consolidated EBITDAS was $177.2 million as compared to $136.4 million a year ago. Let's move on to the balance sheet. We completed the June quarter with a cash balance of $314.4 million, compared to $323.1 million at the end of the March quarter. The cash balance a year ago was $164.9 million, excluding $37.5 million at the JV Company. The bank borrowing balance at the end of June was $63 million, compared to $65.2 million a quarter ago. Net trade receivables were $65.7 million at the end of the June quarter as compared to $39.2 million at the end of the prior quarter and $35.8 million for the same quarter last year. The quarter-over-quarter increase was due to the annual shipments toward the second half of the quarter as a result of the shutdown of our Shanghai assembly and test facilities in April. Days sales outstanding for the June quarter were 26 days, compared to 28 days in the prior quarter. Net inventory was $158 million at quarter end, up from $143.5 million last quarter and up from $154.3 million in the prior year. The quarter-over-quarter increase was primarily due to an increase in wafer inventory as a result of lower wafer consumption at our Shanghai assembly and test facilities because of the COVID shutdown. Average days in inventory were 104 days, compared to 94 days in the prior quarter. Finally, property, plant, and equipment was $318.7 million, up from $245.8 million last quarter. The fixed assets balance a year ago was $174.5 million, excluding $262.5 million at the JV Company. An update on our Oregon fab expansion project, the clean room expansion has been completed, and a good portion of the equipment was installed. However, our equipment installation contractors have experienced a shortage of skilled labor and certain materials. Therefore, we expect the product to be delayed by a quarter. We currently anticipate additional capacity to come online in the March quarter of 2023. Now, I would like to discuss the September quarter guidance. We expect revenue to be approximately $210 million plus or minus $3 million. GAAP gross margin to be 33.8% plus or minus 1%. We anticipate non-GAAP gross margin to be 35% plus or minus 1%. Non-GAAP gross margin guidance excludes $0.8 million amortization of acquired IP and $1.8 million of estimated share-based compensation charges. GAAP operating expenses to be in the range of $45.7 million plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $36.5 million plus or minus $1 million. Non-GAAP operating expenses exclude $9 million of estimated share-based compensation charges and $0.2 million of estimated legal expenses relating to the governmental investigation. Interest expense to be approximately $1.2 million and income tax expense to be in the range of $1.2 million to $1.4 million. With that, we'll now open the call for questions. Operator, please start a Q&A session.

Operator, Operator

Our first question is with David Williams from Benchmark.

David Williams, Analyst

Congratulations on the execution and the resiliency of the business. Obviously, some great success here, and it's great to see. So, congratulations there. On the backdrop, it seems to have deteriorated more than I think we had expected since the prior quarter, particularly in areas where you have a lot of exposure. Stephen, you talked about this in the prepared remarks a little bit, but maybe if you could give us some color around the flexibility to pivot, if there was anything unusual given the assembly and test issues, and maybe speak to the fungibility of your portfolio overall?

Stephen Chang, President

Sure. For us, yes, we're starting to see some softness in some of the end markets that we address. Many of our end markets are consumer-facing, and we're seeing some pressure just due to the current macroeconomic backdrop. However, when you look into each of the businesses that we're in, the story is not necessarily the case across the board in that we address multiple sockets within many of our applications. Depending on the socket, the higher performance applications and higher performance sockets are generally faring better than the lower end. We talked about in computing that we are more focused on commercial applications as opposed to consumer. In general, the drop has been more in the lower to mid-end models, especially on the consumer side, whereas the higher-end models and the commercial PCs have been generally doing better. Additionally, when you look at the BOM content of some of these applications, higher power performance sockets are still under allocation. It is still a hand-to-mouth situation, whereas the lower end is starting to see more pressure from local competition. So that trend can also be seen in other segments as well. As a whole, AOS still remains on allocation. Our backlog is stronger than our capacity right now. Internally, we are basically shifting our supply to support the areas that are more profitable and have stronger demand. We do have the ability because we have much of the supply chain under our own control to be able to shift those resources around to address the stronger portions of the market.

David Williams, Analyst

Great. Certainly helpful. And then maybe on the gross margin side, I know you had expected to recover most of the margin loss from the shutdown in Shanghai. But it looks like you gained about 120 basis points. Was this largely a component of just the mix of lower Power IC or higher Power IC and lower discrete and higher Power ICs? And then how do you think that trends over the next several quarters? Can we get back to the margin that we were previously?

