Earnings Call Transcript - AOSL Q4 2020

Operator, Operator

Thank you for joining us for the Alpha and Omega Semiconductor Reports Financial Results for the Fiscal Fourth Quarter of 2020 Conference Call. All participants are currently in a listen-only mode. After the presentations, we will have a question-and-answer session. Please note that today’s conference is being recorded. I will now turn the call over to our speaker, Gary Dvorchak, from Investor Relations. Please proceed, Gary.

Gary Dvorchak, Investor Relations Representative

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor’s conference call to discuss fiscal 2020 fourth quarter and year-end financial results. I’m Gary Dvorchak, 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 broadcast live over the web and can be accessed for seven days following the call via the link in the Investor Relations section of our website at www.aosmd.com. Mike will begin with a review of the business overview for the quarter. Then, Stephen will provide a detailed segment report. After that, Yifan will continue with a review of financial results for the quarter and fiscal year and provide guidance for the next quarter. Then, we will have the question-and-answer session. The earnings release was distributed by business wire today, August 11, 2020, after the close of the market. The release is also posted on the company's website. Our earnings release and this presentation include certain non-GAAP financial measures. We use the 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 obligations to update the information provided in today's call. Now, I’ll turn the call over to our CEO, Mike, to provide an overview of our business. Mike?

Mike Chang, CEO

Thank you, Gary. Welcome everyone. Before we discuss our fourth quarter results, I want to briefly address the COVID-19 situation, which continues to impact families, businesses, and markets across the globe. I want to thank our employees for staying resilient and being flexible as we navigate this new working environment. Our primary focus is to ensure the safety and well-being of all our employees and their families. Meanwhile, we continue to work closely with customers to support them in every way we can during this challenging time. Now, some key highlights of the June quarter. Solid execution enabled us to deliver results ahead of expectations. Fueled by our product strength and growing customer penetration, revenue of $122 million was up 9% year-over-year and above the high end of our guidance range. Coupled with tightly controlled operating expenses, this resulted in non-GAAP earnings per share that exceeded the consensus. Our core business generated solid operating cash flow of $20 million and the free cash flow of $11 million. Yifan will provide details of our June quarter results later in the call. The favorable financial results were driven by high demand in certain segments and solid operating execution. Shipments rebounded for our products in Computing and Gaming applications, driven by the recent shift to a “work, learn, and entertain from home” environment. We also focused on our cost structure and prudently managed our expenses. We reduced non-essential spending and benefitted from travel bans while still pursuing strategic and critical R&D projects to expand our market reach. The strong fourth quarter capped a solid fiscal year. This is very encouraging, given the backdrop of the COVID-19 pandemic, heightened trade tension between the U.S. and China, and global economic uncertainty. Our results demonstrate the strength of our business strategy, diversified product portfolio, and expanded customer base. Next, I will discuss our strategic plan to further strengthen the foundation to achieve our longer-term objectives. First, our joint venture fab in Chongqing. As part of our strategic plan, we built this fab to fulfill growing customer demand. Indeed, during this quarter, the JV fab made a major contribution to capture surging demand. Even though the COVID-19 pandemic has slowed ramp-up production, we were able to make persistent progress. Importantly, these efforts allowed the JV to achieve positive EBITDA for the June quarter. We expect to approach our target run rate by this time next year. Second, our focused R&D is driving broader and better product innovation. As a solution provider, we are able to deepen our relationships with customers, becoming their trusted strategic partner. As such, our new products are driving growth primarily by expanding our BOM content in core applications. The design of our products, especially our Power IC solutions, into an