Earnings Call Transcript - AOSL Q3 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the Alpha and Omega Semiconductor Reports Financial Results for the Fiscal Third Quarter of 2021 Conference Call. Thank you. I would now like to hand the conference over to your speaker today, Mr. Gary Dvorchak, Managing Director of the Blueshirt Group Asia.

Gary Dvorchak, Investor Relations Representative

Good afternoon, everyone. And welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2021 third 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.

Mike Chang, CEO

Thank you, Gary. I would like to welcome everyone to today's call. I am excited to be speaking with all of you again today and to report another strong quarter. In the March quarter, we experienced strong year-over-year performance in each of our market segments. We saw robust shipments across most of our product categories, leading to results ahead of expectations. Revenue of $169 million reflects solid year-over-year and sequential growth. We benefited from strong end market demand, which enabled us to optimize our product mix. In the meantime, we continued to take a disciplined approach to our spending. All of this resulted in a non-GAAP gross margin of 31.9% and non-GAAP EPS of $0.77, which increased by seven times year-over-year. Yifan will go into more details on our financial performance later.

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 March quarter. As Mike discussed earlier, industry-wide supply remains tight while demand continues to be strong across all our core market segments. In the midst of a worldwide shortage, we continue to optimize our operations, product mix, and capacity allocation to support our key customers and maximize revenue. We are working diligently with our strategic customers to meet their procurement needs. In particular, we have been ramping production at the JV fab in Chongqing. Supplies from the JD fab have enabled us to address growing demand.

Yifan Liang, CFO

Thank you, Stephen. Good afternoon everyone and thank you for joining us. Revenue for the March quarter was $169.2 million, up 6.5% from the prior quarter and up 58.4% from the same quarter last year. In terms of product mix, DMOS revenue was $122.6 million, up 3.5% sequentially and up 40.1% year-over-year. Power IC revenue was $43.4 million, up 16.1% from the prior quarter and up 139.5% from a year ago. Assembly service revenue was $3.2 million as compared to $2.9 million last quarter and $1.2 million for the same quarter last year. Non-GAAP gross margin for the March quarter was 31.9%, up from 31.4% in the prior quarter and up from 27.5% in the same quarter last year. The quarter-over-quarter increase in non-GAAP gross margin was mainly driven by a better product mix, partially offset by lower utilization at some of our factories due to the Lunar New Year holiday and a one-week shutdown at our Oregon fab near the end of March for annual maintenance. Non-GAAP gross margin excluded $0.8 million of amortization of purchased IP for both the March quarter and the prior quarter. In addition, non-GAAP gross margin excluded $0.4 million of share-based compensation charges for the March quarter and the prior quarter as well as the same quarter last year, respectively.

Operator, Operator

Thank you. Your first question comes from the line of Craig Ellis from B. Riley Securities. Your line is open.

Craig Ellis, Analyst

Thanks for taking the question and to the entire team, congratulations on just very robust execution and a breakthrough performance. Mike, you and I have known each other for at least 10 years now, and you've always had an unwavering vision for where you wanted to take the company, and this is certainly a very significant milestone, so good for you. I’ve had to…

Mike Chang, CEO

Thank you.

Craig Ellis, Analyst

You’re welcome. And maybe the first question should be to you with JV fab Phase 2 still ahead of us is the best for AOSL still ahead. And if so, can you just comment on some of the things that you see when you look out over the next couple of years for the company?

Mike Chang, CEO

You talked about specifically on this joint venture.

Craig Ellis, Analyst

Not necessarily just the joint venture, but that as well as some of the things that’s happening with Tier 1 OEM wins that you talked about, the increased diversification that you’re getting across different end markets and the strong revenue and earnings growth that you see in the business. It was more of a general question on the company’s evolution over the next two to three years.

Mike Chang, CEO

Well, thank you very much. Actually the company has one core belief and no matter what we always want to grow. So we have worked hard all these years. Once we grow, our infrastructure will be stronger. Our quality will be better. Our product will be stronger. Our relationship with the customer will be deeper, because they will recognize the value. And that’s what we’re doing. Of course, it’s good for today. Across a certain critical mass or threshold, it’s not before that, okay. You read out the adequate. So I think why always not to get enough mass, right. So the drop you still stand, maybe you will accelerate it because of our bids right now also because our infrastructure everything. I don’t know what is that’s your question. So we are actively looking for a billion dollars and more.

