Earnings Call Transcript - AOSL Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to Alpha and Omega Semiconductor Fiscal Q1 2020 Earnings Conference Call. Please be advised that today's conference is being recorded. Thank you. I'll now turn the conference over to So-Yeon Jeong. You may begin.

So-Yeon Jeong, Investor Relations Representative

Thank you, good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2020 financial results. I'm So-Yeon Jeong, Investor Relations representative for the company. With me today are Dr. Mike Chang, our CEO; Yifan Liang, our CFO; and Stephen Chang, our Executive Vice President. This call is being recorded and broadcasted live over the web and can be accessed for seven days following the call via the link in the Investor Relations section of the website at www.aosmd.com. Yifan will begin with a review of financial results for the quarter. Then Mike will review the business highlights, followed by Stephen, who will provide a detailed segment report. After that, Yifan will conclude with guidance for the next quarter. Then we'll have the question-and-answer session. The earnings release was distributed today, November 4, 2019, after the close of market. The release is also posted on our 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 our earnings release. We remind you that during the course of 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 information provided in today's call. Now, I'll turn the call over to our CFO, Yifan, to provide an overview of the first fiscal quarter financial results. Yifan?

Yifan Liang, CFO

Thank you, So-Yeon. Good afternoon, everyone, and thank you for joining us. Revenue for the September quarter was $117.8 million, up 5.3% compared to the prior quarter and up 2.4% from the same quarter last year. In terms of product mix, MOSFET revenue was $100.6 million, up 4.3% sequentially and up 9% year-over-year. Power IC revenue was $15.7 million, up 14.1% from the prior quarter and down 19% from a year ago. Assembly service revenue was $1.5 million as compared to $1.7 million for the prior quarter and $3.4 million for the same quarter last year. Regarding the segment mix, computing represented 39.2% of the total revenue; Consumer, 18.2%; power supply and industrial 23.2%; communications, 18.1%; and service, 1.3%. Non-GAAP gross margin for the September quarter was 28.3% as compared to 27.4% for the prior quarter and 29.7% for the same quarter last year. The quarter-over-quarter increase in non-GAAP gross margin was mainly driven by the improvement in operational efficiency and product mix, partially offset by price erosion. Non-GAAP gross margin excluded $0.4 million of share-based compensation charge for the September quarter as compared to $0.4 million for the prior quarter and $0.5 million for the same quarter last year. Non-GAAP gross margin also excluded $6 million of production ramp-up costs related to the Chongqing Joint Venture for the September quarter as compared to $2.6 million for the prior quarter and $1.1 million for the same quarter last year. As the JV company's 12-inch fabs started production in July 2019, all fab-related costs were moved from G&A to cost of goods sold for the September quarter. Non-GAAP operating expenses for the September quarter were $25.6 million compared to $22.6 million for the prior quarter and $24.5 million for the same quarter last year. The quarter-over-quarter increase in non-GAAP operating expenses was primarily due to the increase in R&D engineering expenses and our annual merit increase started in the new fiscal year. Non-GAAP operating expenses excluded $1.9 million of share-based compensation charge as compared to $2.1 million for the prior quarter and $2.6 million for the same quarter last year. Both GAAP and non-GAAP operating expenses included $2.8 million of digital power controller team expenses for the quarter as compared to $2.3 million for the prior