Yifan Liang, CFO

Sure. Our September quarter's midpoint of the non-GAAP gross margin guidance is about 120 basis points, as you said, and higher than the June quarter's actual. This guidance reflects the current view of demand dynamics, the expected product mix, and also our factory productions, including the input cost increases. I mean, all those factors have been factored in. Of course, it's a range—35% plus or minus 1%. In terms of future quarters, it's hard to predict at this point. We only guide one quarter at a time. Market demand, the dynamics, and a lot of factors could change for the December quarter and onward. I would expect we can maintain the September quarter guidance range at least.

David Williams, Analyst

Okay. And then maybe just one last one for me, if I can. If you think about your outlook and just given the macro challenges, what do you think the risks are to the outlook? How much is booked into the outlook in terms of that demand? And then how much of the guidance is already booked? Where do you think there could be potential risks from an end-market perspective?

Yifan Liang, CFO

I mean, for the September guidance, I would say that most of the risk is on the production side, and our backlog is pretty much in place. The production side—yes, the China COVID risk is still there. Even though Shanghai city has already released restrictions, their policy towards zero tolerance on COVID is still in place. I think supply chain disruptions will always be a risk there.

Operator, Operator

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

Craig Ellis, Analyst

So nice work getting back up and running and a strong guide for the fiscal first quarter. A couple of things that stood out at least for me in the guide are the strength we're seeing in gaming consoles. I'm wondering if that's in part due to incremental content gain, and if so, how much? The other thing that stood out was that in the industrial and power supply, there's some quick charger share gain with the large smartphone OEM. I'm wondering if you can help us understand how material that is because it seems you might have a couple of tailwinds that at least from our end, we might have been underappreciating as we head into the back half of the year.

Stephen Chang, President

Sure. Craig, this is Stephen. So, addressing the first question about gaming. Gaming consoles, in general, are definitely a strong portion of the business. Historically, this customer, their consoles have been more immune to changes in the economy. We know that from the past year and a half, they've been underproducing and have had difficulty producing fast enough since their launch. They are resolving some of that now. Our growth in the September quarter partly comes from their growth in the second half, as well as share gain. BOM content increase, I don't think is playing a big factor right now, but it is definitely part of it. AOS is shifting more support to this particular customer. So, I would say both the end shipment growth and share gain are what's contributing to the significant step in the gaming console business for AOS. Regarding our quick chargers, this is more focused on the high-end quick chargers. In the quick charger market, we actually address two sets of customers; one is in China for the lower to mid-end. In that area, due to the decline in softness in the China smartphone market, we chose to back off support for that region. But for the major OEM, making higher-end quick chargers for their higher-end phones, this is an area we've been choosing to support more. It's a higher performance socket and a better business for us, and our customer is coming to us for more support. You can see the theme that the higher-end applications are generally faring better, and AOS is shifting our resources to support those applications.

Craig Ellis, Analyst

Got it. Moving on to a supply side issue, can you provide more color on what the specific issues are with the contractors that are working on the fab clean room completion? Given how close we are to the ramp, any update on expectations for the pace and magnitude of revenue ramp out of that facility?

Yifan Liang, CFO

Sure. We have to thank the booming fab construction in the U.S. Right now, there are many fabs under construction. People are competing for skilled and certified laborers. The fab equipment is large and complicated, requiring certain certified people to handle and install it. Our contractors have been experiencing some labor shortages and certain materials. Certain materials like tubes are very specialized for fab operations, and we are seeing shortages in those areas. Therefore, our current estimate is that there will probably be a delay of about a quarter. Previously, we estimated that in the December quarter, we can get it online, but now it's more likely in the March quarter range. Once it does come online, it will gradually ramp up. We would say it will probably take a quarter or two to ramp up to the anticipated expansion capacity.

Craig Ellis, Analyst

Got it. A follow-up question goes back to the environment we're seeing, where there are more visible signs of consumer weakness. The company has several levers to pull. Given what we're seeing with growing signs of inventory correction across the end markets you serve and the seasonal dynamics of the business, could you share thoughts about some of the challenges and opportunities as we look out to the fiscal second quarter?

Stephen Chang, President

Sure. For us, when we look outward to the December quarter and seasonally, the strength largely depends on the strength of the peak season from the previous quarter, the September quarter. We are carefully monitoring the adoption of new smartphones from our major OEM. That’s one of our significant customers. We have been supporting not only for their smartphones but also for other applications like tablets and quick chargers. We’re also monitoring what’s happening in the PC market in terms of how long the inventory correction will take place. While we still gravitate towards the higher end during the time of inventory correction for the lower to mid-end products, we focus on supporting the higher-end products.