Craig Ellis, Analyst

No, that helps. And certainly, large companies with big product programs want companies that can scale with them. And I think one of the things that you’re saying is you have the ability to do that and to be a trusted partner to Tier 1. So thanks for that. Let me take that line of thinking a little bit into the near term and flip it over to you, Stephen. So we had stellar fulfillment execution in the quarter $170 million in revenues with growth across, I believe three of four end markets. As we look at the end market profile, we would typically expect to see revenues increased sequentially from 2Q to 3Q just given some dynamics and things like smartphones and gaming cards and notebooks. The question is, do you have that kind of flexibility in the business? Or as we look at calendar 2Q fiscal 4Q revenues are we really fully optimized in terms of our output relative to in demand?

Stephen Chang, President

Sure. During this time, we're at the end of this year being able to grow our new services. We’re mindful and have a lot of that in-house perhaps shouldn’t be at the house to support our growth. But even with that, we’ve had to make some decisions about what kind of business to support and how to grow, how to support our key customers while also maximizing the ALS side revenue as well. So this has been a careful and deliberate span decisions that we’ve been making to grow our business. So in the short term, we definitely saw computing that we’ve taken the chance to improve the ASPs by selling higher value sockets for both MOSFET and Power ICs, and we’re getting into some more advanced applications in terms of higher power pockets including getting into the graphics; of course, the power state for the CPU is still big as well. We also continue to deepen our home appliance business, and this is an area that we entered into the market a few years ago and have been consistently growing that business. And I think during this time of shortage was a great time to improve our ability to serve some of these Tier 1 customers. And smartphone is going to be big and it’s still going to be turning back. So if you’re talking about looking a little further out, we are preparing for a the normal peak in the September quarter, because we are well-positioned with the key smartphone makers there. So I think seasonality is a little bit different this year, but I think in some ways it’s still the same as long too. So I think a smartphone is an example of that.

Craig Ellis, Analyst

That’s really helpful. And then clarifying the gaming card production delay issue. Is that related to AOSL components or is that related components away from AOSL, but it impacts your shipment intensity into the application?

Stephen Chang, President

That's a little bit of both. I think right now when things are so tight and especially with Power IC products, there's more things that you have to take care of, or have, I guess allegation for. So while we believe that this is a short-term issue and behind us this is a temporary situation, and it should be resolved quickly.

Craig Ellis, Analyst

Yes. That's helpful. And then Yifan, a couple for you if I could place. The first question is nice to see the guidance for our gross margin increase. But I thought that three months ago when the company initially guided to gross margin, it indicated that the Lunar New Year, one-week shutdown and that Oregon Fab shutdown would negatively impact gross margin by about 190 basis points. So is it possible that the gross margin improvement would actually be greater than what I think is a 60 basis point increase as you get the full month benefit from that higher level of utilization versus really the absence of a week in each of your two internal fabs?

Yifan Liang, CFO

Sure.

Craig Ellis, Analyst

And if not, what would the offsets be that would preclude that?

Yifan Liang, CFO

Okay. We are pleased with our margin improvement. In the March quarter, it was primarily driven by the better product mix. Yes, I mean originally, we estimated some reductions on the operators in China for Lunar New Year. Actually, it turned out better than expected and also the Oregon fab's annual maintenance largely got pushed towards the end of the March quarter. So the impact on the March quarter was relatively smaller. So overall net, I mean, we think and then, I mean this product mix and then we can continue to improve some there and then one factor is that the current tight supply and demand environment where we are in now, and then provided some opportunities for us to optimize the mix. Another contributing factor is the growth of our new products. For example, you saw our Power IC products grow quite a bit and almost 140% year-over-year growth. So those are newer products, which generally carry a higher margin for us. So fundamentally we expect to gradually improve our margin with new products.

Craig Ellis, Analyst

Got it. And then in the prepared remarks, there was mention of a $20 million advance payment, I believe related to capacity. Can you talk a little bit more about what that relates to and when the fulfillment would be executed for that payment?

Yifan Liang, CFO

Sure. In the March quarter, we received $20 million in customer deposits for securing supply for the next few years. And I mean, each year we have some numbers and we guarantee in the quarter before. In the December quarter, we also received $10 million. I think back then those deposits are indicators that our relationship with our customers are getting deeper and deeper. So they are recognizing AOS' products and our supply. So we were happy to see that.

Craig Ellis, Analyst

That’s helpful. And then lastly, before I hop in the queue. Nice to see the JV Fab at the time, motoring along around the mid-single digits for another quarter. At these revenue levels, is that a reasonable level or are there some gives and takes either way coming in the next couple of quarters that would shift fab appetite either materially up or down?