upcoming gaming system and a new PC graphics card demonstrates the opportunities created when we secure trust and confidence from our customers. In looking back in the fiscal year, we are pleased with our accomplishments. The power semiconductor industry is a large market, and we are making significant progress to capture opportunities and increase market share. We also recognize that conditions are still fragile. Economic conditions could change at any moment due to factors beyond our control, including the COVID-19 pandemic’s resurgence. Because of this, we continue to operate cautiously and take prudent actions, even as we identify and seize new opportunities. I would like to thank our customers, business partners, and shareholders for their continued support and confidence in AOS. I especially want to acknowledge our employees, as our success could not have been possible without their hard work, dedication, and sacrifice in the past year. 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 40.2% of our total revenue in the June quarter. Revenue was up 4.1% sequentially and flat year-over-year. While sell-in was okay, sell-through was quite dramatic. Many customers that had paused production in the first calendar quarter were catching up in the June quarter. End demand is strong, and we were able to meet it with ramping supply from our JV fab. With so many people around the world working, creating, and learning from home, PCs have become even more indispensable. Because we did not shut down fully in the March quarter, we were able to meet this resurgence in demand. Going forward, we continue to optimize our production mix to satisfy the anticipated high demand for PC-related products. We are especially excited about the ramp of our high-performance DrMOS and digital power solutions in some key customers’ upcoming graphic card platforms. We expect Computing revenue to be strong in the September quarter, with mid-teens sequential growth. Now turning to the Consumer segment, it represented 22.5% of total revenue in the June quarter. Revenue increased 37.5% sequentially and was up 31.7% year-over-year. COVID-driven home-sheltering boosted sales of gaming, TVs, and Home Appliances, enabling those segments to achieve healthy growth. Gaming was up significantly sequentially and is expected to grow rapidly. We have multiple sockets across multiple products, Power IC and MOSFET, in an upcoming gaming system that is expected to launch in the second half of 2020. Looking to the September quarter, we anticipate strong double-digit growth in the Consumer segment, driven by home entertainment, gaming, and TVs. I want to note that Power IC is regaining traction. Since 2018, we re-aligned our Power IC product line by focusing on our core competencies of proprietary MOSFET technology, advanced packaging, and intelligent ICs ideally suited for the application. We chose to go after high volume applications within the Computing and Consumer segments given our established MOSFET business. As a result, today, our multi-chip package products deliver the small size and high efficiency required in the latest gaming and graphic card platforms, as you can see in recent Computing and Consumer design wins. Now, let’s discuss the Power Supply and Industrial Segment. It accounted for 19.4% of total revenue, up 24.2% sequentially and up 3% year-over-year. After a pause in the March quarter, this segment rebounded in the June quarter, driven by higher demand for adapters used for PCs and gaming systems. Our AC-DC power supply business was up significantly versus the March quarter, tracking the surge in PC sales. Demand was good in medium and high voltage products. Once again, we were able to meet high voltage demand with supply from our JV fab. We expect this segment to be down somewhat in the September quarter due to a bit softer demand for quick chargers and DC Fan. Finally, let’s move to the Communications segment, which was 16.2% of total revenue in the quarter, up 3% sequentially and up 16.1% year-over-year. Telecom drove the growth, although over time we expect unevenness as the 5G rollout advances. Meanwhile, the smartphone market was subdued. One large customer slowed production in the June quarter, so our battery protection line was down slightly sequentially. Looking to the September quarter, this segment appears to be resuming growth across all our core customers. We expect the Communications segment to be up single digits sequentially in the September quarter. With that, I will now turn the call over to Yifan for a discussion of our fiscal fourth quarter financial results and our outlook.

