Earnings Call Transcript - AOSL Q2 2024

Operator, Operator

Good afternoon, ladies and gentlemen. Thank you for joining today's Alpha and Omega Semiconductor Fiscal Q2 2024 Earnings Call. My name is Tia, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. I would now like to pass the call over to your host, Steve Pelayo. Please proceed.

Steve Pelayo, Investor Relations Representative

Good afternoon everyone, and welcome to Alpha and Omega Semiconductors conference call to discuss fiscal 2024 second quarter financial results. I'm Steve Pelayo, investor relations representative for AOS. With me today are Stephen Chang, our CEO; and Yifan Liang, our CFO. This call is being recorded and broadcast live over the web. A replay will be available for 7 days following the call via the link in the Investor Relations section of our website. Our call will proceed as follows today. Stephen will begin with business updates, including strategic highlights and a detailed segment report. After that, Yifan will review the financial results and provide guidance for the March quarter. Finally, we'll have the Q&A session. The earnings release was distributed over the wire today, February 6th, 2024 after the market close. The release is also posted on the company's website. Our earnings release and this presentation include non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the earnings release. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of the business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligation to update the information provided in today's call. Now I will turn the call over to our CEO Stephen Chang. Stephen?

Stephen Chang, CEO

Thank you, Steve. Welcome to Alpha and Omega's fiscal Q2 earnings call. I will begin with a high-level overview of our results and then jump into segment details. We delivered fiscal Q2 results in line with our guidance: revenue was $165.3 million. Non-GAAP gross margin was 28%, and non-GAAP EPS was $0.24. The bottom line finished at the high end of our guidance, primarily driven by overall operational control. These results were driven by continued recovery across notebooks, desktop computing, and smartphones, offset by an ongoing inventory correction in gaming and weak demand for quick chargers and solar. Looking back on the full calendar year 2023, it was undeniably a challenging period for our entire industry. AOS revenue experienced a significant decline of 19% following a record-breaking 2022. This drop was primarily due to the inventory correction in PCs and smartphones that commenced in late 2022 and broader macro headwinds. In the second half of calendar 2023, our performance was further hampered by inventory corrections and slowdowns in demand across other segments. While revenue declined in calendar 2023, I think it's important to recognize that the challenges resulting from the post-COVID semiconductor cycle are nearing completion, and we are approaching the recovery phase of the next cycle. Over our 23-year history, we have navigated many boom and bust cycles in this industry, emerging each time stronger and more resilient on the other side. Looking forward, we expect stabilization across most of our business lines notwithstanding normal seasonality. While near-term visibility is limited, we remain cautiously optimistic about a broader market rebound in the second half of calendar 2024. Fundamentally, we are extremely well-positioned for future growth as the market recovers. Today, our market position is stronger than ever, supported by our leading technology, a more diversified product portfolio, and a Tier 1 customer base in all of our business segments. More importantly, whether it's AI accelerators, digitalization, advanced connectivity, electrification, or the transition to a low-carbon society, power management lies at the core of these trends. We remain committed to executing our technology roadmap, introducing innovative new products and solutions to our customers, and focusing on long-term growth drivers that will allow us to surpass industry growth rates and establish ourselves as a sustained outperformer in the long run. With that, let me now cover our segment results and provide some guidance by segment for the next quarter. Starting with computing, December quarter revenue was up 12.3% year-over-year and up 2% sequentially and represented 43.4% of total revenue. These results were ahead of our original expectation for a low single-digit decline sequentially and were driven by a continued recovery and stabilization in shipments across notebook and desktop computing applications. The recovery has been driven by high-end driver ICs and MOSFETs for powering CPUs. Looking forward into the March quarter, we expect the segment to be down mid-single digits on normal seasonality and the impact of Chinese New Year. Notably, the inventory correction in graphics cards is coming to an end, and tangential markets such as AI accelerators are becoming a meaningful portion of our data center-related business. In summary, we are not immune to seasonality and broader market conditions, but solid rebounds expected in graphics cards and continued contributions from AI-related products demonstrate the diversity of our computing segment. Turning to the consumer segment, December quarter revenue was down 50.2% year-over-year and down 24.4% sequentially, representing 14.2% of total revenue. As we indicated last quarter, gaming is undergoing an inventory correction after extremely strong shipments into the number one console manufacturer between mid-calendar 2022 and mid-calendar 2023. Similar to what we saw in PCs and smartphones in early calendar 2023, given the speed of the current correction, we believe demand will revert back to a new normal