Mike Chang, CEO

I would expect, I mean, to stay around this level for a couple of quarters, I mean, this relatively two quarters revenue guidance is slightly higher than the March quarter. So that would be the similar production level for the JV company. So overall, it is marching toward their target run rate in the September quarter.

Craig Ellis, Analyst

Got it. Thanks everybody. I’ll get back in the queue.

Mike Chang, CEO

All right. Thank you.

Yifan Liang, CFO

Thank you, Craig.

Operator, Operator

Your next question comes from the line of David Williams from Loop Capital. Your line is open.

David Williams, Analyst

Hey, good afternoon, and congrats on the incredible quarter here. It’s great to see the progress.

Mike Chang, CEO

Thank you.

David Williams, Analyst

So I wanted to maybe think a little bit about the solution standpoint and maybe the modules that you’ve talked about. Obviously, you’ve been growing the IC business. But do you think that over time AOS becomes more of a solution provider, maybe modules, and less like a discrete silicon provider?

Mike Chang, CEO

I think from our perspective, definitely moving to modules and IC is something that we have been doing and as part of our strategy going forward. And our view of total solutions is actually, it’s a total set, right. When you’re talking about individual sockets, then yes, you’re talking about ICs and modules. But we want to be a solution provider to our customers. So usually, when they’re looking when a customer is designing a board, they have multiple sockets that need to work together in order for the application to perform at its best. So it’s best when we can provide a total solution to help the customer and say, hey, these parts work together and know how to perform at best without leaving too much on the table. And basically, we can get the best performance by having the parts operate together. For us, I think we’ll be continuing to grow our portfolio of products, certainly. But it’s not going to be moving away from the discretes or anything. And also just to make a bigger point that our IC products and module products have a lot of them that have discrete solutions – discrete silicon devices inside. And that’s what powers the device, but of course, coupled with the IC, it can really bring out the performance.

David Williams, Analyst

Sure. Thank you. And thinking about that, is there – do you think that this is kind of an organic approach longer-term? Or do you think there’s an opportunity maybe for an acquisition or something that might come in to perhaps supplement that?

Mike Chang, CEO

In general, we are always on the lookout for M&A opportunities, especially if there’s something that complements what we’re trying to do that can help us to really move forward in one area or maybe compensate in an area that we are weak. But I think we definitely have an organic plan for it, but it’s not strictly restricted to that.

David Williams, Analyst

Okay, great. And then maybe on to the booking side, obviously, a strong quarter and a good guide. Can you talk maybe a little bit about the velocity of bookings through the quarter and how that may be trending into April?

Mike Chang, CEO

Sure. Backlog has been strong and steady throughout the quarter, not so much fluctuation there. It’s reflecting the strong end market demand, and our company-specific business growth and our design wins. So we monitor the market changes and dynamics very closely and so that we will adjust our plans accordingly.

David Williams, Analyst

Okay. That’s fair. And maybe in terms of the JV, you’ve talked about it reaching the run rate in the September quarter and the planning phase of the second phase there of the JV. When do you think in maybe realistic times, could you have capacity if we continue to see the strength that we’re seeing in the market now? When could you reasonably have the phase two, at least in ramp pace?

Mike Chang, CEO

We certainly understand the current market demand and supply situation. Our JV company also understands it. As I said in my prepared remarks, the JV company is in the process of additional financing to further expand in their Phase 2. So, I don't want to jump the gun here. And so, we will provide more details when available.

David Williams, Analyst

Okay, great. And then just one more for me, if I can on the margin improvement, is there any way you really, the size, maybe what the prioritization of the higher margin products versus maybe what the volume benefit would have been in the quarter?

Mike Chang, CEO

In the March quarter, pretty much entirely the margin improvement came from better product mix in this tight supply-demand environment. We have opportunities to optimize our mix. And also reflected some newer products, which are carrying at a higher margin for us. So yes, it's primarily from the product mix.

David Williams, Analyst

Great. Thanks so much.

Mike Chang, CEO

Thank you.

Operator, Operator

Thank you. Your next question comes from the line of Jeremy Kwan from Stifel, Nicolaus. Your line is open.

Jeremy Kwan, Analyst

Yes, thank you. And let me add my congratulations on the strong execution and results. I wanted to follow up on the capacity question because yes, my understanding is that, combined with the JV and your Oregon fab, the quarterly revenue that it could support, the total company could support and fit with Phase 1 with $150 million or so quarterly revenue. Obviously, you are well above that. Can you give us an idea of where the utilization stands both in Oregon and also in the JV? And how that – and to kind of follow on with some of the earlier questions, how quickly can you add additional capacity to expand your headroom?