quarter and $2.7 million for the same quarter last year. Our digital power controller team continues to engage with customers in product designs and is making steady progress toward our product roadmap. Income tax expense for the quarter was $0.4 million as compared to income tax benefits of $0.6 million for the prior quarter and income tax expense of $0.6 million for the same quarter last year. Non-GAAP EPS attributable to AOS for the quarter was $0.26 per share as compared to $0.35 for the prior quarter and $0.36 for the same quarter last year. Historically, AOS has been generating positive operating cash flow. However, in the September quarter, net cash used in operating activities by AOS was $4.2 million. This was largely impacted by two items totaling $15.1 million. First, $9.2 million one-day delay of receivable payment from one of our major distributors due to the bank shutdown on September 30, 2019, because of Typhoon Mitag in Taiwan. Second, $5.9 million net intercompany receivable impact from the JV company. For the prior quarter, AOS generated $15.2 million operating cash flow and $18.4 million for the September quarter last year. The JV company generated $1.6 million operating cash flow in the September quarter compared to $6.9 million used in operating activities for the prior quarter and $0.4 million for the same quarter last year. The $1.6 million operating cash flow was largely attributable to the $5.9 million intercompany payable to AOS and a $2.7 million interest refund received from the local government under the joint venture agreement. This refund program will continue for the next two years at the same amount each year. Consolidated EBITDAS for the September quarter was $14.3 million compared to $14.2 million for the prior quarter and $15.4 million for the same quarter last year. EBITDAS attributable to AOS for the quarter was $13.8 million as compared to $15.1 million for the prior quarter and $16.7 million for the same quarter last year. Now let's look at the balance sheet. We completed the September quarter with cash and cash equivalents of $103.1 million, including $88 million at AOS and $15.1 million at the joint venture. This compares to $121.9 million at the end of the last quarter, which included $100.7 million at AOS and $21.2 million at the JV company. Our cash balance a year ago was $113.2 million, including $81.2 million at AOS and $32 million at the JV company. Bank borrowing balance at the end of the September quarter was $136.4 million, including $41 million at AOS and $95.4 million at the JV company. In the September quarter, AOS borrowed $2 million from a new line and paid back $2.1 million of the existing loans. The JV company borrowed $0.8 million from a new working capital line and paid back $1.7 million of the existing loans. Net trade receivables were $39.3 million as compared to $24.3 million at the end of the last quarter and $37.1 million for the same quarter last year. Day sales outstanding for the quarter was 25 days compared to 24 days in the prior quarter. Net inventory was $118.6 million at the quarter-end, up from $111.6 million last quarter and from $98 million in the prior year. Average days in inventory came down to 114 days for the quarter as compared to 117 days in the prior quarter. Net property, plant and equipment was $400.3 million as compared to $409.7 million last quarter and $368.5 million last year. Capital expenditures were $14.4 million for the quarter, including $8.3 million at AOS and $6.1 million at the JV company. Before I turn the call over to Mike, I would like to share the progress at our JV company. During the September quarter, assembly and test production continued to ramp up and the 12-inch fab started small mass production in July 2019. We expect to continue to ramp up Phase 1 of the 12-inch fab in accordance with our plan to approach the target run rate by the September quarter of calendar year 2020.