in a couple of quarters, factoring in that the console is now in its midlife part of the platform cycle. Further, we see opportunities to increase bond content within the current console platform as part of its refresh this year. Longer-term, we believe our relationship with this customer is very strong and are already engaged in discussions for their next model design. For the March quarter, we anticipate stabilization in this segment, forecasting a low single-digit sequential decline. Next, let's discuss the communication segment. Revenue in the December quarter was down 18% year-over-year, and down 6.6% sequentially, representing 17.5% of total revenue. Shipments to Korea and China-based smartphone OEMs were strong; however, this was more than offset by a pullback in shipments to the Tier 1 U.S. smartphone customer. Note that the customer had strong shipments in the September quarter in 2023 ahead of their fall device launch. Looking ahead, due to strong shipments from Chinese OEMs, we anticipate this segment to remain flat sequentially, outperforming seasonality. Now let's talk about our last segment, power supply and industrial, which accounted for 21.1% of total revenue. December quarter revenue was down 15.4% year-over-year and down 16.6% sequentially. These results were driven by reduced quick chargers following our peak season shipments to our Tier 1 U.S. smartphone customer in the September quarter, and continued weakness in solar. Power tools were a notable standout in the December quarter, further solidifying their strong growth and contribution throughout calendar 2023. For the March quarter, we expect this segment to further decline in the mid-teens sequentially, mainly due to reduced quick chargers following the peak season and lower solar demand. While power tools will also see a seasonal decline, we expect strong sequential growth in our e-mobility segment, driven by deepening customer relationships for e-bikes and e-scooters. In closing, we delivered fiscal Q2 in line with our expectations. While we are not immune to the macroeconomic headwinds, there are indications that the cycle has bottomed, and we are looking forward to the recovery phase. Therefore, it is important to emphasize that our core fundamentals remain strong, a testament to the strategic investments we have made over the past years. These investments have positioned us well for growth, and we continue to focus on driving the company towards growth beyond our $1 billion revenue target on the other side of the cycle, supported by our leading technology, a more diversified product portfolio, a Tier 1 customer base in all of our business segments, and expanding manufacturing capability and supply chain. With that, I will now turn the call over to Yifan for a discussion of our fiscal second 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 $165.3 million, down 8.5% sequentially and down 12.4% year-over-year. In terms of product mix, DMOS revenue was $108.8 million, down 10.5% sequentially and down 20.9% over last year. Power IC revenue was $50.3 million, down 4.6% from the prior quarter and up 0.6% from a year ago. Assembly service revenue was $0.7 million, compared to $0.7 million in the last quarter and $1.2 million for the same quarter last year. License and engineering service revenue was $5.5 million for the quarter versus $5.6 million in the prior quarter. Non-GAAP gross margin was 28% compared to 28.8% in the prior quarter and 29.5% a year ago. The quarter-over-quarter decrease in non-GAAP gross margin was mainly impacted by ASP erosion and an increase in inventory reserve, partially offset by the improved product mix. Non-GAAP operating expenses were $37.9 million compared to $40.8 million for the prior quarter and $32.8 million last year. The quarter-over-quarter decrease was primarily due to lower R&D engineering expenses and more vacation taken during the holidays. Non-GAAP quarterly EPS was $0.24 compared to $0.33 in the last quarter and $0.67 a year ago. Moving on to cash flow, operating cash flow was negative $23.5 million, including $11 million of repayment of customer deposits and $11.3 million deposit that we made to secure silicon carbide wafer supply. By comparison, operating cash flow was $13.8 million in the prior quarter and $0.3 million a year ago. You did ask for the quarter was $20.7 million compared to $23.3 million in the last quarter and $31.8 million for the same quarter last year. Now let me turn to our balance sheet. We completed the December quarter with a cash balance of $162.3 million compared to $193.6 million at the end of last quarter. Net trade receivables decreased by $2.5 million, and days sales outstanding remained at 18 days for the quarter. Now the inventory increased by $4 million quarter-over-quarter. Average days in inventory were 141 days compared to 129 days in the prior quarter. CapEx for the quarter was $9.1 million compared to $12.5 million for the prior quarter. We expect CapEx for the March quarter to range from $8 million to $12 million. Now, I would like to discuss March quarter guidance. We expect revenue to be approximately $150 million plus or minus $10 million. GAAP gross margin to be 23.5%, plus or minus 1%. We anticipate non-GAAP gross margin to be 25% plus or minus 1%. A quarter-over-quarter decrease in gross margin mainly reflects the lower factory utilization due to seasonality and the Lunar New Year holiday. GAAP operating expenses to be in the range of $46.7 million plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $39.5 million, plus or minus $1 million. Interest expense is expected to be approximately $1 million, and income tax expense is expected to be approximately $1.1 million. With that, we'll open the call for questions.