Yifan Liang, CFO

Thank you, Stephen. Good afternoon everyone and thank you for joining us. Revenue for the June quarter was $122.4 million, up 14.5% from the prior quarter and up 9.4% from the same quarter last year. In terms of product mix, MOSFET revenue was $100 million, up 11.2% sequentially and up 3.8% year-over-year. Power IC revenue was $20.3 million, up 29.2% from the prior quarter and up 47.1% from a year ago. As Stephen discussed earlier, this is a welcome reversal for our Power IC product line, the result of our focus on regaining traction with new and better solutions. Assembly service revenue was $2.1 million as compared to $1.3 million last quarter and $1.7 million for the same quarter last year. For the fiscal year 2020, revenue was $464.9 million, up 3.1% from fiscal year 2019. Non-GAAP gross margin for the June quarter was 27.5%, flat with the prior quarter and up slightly from 27.4% for the same period last year. Non-GAAP gross margin excluded $0.3 million of share-based compensation charges for the June quarter, as compared to $0.4 million for the prior quarter and for the same quarter last year. Non-GAAP gross margin also excluded $4.4 million of production ramp-up costs related to the JV company for the June quarter, as compared to $6.6 million for the prior quarter and $2.6 million for the same quarter last year. For the fiscal year 2020, non-GAAP gross margin was 27.9%, as compared to 28.4% for the prior year. Non-GAAP operating expenses for the June quarter were $25.3 million, as compared to $25.8 million for the prior quarter and $22.6 million for the same quarter last year. Non-GAAP operating expenses for the quarter excluded $2.4 million of share-based compensation charges and $2.6 million of legal expenses related to the government investigation. This compares to $2.5 million of share-based compensation charges, $2.1 million of legal expenses related to the investigation, and $0.6 million impairment charge related to an investment in a privately held start-up company for the prior quarter, as well as $2.1 million of share-based compensation charge, and $3.9 million of pre-production expenses related to the JV Company for the same quarter last year. Both GAAP and non-GAAP operating expenses included $3 million of digital power team expenses for the quarter, as compared to $3.1 million for the prior quarter and $2.3 million for the same quarter last year. In July, we made the first shipment of our digital power product. Non-GAAP operating expenses for the fiscal year 2020 were $102.5 million, compared to $95.3 million for the prior year. Non-GAAP operating expenses excluded $8.9 million of share-based compensation charges, $4.7 million of legal expenses related to the investigation, and $0.6 million for an impairment charge in the current fiscal year, as compared to $11.2 million of share-based compensation charges and $15.8 million of pre-production expenses related to our JV Company in the prior fiscal year. Income tax expense for the quarter was $0.4 million, compared to a tax benefit of $1 million for the prior quarter and $0.6 million for the same quarter last year. The tax benefit in the prior quarter was primarily driven by relief from the CARES Act. Income tax expense for the fiscal year was $0.3 million, compared to $1.3 million for the previous fiscal year. Non-GAAP EPS attributable to AOS for the quarter was $0.29 per share as compared to $0.11 for the prior quarter and $0.35 for the same quarter last year. Non-GAAP EPS attributable to AOS for the fiscal year was $0.88 as compared to $1.23 for the prior fiscal year. AOS continued to generate positive operating cash flow. AOS on a stand-alone basis generated $20.2 million of operating cash flow in the June quarter, as compared to $29.5 million in the prior quarter and $15.2 million in the same quarter last year. Cash flow provided by operations attributable to the JV Company was $20.1 million in the June quarter, primarily due to a refund of accumulated value-added tax paid previously. Cash flow used by the JV Company in the prior quarter and the same quarter last year was $15.2 million and $6.9 million respectively. Cash flow from operations attributable to AOS for the fiscal year was $58 million as compared to $65.3 million for the prior year. Cash flow provided by operations attributable to the JV Company was $4.4 million for the year, compared to $33.9 million of cash flow used in the prior year. Consolidated EBITDAS for the June quarter was $14.9 million, compared to $8.8 million for the prior quarter and $14.2 million for the same quarter last year. EBITDAS attributable to AOS for the quarter was $12 million, as compared to $6.5 million for the prior quarter and $15.1 million for the same quarter last year. The JV Company achieved its first positive quarterly EBITDA of $1.1 million in the June quarter, as compared to negative $1.1 million for the prior quarter and negative $5.6 million for the same quarter last year. Consolidated EBITDAS for the fiscal year was $52 million as compared to $55 million in the fiscal year 2019. EBITDAS attributable to AOS for the year was $44.8 million, as compared to $61 million a year ago. Now, let’s look at the balance sheet. We completed the June quarter with a cash balance of $158.5 million, including $110.3 million at AOS and $48.2 million at the JV Company. This compares to $110.2 million at the end of the last quarter, which included $99.5 million at AOS and $10.7 million at the JV Company. Our cash balance a year ago was $121.9 million, including $100.7 million at AOS and $21.2 million at the JV Company. The bank borrowing balance at the end of June was $173.4 million, including $32.7 million at AOS and $140.7 million at the JV Company. During the June quarter, the JV Company borrowed a total of $47.1 million. AOS and the JV Company repaid $2.1 million and $25.4 million of existing loans, respectively. Net trade receivables were $13.3 million at the end of June quarter, as compared to $17.5 million at the end of the prior quarter and $24.3 million for the same quarter last year. Days Sales Outstanding for the quarter were 18 days, compared to 22 days in the prior quarter. Net inventory was $135.5 million at the quarter-end, up from $127.4 million last quarter and up from $111.6 million in the prior year. Average days in inventory was 127 days for the quarter, compared to 131 days in the prior quarter. Net Property, Plant and Equipment was $412.3 million, flat compared to the prior quarter and $409.7 million last year. Capital expenditures were $13.2 million for the quarter, including $9 million at AOS and $4.2 million at the JV Company. With that, now I would like to discuss the guidance for the next quarter. We expect revenue to be between $134 million and $138 million. GAAP gross margin to be 26%, plus or minus 1%. We anticipate non-GAAP gross margin to be 27.7%, plus or minus 1%. Note that non-GAAP gross margin excludes $0.4 million of estimated share-based compensation and $2 million of estimated production ramp-up costs relating to the JV Company. GAAP operating expenses to be in the range of $32.8 million, plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $27.8 million, plus or minus $1 million. Both GAAP and non-GAAP operating expenses include $3.2 million to $3.5 million of estimated expenses related to the development of our digital power business. Non-GAAP operating expenses exclude $2.5 million of estimated legal expenses related to the government investigation and $2.5 million of estimated share-based compensation charges. Income tax expense to be approximately $0.5 million to $0.7 million. Loss attributable to non-controlling interests to be around $1.2 million. On a non-GAAP basis excluding estimated production ramp-up costs relating to the JV Company. This item is expected to be approximately $0.2 million. As part of our normal practice, we are not obliged to update this information. With that, we will open the call for questions. Operator, please start the Q&A session.