Mike Chang, CEO

Thank you, Yifan. Good afternoon. We are pleased with our performance and financial results in the September quarter. AOS achieved a record quarterly revenue of $117.8 million, marking the 15th consecutive quarter of year-over-year revenue growth. The strong top line performance was driven in part by the additional supply contribution from the 12-inch fab at the JV company. Gross margin came in higher than the midpoint of our guidance, which was more than enough to offset the investment in R&D and delivered healthy earnings for the quarter. One of the major growth drivers for us is mobile applications, such as smartphones, battery protection, and quick chargers. I will take a few minutes to share with you the exciting progress we are seeing in this business. It always starts with strategy. As a relatively young company, we identify applications that give us a head start with our core technology as well as the volume to scale. Once we land, we expand our footprint with multidimensional initiatives, including share gain, content increase, and customer expansion to become a market leader. We then use this success as a springboard to leap to the next market and replicate the success. We have demonstrated our ability to execute this strategy in the computing market, where we grew from zero dollars to about $200 million in annual revenue. We plan to do the same in the mobile market, where the served available market opportunity is more than double that of the computing market. We have successfully landed at each of the seven largest smartphone OEMs worldwide as one of their key suppliers. Our mobile business combining battery protection and quick charger products is growing significantly. In the September quarter, we doubled mobile business revenue from the same quarter last year. Now that we are aligned with top-tier global brand OEMs and ODMs, we will continue to focus on expanding our presence to multiple generations of smartphone models and the peripheral devices. As a case in point, last year, we initially penetrated into a global brand OEM with a one-year model as a new supplier. This year, we won new models on top of last year's model and further penetrated into several adjacent sockets. We plan to grow our share by adding additional days of business year after year at multiple global OEMs and ODMs. The JV company is expected to play a vital role as a reliable and scalable supply chain for many years to come. In the meantime, to support the current demand for our mobile products for this year's models, we are diligently working to make room at the Oregon fab by transferring production of some of our products to the JV company. Typically, transfer activity takes approximately six to nine months depending upon the complexity of applications as well as the number of OEMs and ODMs involved. Generally speaking, transferring products for applications with short cycles such as PC is relatively faster with a simpler requalification process. We have already started the requalification process for some computing products and are making steady progress. Given that the market is less tight and the macro environment is uncertain, the requalification process is returning to a normalized pace rather than the accelerated pace we experienced last year. Nonetheless, we expect this transfer activity to still help us buck the seasonality with slight growth in the December quarter following the record-high September quarter. The products manufactured at the JV company are already in customers' hands for qualification, and design-in momentum for these products is building. We are confident in our ability to reach the Phase 1 target run rate by the September quarter next year, as we discussed on our last earnings call. In addition to the mobile business, we are also encouraged by healthy demand across our product lines. As the computing industry expands to include artificial intelligence, big data, and the Internet of Things, our customers increasingly value our highly efficient and high-performance products, especially for the Vcore and system power. Our IGBT solutions also continue to establish a strong footing at a broad base of home appliance customers. We also see solid demand for our products for AC/DC power supplies. Notably, the Oregon fab has been running at full capacity and some products built there are still on allocation. Despite macro headwinds and growing market uncertainty, we are generating positive results by executing our prudent business strategy. Our diversified products are well positioned with strategic players in multiple key market segments. We are committed to even better serving those customers through increasingly sophisticated total solutions and a reliable supply chain. We are encouraged by the tremendous growth opportunities ahead of us, which give us confidence in achieving our calendar year 2021 target of $600 million of annual revenue. With this solid start in the first quarter, we will continue to execute on our growth strategy and build strong momentum in our business in fiscal year 2020 and onward. Now I will turn the call over to Stephen for a detailed segment report. Stephen?

Stephen Chang, Executive Vice President

Thank you, Mike, and good afternoon. Let me start with computing. It represented 39.2% of our total revenue in the September quarter. Revenue was down 6.1% sequentially and down 8.3% year-over-year. As planned, we served our computing customers in the peak season utilizing channel inventories on hand. Computing sell-through grew by double digits sequentially to reach a record high. Our Vcore business is strong, and we see some early adopters of the system power products built at the Chongqing JV. While the CPU supply constraint is easing, it is expected to remain challenging in the December quarter. Based on that, we are estimating conservatively a modest increase for the December quarter. Now let's discuss the Consumer segment, which represented 18.2% of total revenue in the September quarter. Revenue increased 2.5% sequentially and was up 0.6% year-over-year. The sequential growth was driven mainly by IGBT products in home appliances in China and Korea. We continue to grow our business in refrigerators and air conditioning systems as our IGBT products provide our customers with the performance and reliability demanded by these applications. We are on track to achieve another 40% growth with our IGBT product line this calendar year, the second year in a row at that level. Going into the low season, although home appliances will grow slightly, it is not expected to be sufficient to offset a seasonal decline in TVs. We expect a double-digit decline in the Consumer segment for the December quarter. Now let's turn to the power supply and industrial segment. This segment accounted for 23.2% of total revenue, up 19.1% sequentially and up 25.4% year-over-year. Our quick charger momentum accelerated during the September quarter. We again achieved double-digit growth from the strong June quarter because of our strategic position at global smartphone OEMs in their peak season. We also saw a rebound in our AC-DC power supply business during the September quarter. Looking into the December quarter, the quick charger business was slow as we exit the smartphone season. However, we expect to maintain overall segment revenue at the September quarter level due to growth from other applications. Finally, let's discuss the communications segment, which was 18.1% of revenue in the quarter, up 24.6% sequentially and up 19.2% year-over-year. Rising demand for our battery protection products resulted in substantial growth in this segment in the peak smartphone season. Our products are based on our leading low voltage MOSFET technology, which enables higher efficiency and cooler operation during battery charging and discharging. We saw some softness in the 5G telecom business during the September quarter amid trade tensions. Looking to the December quarter, we expect the battery protection business to decline slightly. This will be offset by some recovery of our 5G telecom business. Therefore, we expect to maintain this segment's revenue in the December quarter. With that, I will turn the call over to Yifan for the guidance.