Mike Chang, CEO

Sure. Overall, last year or year and a half ago, I had guided that yes, combined capacity probably can support us to a $115 million revenue on a per-quarter level. During the last year or two, our product mix improved quite a bit. So, when we rolled out our newer products, they generally carry a higher ASP, higher margin. And at the same time, the new products generally have been shrinking by size, which is like equivalent to giving us additional capacity. So, that's the delta right now, $170 million quarterly revenue versus $150 million quarterly revenue, and that pretty much contributed to our newer products. So, right now our Oregon fab is at full capacity and the JV fab is ramping up and is fairly close to their target run rate. So, they still have some room to go. So overall, I'm happy with the JV’s progress.

Jeremy Kwan, Analyst

Maybe if I can push a little further on that. Can you give us an idea of how much room you have left to go? And how much of a runway you need to keep growing? Because I understand the equipment market is – there's very long lead times, it takes time to install equipment, get things up and running. So is there a period where you might be a little bit capacity limited at some point? And can you give us an idea of what that could be? What that limit might be?

Mike Chang, CEO

Okay, sure. As I said, the JV fab can still ramp up a little bit. I would say probably a few million dollars per quarter contribution to our revenue range. Then yes, we recognize semi-equipment lead time is getting longer. The JV is also doing their part of the work to expand their capacity. We don't have to do the whole phase of Phase 2 altogether. Beyond the Phase 1, the current Phase 1 cleanroom still has some space. They can squeeze in some equipment to lift up some bottleneck areas, so that they can produce more wafers. Fundamentally yes that's where they are in the process of additional financing for the full phase of Phase 2 expansion. Yes, then we will provide more information later on.

Jeremy Kwan, Analyst

Great. Thank you. That's very helpful. And a question on the $20 million deposit, I guess, two questions there. One is, is this including the operating cash flow for AOS?

Mike Chang, CEO

Yes. Yes.

Jeremy Kwan, Analyst

Okay. And is this received – is this for securing capacity at the Oregon fab or at the JV?

Mike Chang, CEO

It's the supply from AOS. They're not spelled out in wherever we are manufacturing them.

Jeremy Kwan, Analyst

Got it. Okay. And is this something that's recognized? It sounds like it's going to be recognized over the next couple of years. It's securing capacity for the next couple of years. And is it kind of against potential revenue?

Mike Chang, CEO

Incremental isn't guaranteed them for a certain dollar amount of incremental supply for the next multiple years.

Jeremy Kwan, Analyst

So, is it something that gets converted into revenue at some point, or is it kind of a deposit that you hold for now and return later?

Mike Chang, CEO

Yes, this is deposits, yes then we'll return later soon.

Jeremy Kwan, Analyst

Got it. And then when that happens, will it be counted as like a – how do you record that on the cash flow statement?

Mike Chang, CEO

Well, that would be a reduction of operating cash flow at that time when we return the deposit.

Jeremy Kwan, Analyst

Got it. Thank you. And a question for Mike on the Power IC, it's very nice to see that, increasing those substantially as a percent of sales. I think 15%-ish last year, 25% or more this year. Two questions. First part is, is this bad externally? And if so, what kind of wafer requirements are you seeing? Are there any shortages, things that can impact your needs from that level? And then longer term, you mentioned that $1 billion target eventually. Where could Power IC be once you hit that kind of revenue run rate?

Stephen Chang, President

This is Stephen, maybe I’ll address this first and then I think Mike can definitely give the overall picture. Power ICs just like any product, everything does need to be sourced. And some of our products are monolithic. Some of our products are multi-chip, especially when it's taking advantage of our silicon. And so to some degree, it's internal, but to some degree we will also depend on outside. In general, I think ICs for any kind of foundry business is tight these days, whether it's a MOSFET or whether it's an IC. So yes, I think we are facing some constraints there, just like any other business. Power IC definitely is something that we are investing to grow in and proportionally it will start to become a bigger portion going forward, especially when you look out to the plan for $1 billion and beyond. But at the same time, I also expect the Discrete business to grow as well too. And fundamentally Discrete is still one of the underpinnings of a lot of the Power IC strains. So, in the bigger picture, we still expect Discrete to be a bigger majority of the business still. But at the same time, Power IC is going to grow both percentage-wise as well as in total absolute dollars.

Jeremy Kwan, Analyst

Great. Thank you, Stephen.

Stephen Chang, President

You're welcome.