Craig Ellis, Analyst

There was a significant gaming card launch that I believe was anticipated in the calendar third quarter and fiscal first quarter. Given the inventory correction, it seems like that would be one item that if it occurs at that time frame, it would sequentially benefit the business significantly. Or has much of the product for that cycle already been produced and shipped to that customer?

Stephen Chang, President

We are still shipping and producing for that particular customer. They are currently dealing with their own challenges balancing the inventory of existing graphics cards from their current platform. AOS is continuing to ship into that application, but at the same time, we’re also taking some of that product supply support to assist other stronger applications such as gaming consoles.

Operator, Operator

Our next question is with Jeremy Kwan from Stifel.

Jeremy Kwan, Analyst

Let me add my congrats on the strong execution here in the quarter. Stephen, you mentioned that your backlog is still higher than overall capacity. Would you mind giving us a bit more color in terms of the makeup of the backlog and maybe the quality of it? Is it cancelable? Are there different dynamics going on between the DMOS backlog versus the Power ICs?

Stephen Chang, President

I think for us, it reflects the change in the backlog. Yes, we see some inventory correction going on. But as I mentioned before, it differs depending on which products are involved. The higher-end products, the higher performance products are still hand-to-mouth, and the backlog is tight on those. However, on the lower to mid-end, we are seeing more competition coming from other suppliers, including local suppliers that are starting to get better access to foundries in the current market landscape. We welcome the backlog adjustments. It's a good time to clean up the backlog for a clearer picture of actual demand. Part of this is initiated by customers, but part of this is also initiated by us to get a clearer view of what to build.

Jeremy Kwan, Analyst

Great. That's very helpful. Can you give us insight into how order linearity is looking currently? I know last quarter there was likely a lot of catch-up in June, which probably helped drive DSOs up. Can you talk about how things are trending this quarter so far?

Stephen Chang, President

The main thing about the June quarter was we were affected by the lockdown, right? Once we were able to get back to full production, June was much heavier for us. Our operations team did an excellent job to bring things back online and get our products out the door. Last quarter was an abnormal quarter; shipments were more back-heavy. We expect the September quarter to be more linear and return to our normal shipping patterns.

Jeremy Kwan, Analyst

Could you give any color on the pricing trends? Some of your peers have talked about 8% year-over-year pricing increases and even a 2% sequential. Is this something you are seeing, and is there a differentiation between the higher end and lower end? Where do you see that trending next quarter?

Yifan Liang, CFO

Overall pricing environment is steady at this point. Yes, we selectively pass on some input cost increases to certain customers. But overall, it remains steady.

Jeremy Kwan, Analyst

Last quarter, you mentioned CapEx was $43.4 million, and you expected something similar for this quarter. Can you give us that number for this quarter? How do you see things trending, especially given the delays in installation?

Yifan Liang, CFO

Sure. June quarter's CapEx spending was roughly $34 million to $35 million. For the September quarter, we still expect a similar level in the $30 million to $40 million range. This is primarily for our Oregon fab expansion and back-end facility expansion as well.

Operator, Operator

Our next question is with David Duley from Steelhead Securities.

David Duley, Analyst

A couple of clarifications. You mentioned that your June quarter was back-weighted. I saw receivables were up at least $25 million to $26 million. I’m assuming since this next quarter is going to be linear, you’re going to have a strong cash flow from operations quarter as you unwind the receivables and perhaps the inventory. Could you just comment on how much you think cash flow might be from lowering the working capital needs?

Yifan Liang, CFO

For the June quarter, yes, our operating cash flow got impacted by this receivable balance. In June, the first half of the quarter, our production was suspended in Shanghai facilities. Now that’s back to normal production. For the September quarter, I would expect the receivable balance to come down a bit, which will also depend on our total revenue guidance growing compared to last quarter’s $194 million. So, we should be able to see some accounts receivable balance drop. In terms of inventory, the inventory increase in June was primarily due to wafer inventory increase because our Shanghai factory shutdown led to lower wafer consumption.

David Duley, Analyst

You mentioned a delay in bringing on new capacity in the Oregon fab by a quarter, but much of the equipment is already installed. I’m assuming because you can’t finish everything, you can delay hitting the depreciation button on all that equipment until the March or June quarter?

Yifan Liang, CFO

Yes, depreciation would start when production begins, so it's tied to the production timeline.

David Duley, Analyst

The Power IC business was down sequentially, more than the overall revenue. Could you comment on why? Would this business be expected to grow faster than overall revenue in the back half of the calendar year, given that it's higher margin and higher value-added?