Yifan Liang, CFO

As we look forward to the second quarter of fiscal year 2020, we expect revenue to be between $117 million and $121 million, GAAP gross margin to be 22.3% plus or minus 1%. Non-GAAP gross margin is expected to be 27.3% plus or minus 1%. Note that non-GAAP gross margin excludes $0.4 million of estimated share-based compensation and $5.8 million of estimated production ramp-up costs relating to the JV company. GAAP operating expenses are expected to be in the range of $27.4 million plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $25.4 million plus or minus $1 million. Both GAAP and non-GAAP operating expenses include $3.1 million to $3.3 million of estimated expenses relating to the development of our digital power controller business. Non-GAAP operating expenses exclude an estimated share-based compensation charge of approximately $2 million. Tax expense is expected to be approximately $0.5 million or $0.7 million. Loss attributable to non-controlling interest is expected to be around $3.6 million. On a non-GAAP basis, excluding estimated production ramp-up costs relating to the JV company, this item is expected to be approximately $0.9 million. As part of our normal practice, we're not assuming any obligations to update this information. With that, we'll open up the floor to four questions.

Operator, Operator

And our first question comes from David Williams with Loop Capital.

David Williams, Analyst

Congratulations on the quarter and the progress being made. From a design win perspective, I'm trying to gauge customer interest. What are you seeing in terms of design activity and projects starting up? Are there any delays or perhaps some acceleration? In the past, you mentioned delays and the postponement of certain projects. Are you still experiencing that, or are customers showing more willingness to initiate these projects?

Stephen Chang, Executive Vice President

Sure. This is Stephen. Good question. So our design win is very healthy. Right now, it's following normal seasonal patterns. And several of our peak segments are computing and smartphone related, and those tend to peak in the Q3 timeframe. So our design wins are going well in terms of tracking into those new projects going into next year. So we are happy with the progress that we see there.

David Williams, Analyst

Great. Secondly, regarding the demand trend and what you're observing with channel or distributor inventory, are you noticing that inventory levels have decreased? Are they at a lean stage, or are they still somewhat high? What are your expectations for a potential replenishment of the supply chain?

Yifan Liang, CFO

Sure, David. This is Yifan. Right now, our channel inventory remains at a healthy level. Right now, it is at the low end of our target range of two to three months. So right now, we don't see much channel inventory stuffing at this point.

David Williams, Analyst

Okay. Do you expect to see some replenishment? Are you at levels that you would expect to see some pull-in from that as we head into December and maybe the first calendar quarter?

Yifan Liang, CFO

Well, as we stated in our prepared remarks, in different sectors, we may see a little bit different scenarios there. Overall, we see our production is catching up so that it can allow us to buck the seasonality. I mean, that's the overall picture over there. So in terms of segment, in the computing area, we would be expecting some strong segment sell-in over there.

David Williams, Analyst

Okay, great. Could you elaborate on the design wins and the additional sockets you are securing, as well as the share gains you are experiencing with some of the major OEMs? What are your expectations in this area? We have discussed some peripheral sockets before, but how are you progressing with the next generation? Do you believe you will gain market share? What opportunities do you have to transition into a primary or secondary supplier position with those handset OEMs where you currently serve in a third-source capacity?