Jeremy Kwan, Analyst

Yes, that was very thorough. Thank you, Stephen. One last question on the communication segment, it looks like you're doing very well there. I think in your prepared remarks, you talked about Chinese OEMs doing quite well. Can you talk about the dynamics you see? I understand there's market dynamics going on with Huawei and non-Huawei Chinese OEMs going after that market share. Can you talk about what you're seeing in terms of the – how that settles out and if there's a chance for a pause as people take stock of where their market share gains actually were?

Stephen Chang, President

Sure. I mean, I don't want to speculate on in terms of like, well, who's going to win out at the end. But in general, yes, certainly other vendors are all talking for market share starting from last year. But part of that also is we have more capability to serve that market. Before, actually these Chinese customers' phone makers were one of our first early customers for PCM as battery protection products before we engaged with the tier ones. And we had to put them on allocation for a bit, but now because of the assumptions, we have increased ability to supply. So we have actually been working on and winning some of this business and supporting it. So going forward, I believe that we will have a strong business from all the global markets, U.S., Korea, as well as China.

Jeremy Kwan, Analyst

Great. Thank you. And sorry, one last question. Some of your semiconductor peers that talked about first half versus second half maybe first half kind of being stronger than the second half. Can you – do you have any kind of early read on that, giving your backlog levels and your visibility, any expectations from your end?

Mike Chang, CEO

Well, right now the March quarter was definitely above normal seasonality, the June quarter is one that we guided already. So right now our backlog is still strong and healthy. So we are closely monitoring market dynamics. Our channel inventory actually is below our target range right now.

Jeremy Kwan, Analyst

Can you quantify that for us, please? The channel inventory specifically…

Mike Chang, CEO

Channel inventory we normally target two to three months, and then channel inventory right now isn't below the low end of the target.

Jeremy Kwan, Analyst

Great. Thank you very much.

Mike Chang, CEO

Okay. Thank you.

Operator, Operator

I think we have a follow-up question from the line of Craig Ellis from B. Riley Securities. Your line is open.

Craig Ellis, Analyst

Thanks for taking the follow-up. Just two quick ones. The first is either for Stephen or Yifan. Guys, if I rebound the clock six months, I think when we were talking about some work going around fab capacity, one of the things that we were talking about is the potential for an incremental tool here or there to yield some deep bottlenecking benefits and give some incremental supply. And in today’s discussion, it sounds like the variance 150 to 170 is really new product. So did I misinterpret what the company was conveying six months ago, or is the de-bottlenecking benefit just a small minority of the overall gain that we're seeing from 150 to 170 with the majority being from the new products?

Stephen Chang, President

Yes. You are right.

Craig Ellis, Analyst

Okay. And then the second question is really a bigger picture question just on how we look at how the joint venture fab is being optimized from Phase 1 through Phase 4. My understanding was, and has been for the last few years that we were going to optimize phases one through three for volume and scaling. And we're certainly doing that. But we really weren't going to optimize for gross margin until Phase 4, but with your strong fulfillment execution, good industry dynamics, and some other things that we're getting very good gross margin. So is it possible going forward that we can actually optimize for both through Phase 2 through 4 where we're optimizing for both strong gross margin and getting the volume ramp that Mike talked about as being so important for the longer-term evolution of the company?

Mike Chang, CEO

Sure. I mean, yes. I mean, it can help both ends, but for us the first thing is to expand their capacity, providing volume support to us. So I mean, yes, I would expect that in Phase 2 and 3 the margin on the front can also benefit to some extent.

Craig Ellis, Analyst

That's great. Thanks, guys. Thank you.

Mike Chang, CEO

Thank you.

Craig Ellis, Analyst

Thank you.

Operator, Operator

Thank you. We have follow-up questions from the line of Jeremy Kwan from Stifel Nicolaus. Your line is open.

Jeremy Kwan, Analyst

Yes, thank you. Just a quick question on the pricing. I think, last quarter you mentioned adjusting the pricing to reflect cost increases, but being very selective about it. I'm thinking of maybe an update about where you see things now in terms of your own input costs and things that you're doing to mitigate that and any kind of pricing that you're benefiting from.

Mike Chang, CEO

Yes. So I think in this current climate, we are certainly seeing cost increases just like anybody else. We are putting and implementing what we said last time in terms of implementing price adjustments at some of our customers in order to absorb and share that gain and pass along that cost. Again, we're being selective about that. We need to support our customers in their business, but they also understand that the nature of this industry-wide situation too. So that is something that we are implementing now.

Jeremy Kwan, Analyst

Great. Thank you. Thank you. There are no other audio questions as of this moment. I would like to turn the call back to the management for the closing remarks.

Yifan Liang, CFO

Sure. 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

Thank you so much, speakers. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.