Operator, Operator

The first question comes from Craig Ellis with B. Riley Securities. Please proceed.

Craig Ellis, Analyst

Thanks for taking my question. I had one for Stephen and one for Yifan. So, Stephen, starting with you, like the color on how you're looking at the year and the fact that you see a cyclical recovery coming in a much stronger second half. Can you just provide some further color on how that could play out on the top line? I'm not looking for specific guidance, but any sense on how the linearity plays out or what can happen as we look out in each quarter. The third and fourth calendar quarter of the year, if you expect both of those to be up materially versus first half would help us see a little bit of the things that you're seeing.

Stephen Chang, CEO

Sure. Thank you, Craig. We are anticipating the usual seasonality that will arrive in the September quarter, which is the peak period for both PCs and smartphones. In these markets, we remain well-positioned with our customers. When comparing the first half of the year to the second half, we do expect the second half to be stronger. The key factor is whether the overall macroeconomic conditions are recovering. At the moment, we believe we are nearing the end of a broader correction. Depending on the macroeconomic conditions, if the market returns to neutral or favorable, we can also expect the December quarter to align with September. However, our visibility does not extend clearly that far at this point. Our primary focus is on the upcoming September seasonal peak.

Craig Ellis, Analyst

And I'll direct the next one to Yifan. Yifan, I wanted to follow-up on the gross margin for the first quarter. So Lunar New Year impact is something that impacts the business every year, but I thought the impact was closer to 150 basis points to 200 basis points, or 100 basis points to 200 basis points rather than 300 basis points. So, can you just detail the factors that are causing gross margin to decrease by 300 basis points sequentially, quarter on quarter, how much is the lower utilization for Lunar New Year? And what are the other factors? And then beyond that, how would you expect to gross margin to recover off of the 25% level if we have the type of environment that Steven was talking about, which is much better calendar, second-half demand? Thank you.

Yifan Liang, CFO

The March quarter gross margin guidance, we factor in a couple of things. So primarily the utilization portion, because the March quarter typically is our lowest quarter seasonality-wise. And then also, I mean, we also see some price erosions there to a lesser extent offset by some better product mix. So, you are probably right in the range of 200 basis points for the utilization portion and then 50 basis points to 100 basis points for the net of ASP erosion and the better part of the mix. So that's the combination of those factors.

Operator, Operator

The next question comes from the line of David Williams with Benchmark. Please proceed.

David Williams, Analyst

Good afternoon. Thanks for taking my question. I certainly appreciate it. A lot of great color there, but just wondering if maybe you can give us a little color on some of the areas of weakness that you're seeing. I know you expanded some in, during the call, but just anything, I guess trying to square the recovery in the second half and is that really velocity of orders or maybe just any color there to help us get more comfortable that the second half recovery does materialize.

Stephen Chang, CEO

For a stronger second half, we're relying not just on seasonal factors but also on the overall economic landscape. We're analyzing our end markets, many of which have been experiencing an inventory correction. The PCs and smartphones started this process more recently, and graphics and gaming have also gone through it. We believe we're nearing the end of the PC inventory control phase, which is tapering down. The focus now is on the end demand that needs to recover. We need healthier PC refresh cycles and improved macroeconomic conditions to boost consumer spending. We also noted that the inventory control for graphics is coming to a close. We're expecting a resurgence in that sector, alongside gaming, which both began their inventory corrections about two quarters ago. Since they're approaching the end of this phase, we're primarily looking for an uptick in end demand. If that can go back to at least neutral or even growth, we could see a stronger second half.