Stephen Chang, Executive Vice President

Sure. I'll take that question. So in our smartphone business, there are two main applications we get into. One is the battery protection and the second is the quick charger, which is sold in the box with many of these handsets. So right now, our position is growing stronger. We are, as Mike mentioned, in each of the seven leading smartphone makers. And some of these are relatively newer. Some have been longer-term customers of AOS. So we'll continue to layer on top of our business with additional models continuing to roll out. The same thing goes also with our quick charger business.

David Williams, Analyst

Okay, great. And then one last question from me, if you don’t mind. I’m considering the margin profile as the new joint venture comes online. I recognize that the benefits and cost savings from the 12-inch fabrication process will take time to fully materialize due to yield efficiencies and other factors. However, considering the significant revenue potential, what do you anticipate the additional margin contribution will be once that fabrication facility is operating at full capacity?

Mike Chang, CEO

Sure, David. Right now, we expect and we can ramp up to the targeted run rate of Phase 1 12-inch fab in the September quarter next year. So at that time, we're currently estimating our 12-inch wafer cost on a per-die basis will be on par with our current 8-inch wafer. This is only Phase 1 on its own. Right now, for the additional phase, I would expect some cost benefit generating from there.

Operator, Operator

And your next question comes from Craig Ellis with B. Riley.

Craig Ellis, Analyst

Congratulations on your first full quarter of 300-millimeter fab output on. Yifan, I'll start with some clarifications for you. So first, you mentioned two items that hit at the end of the quarter that were in total $15 million. So is it fair to say that if not for those, operating cash flow and end of quarter cash would have been $11.8 million and $103 million, respectively? And I assume that those collections came in right at the start of fiscal Q2, is that fair?

Yifan Liang, CFO

Yes. Yes. Exactly. The $9.2 million came in on October 1, so that was the way it is.

Craig Ellis, Analyst

Okay. Secondly, I think we had been looking for an increase in operating expense in the quarter, but it came in about $1 million above what I was expecting. I anticipated that digital power would be ramping up. But were there any one-time items in the quarter? Or was the increase really all about fringe and performance accruals, etc.?

Yifan Liang, CFO

Yes. OpEx in the last quarter was relatively low, was fluctuating to a low point. This quarter, it fluctuated back. And also, we also increased some investment, so to beef up our R&D activities. So we would expect that all those R&Ds will support us for next year and the future's growth.

Craig Ellis, Analyst

So is it fair to say you'd expect a flatter OpEx trajectory from here? Or is there something that would cause OpEx to move higher as you go through the second half of fiscal '20?

Yifan Liang, CFO

For '20, I would expect, yes, in the March quarter, probably in line with the current level in the June quarter, I would expect an increase. At that time, we'll have more activities for the R&D design-ins or wins for the following year.

Craig Ellis, Analyst

My final clarification is a follow-up to the earlier question. Three months ago, we were concerned about distributor channel inventory, especially in the PC sector, and the distributors' intention to reduce inventory levels. While you discussed overall inventory levels, are you also indicating that you are satisfied with the PC inventories being at normal levels?

Yifan Liang, CFO

In the last couple of quarters, we successfully managed the balance between our internal inventory, external inventory, and our production. We anticipated that our computing and mobile businesses would peak in the September quarter. Despite our limited capacity, we adjusted our strategy to utilize our channel inventory to support the peak season for PCs. As a result, our sell-through PC revenue reached a record high in that quarter, and we allocated additional capacity to support growth in the mobile segment.

Craig Ellis, Analyst

Okay. And congratulations on the record sell-throughs with compute. I'll use that as a segue to ask Stephen a few questions. Stephen, just on the Communications business, can you help us understand, one, the degree to which the wins that the company is getting is for 4G phones versus 5G? And given the very significant increase in expectations for 5G phones next year, which I think consensus is probably around 250 million units, how does the company feel about its ability to get designed-in into those phones since that's where a lot of the interesting growth is going to be coming from in the calendar '20?