Yifan Liang, CFO

The decrease in Power IC revenue in the June quarter was largely due to the Shanghai factory shutdown. Our Power IC products leverage more advanced packaging technologies, so those are primarily produced at our Shanghai facility. Due to the factory shutdown in April and partially in May, that limited Power IC revenue growth. We expect the September quarter Power IC revenue to grow faster than overall revenue.

Stephen Chang, President

In the bigger picture, yes, the growth of our Power IC business is tied to gaming consoles, PCs, and graphics too. Graphics might slow down a bit, but in regards to PC and gaming, there is still strength in these areas.

David Duley, Analyst

In prepared remarks, it was mentioned that your Tier 1 market share is the highest it has ever been. Can you frame that for us? Is it 20% of your revenue coming from Tier 1 accounts? I don’t need an exact number, but what does that mean?

Stephen Chang, President

Overall, the majority of our business is tied to Tier 1 accounts these days. That's been a significant change over the last three or four years, as we've focused on market leaders in every application we serve. Whether it’s in the PC market, home appliances, gaming market, or graphics cards, we've concentrated our efforts on designing end products and allocating our supply to these Tier 1 customers. It’s a reflection of that effort, and it's evident in our revenue and market share.

Operator, Operator

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

Craig Ellis, Analyst

I wanted to follow up on the point about customer deposits. The increase in the quarter was moderate at $3 million, compared to $10 million in the last two quarters. I’ve been surprised about the customer deposits in two quarters and 10% above expected capital costs of the expansion. Can you talk about what's been driving the increase rate? Is it possible that we would have continued customer deposit intake in the back half of the year, and if so, to what extent?

Yifan Liang, CFO

Yes, in the June quarter, we had about $3 million or $4 million in net customer deposits. Going forward, I wouldn't expect a significant number of new deposits. Those deposits are earmarked for delivery support to our customers. A lot of the Oregon fab expansion capacity is already allocated to those who placed deposits. While I wouldn’t expect many new deposits, certain customers still want to secure their supply, and we want to deepen our partnerships with our Tier 1 customers.

Craig Ellis, Analyst

Can you provide any color on where those deposits are coming in? The last time I asked a question, it was more about the PC customer base. Can you provide color on how many different customers have placed deposits? Is it still more PC-centric or has it broadened into other application areas?

Yifan Liang, CFO

Deposits are coming from pretty much all segments—customers in different industries. We see inquiries from PC, smartphones, power supply, home appliances, and a variety of customers.

Operator, Operator

Our final question will be with Jeremy Kwan from Stifel.

Jeremy Kwan, Analyst

A quick follow-up on the delay in the capacity expansion from December to March. Will that impact your ability to grow? Are you guys maxed out at this point? Or are there other levers you can pull to manage this delay?

Stephen Chang, President

We are working closely to resolve those challenges with labor and specialized equipment. We have great relationships with the local labor force, and they are cooperative in helping us close this gap. This is the last leg of our project—the major equipment is already installed, and now we’re trying to get all the associated tools up and installed as well. We are confident our team and our partnerships with local vendors will help us get this done. Yes, it will impact our expansion, and we were hoping to get benefits by the end of this calendar year. However, this will not stop our overall direction; we still plan to grow next year even if the market changes.

Jeremy Kwan, Analyst

What gives you confidence that these issues will be resolved within that timeline?

Stephen Chang, President

Overall, we will start to see benefits coming from external foundries as well. This will help us grow in addition to our 8-inch fab expansion coming online.

Jeremy Kwan, Analyst

I see. Regarding the local competition in the low to mid-end range of your products, what classifies as low to mid-end? Are there distinguishing features other than pricing? What applications are being targeted first?

Stephen Chang, President

It's tied to lower performance sockets where it’s easier for competitors to copy. In our products, power density is crucial, and if you can deliver the same power in a smaller form factor, you have an advantage. In cases where space isn't an issue, some competitors can use inferior processes with bigger dies and compete with lower margin products. This occurs much more in the low end of the market with more standardized products. AOS has focused on differentiating with our products—both high-end discretes and MOSFETs, especially with our Power ICs. The trend is toward more integration, as reflected in our product portfolio. The more we differentiate, the more we can defend against challenges from local competitors.

Operator, Operator

This concludes our Q&A session. I will pass the call back to the management team for any closing remarks.

Mike Chang, CEO

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.

Yifan Liang, CFO

Thank you all.

Operator, Operator

Thank you for your participation. You may now disconnect your lines.