David Williams, Analyst

Great, thanks. Yifan, could you provide more insight into the gross margin? Specifically, how much impact are you seeing from utilization compared to the revenue leverage loss, and what factors should we consider as we think about the long-term gross margin? We expect it to improve slightly from its current level, so any additional details would be appreciated. Thank you.

Yifan Liang, CFO

Okay, sure. I mean, if you recall in the March quarter 2023, then our gross margin was around the 25% range. So nowadays, in the March 2024 quarter, even though the top line is a little bit higher than the 2023 March quarter, but the utilization right now is about similar to the March quarter 2023, and at our factory. Overall, I would expect, and when our top-line recovers and then I would expect that our utilization there would help and also product mix, and I would expect to come back at a better product mix as well.

Operator, Operator

The next question comes from the line of Jeremy Kwan with Stifel. Please proceed.

Jeremy Kwan, Analyst

Good afternoon. I would like to discuss a different aspect of the gross margin question. It appears that inventories increased this quarter and are expected to rise again, particularly in terms of days of inventory. Can you provide some insights on what we should anticipate for inventories over the next few quarters? Additionally, where do you consider a suitable operating level in terms of both days and dollars?

Stephen Chang, CEO

No, that, I mean, inventory balance at the end of the December quarter increased by like $3 million or $4 million. And then, I mean relative to the overall inventory size, and then it's marginal. For the March quarter, we would expect the inventory level to maintain around a similar level. We already slowed down our own production and also some purchases. So, going forward, I would expect the inventory to adjust based on our expected business growth. If we needed some additional production to support, we would ramp up some production depending on the bottleneck areas. So, we manage on a daily basis.

Jeremy Kwan, Analyst

Also, I guess maybe can you add some more color on the inventory reserve you took? I wasn't sure if I caught how much that was and without that inventory reserve, where would the inventories have gone?

Yifan Liang, CFO

The inventory reserve went up by a couple million dollars in the December quarter, so we took a higher reserve.

Jeremy Kwan, Analyst

Is this something that you anticipate needing to do again going forward? Or is it kind of one-and-done and you kind of reset from here?

Stephen Chang, CEO

Well, it depends on the market conditions and the overall environment, and it's hard to say for inventory reserve. Generally, I would expect probably back to normal, and I wouldn't see the additional inventory reserves out there.

Jeremy Kwan, Analyst

I appreciate the CapEx guidance you provided for the quarter. Can you share what your outlook is for the year? Do you expect it to stay around the 10 million range, or could it be reduced a bit? Additionally, regarding the customer deposits, specifically the ones you're refunding, how much is remaining? As for the silicon wafer deposit, do you see this as a one-time situation, or will you need to secure more supply in the future? Thank you.

Yifan Liang, CFO

Regarding our own CapEx, I would expect throughout this calendar year, our CapEx right now is in maintenance mode. We do our regular upgrades and solve some production bottleneck areas. We don't have a major plan to expand. Generally, we target 6% to 8% of our revenue as CapEx. So, I would expect this year, around $10 million per quarter, that's probably in the ballpark. In terms of customer deposits, last calendar year 2023, we returned about $30 million or so. This calendar year 2024, we expect to return another $30 million or so in customer deposits. In terms of our own deposit made, that's a one-time deposit, so I would not expect further or, well, depends on the situation. But at this point, that's a one-time deposit.

Jeremy Kwan, Analyst

Quick follow-up on the deposit that you're returning. How much is left after you do the $30 million this year?

Yifan Liang, CFO

At the end of December last year, we had about a $60 million deposit on hand. So, for calendar 2024, we will return another $30 million as well.

Jeremy Kwan, Analyst

Got it. And one last question if I could. Stephen, I appreciate the guidance that you gave for each end market. If I'm doing the math right, it looks like licensing and others that kind of goes down to less than 1%. If that's not the case, can you help me see where I went wrong?

Yifan Liang, CFO

There was some assembly service, so that's probably it.

Jeremy Kwan, Analyst

So the expectations are for that to fluctuate and it's not expected to be a material contributor that way to look at it?

Yifan Liang, CFO

No. Correct. I mean, assembly service we just do some services for some idle capacity. So it's not a major business for us.

Operator, Operator

There are no additional questions at this time. I'll hand it back to the management team for closing remarks.

Stephen 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

That concludes today's conference call. You may now disconnect your lines.