Stephen Chang, Executive Vice President

Sure, Craig. Generally, higher power requirements lead to a need for larger batteries, which means more power-related components for AOS. With the introduction of 5G, we expect usage to increase due to more video streaming and higher demands on battery performance during both charging and discharging. We are pleased to see a push for improved performance in our power products. We believe this area will continue to grow as battery capacities increase and as MOSFETs become more efficient.

Craig Ellis, Analyst

Does that mean you think that a majority of your design wins are 5G? Or just that a majority of your design wins are at the very high end of the performance continuum for the seven smartphone OEMs that you and Mike had mentioned?

Stephen Chang, Executive Vice President

We don't really break it down that way. Generally, the high-performance products are the premium smartphones. While 5G is one of the factors driving the demand for larger batteries, it's not the only reason for the need for greater capacities and higher power consumption. We view this as a spectrum regarding the demand for phones.

Craig Ellis, Analyst

Okay. Lastly, in the communications space, before I turn it over to Mike, there seems to be a view forming that the first calendar quarter, or our fiscal third quarter, and possibly even the fiscal fourth quarter, could exceed seasonal norms due to significant baseband release activity from Asian players. This is especially relevant as many 5G smartphone models are set to launch from Chinese OEMs and others. What is your perspective on the strength of the Communications business beyond the current quarter? Is there a possibility for the business to remain flat in the first quarter or even experience growth given the upcoming new model launches?

Stephen Chang, Executive Vice President

Generally, smartphone, again, the peak is in this September quarter. Definitely, I think we're seeing more models filling in the gap between the peaks. But in general, I don't think that will be big enough to offset the normal seasonal pattern for phones. The major vendors still tend to be releasing around that September timeframe.

Craig Ellis, Analyst

Okay, got it. One for Mike, and then I'll ask my final. Mike, it's helpful to get your perspective on land-and-expand in the strategy the company is deploying, and certainly, there are some encouraging signs of success in communications. My question is this, as you look at the penetration rate and adoption capacity of the seven different OEMs, in a better case environment, if all OEMs were to march at the pace of some of your best adopters within that group, how big can communications be in a year or two years from now? If it's 18% of sales now, does it have the opportunity to get into the mid-20s in 12 months and maybe even towards 30%, longer term? Or what are we looking at if things really hit with land-and-expand?

Mike Chang, CEO

For the mobile business there, definitely, we're looking for above 20%. That's for sure, okay? So the healthy one would be 25% to 30%. And we look into the momentum, we think, which is pretty practical. And probably in the Q3, we'll probably reach 25%.

Craig Ellis, Analyst

That's great. And that helps answer my last question. I'm not sure if this is for you or Yifan or even, Steve. But one, Yifan, can you clarify what the 300-millimeter revenue contribution is within the fiscal second quarter guidance? And from the first fiscal quarter, if we got the $7 million we were looking for, then there's about $30 million of revenue to get to that run rate level in the September quarter of next year. If we were to break that down, $10 million in three buckets, how do we bridge the gap between where we are now and where we need to be late next year so that we're at that $37.5 million run rate? How much of that sort of differently comes from Comms, from compute, from IPC, et cetera?

Yifan Liang, CFO

I'll start with this question. Yes, we are confident in reaching the target run rate in the September quarter next year. Currently, we are gradually ramping up the 12-inch fab. This process may not be linear. We are engaged in design-ins and securing wins using products from our joint venture, while also transferring some production of our products to the joint venture to free up capacity for our Oregon fab. This transfer requires requalification with our customers. The timeline for these two aspects will influence our results, and as Mike and Stephen noted, design-ins and requalifications take time. Therefore, I expect that you will see some progress in the June quarter, with the majority observed in the September quarter.

Stephen Chang, Executive Vice President

And so I'll chime in. This is Stephen. The move to Chongqing actually helps not only the products that are moving to Chongqing, but also the products that stay behind in our 8-inch fab. So it actually helps with the total loading. So basically, I think every segment can benefit from the additional total capacity after we open up Chongqing to that level.

Operator, Operator

At this time, there are no further questions. I'll now turn the conference back over to your host for 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.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.