Operator, Operator

Thank you. Your first question comes from Craig Ellis from B. Riley FBR. Your line is open.

Craig Ellis, Analyst

Yeah. Thanks for taking the question and congratulations on the nice execution in the quarter, guys. Yifan, the first one's really just a clarification, did you mention what the JV Phase 1 revenues were in the quarter and what are they expected to be inside of the fiscal first quarter outlook?

Yifan Liang, CFO

Yeah. During the June quarter, the majority of our revenue increase was supported by our joint venture. So, as you saw, the joint venture achieved the first EBITDA positive quarter, we’re happy with that. Right now, because of the uncertainty of this pandemic situation, we expect that it will continue to ramp up this joint venture fab. Our September guidance also factors in that support from the joint venture. So, as Mike mentioned, the world was going to progressively continue to run this JV fab during the course of the fiscal year 2021.

Craig Ellis, Analyst

Okay, and as long as we're just talking about the fab ramp and what happens in the fiscal year, before coming back some other near-term items, how should we expect that to play out through what's typically a seasonally softer part of the business in fiscal 2Q and Q3? Would we expect fab production and fab sales to mirror historic seasonality, or is there something about the design win profile you've been able to achieve with products from Phase 1 that would allow that fab to continue to grow putting revenue sequentially through next year, when you expect to get to that original $37.5 million target?

Yifan Liang, CFO

I would expect, and you know, there is some seasonality along the way, in this fiscal year 2021. On the other hand, yes, we have some design wins and company specific, and then we are going to continue to run the joint ventures and fab. We're all – I was thinking, and you know, there is still some uncertainty down the road in terms of the December quarter, March quarter, and you know, we just would go quarter-by-quarter. So, right now, our September quarters guidance reflects our expected run.

Craig Ellis, Analyst

Okay, thanks for that. The next one is a question for Steven. Steven, I think three months ago, we thought that the new gaming platform might deliver $6 million in sales and it looked like consumer was up significantly enough that that $6 million might have been $7 million, or $7.5 million. One, can you confirm what the revenue contribution was from the new gaming platform? What would you expect in the fiscal first quarter? And somewhat similar follow-on, as I had for Yifan, given the highly seasonal nature of gaming platforms, would we expect revenues from this set of design wins to moderate in fiscal 2Q and 3Q before reaccelerating next year?

Stephen Chang, Executive Vice President

Yes. So, we're very excited about the gaming business that's ramping up now. We saw that ramp up already happening in the June quarter on this platform. This gaming console is not going to release until the later part of this year, more towards the end of Q3 beginning of Q4. However, obviously, the production has already started for that. And we're not quoting any specific numbers for these quarters, but it's very healthy, and we expect another big jump going into the September quarter. Beyond that, we have to see how the console reaches the market and see if there are any production hiccups on our customers' end, but so far, we don't see anything. Right now, we are pretty happy with this business. And as Yifan mentioned, this is one of the key design wins for new business that we are counting on for the December quarter.

Craig Ellis, Analyst

Okay, great. And then interesting teaser about server power shipping in the June quarter, so can you give us some further color on what happened there and what’s happening in the back half of the year?

Stephen Chang, Executive Vice President

Sure. So, digital power and we're very excited to be in one of the upcoming graphics card platforms. This is going into one of the high-end models that get released at the start of the platform release. So, we have our SPS product, going to be shipping already in this September quarter, as well as ramping into the December quarter. So, naturally, as we talked about before, our digital powers focus on two key markets going after advanced computing, as well as Telecom. So, it's not too surprising that we see the first business win coming more from a client-side portion of the computing sector. We are pretty excited about this. This will ramp up some more next year as well. At the same time, we have other opportunities that are being developed at the moment for other applications.

Craig Ellis, Analyst

Okay, that sounds good. And then lastly, just a long-term question to Yifan, and maybe even for Mike. So, guys, thanks for clarifying the Phase 1 fab ramp target. Got it. Fiscal 1Q 2022 it sounds like, how should we think about what was the $1 billion revenue target for calendar 2023? Is calendar 2023 still the right period for that revenue target or would that shift out due to the COVID crisis?

Yifan Liang, CFO

Well, I'll take the first question. The original target of a billion dollars in revenue for calendar year 2023, I would expect to be pushed out by one year because of this 2020 pandemic situation. That’s how we currently view it, and it may change down the road depending on the market situation. So leave it that way.

Mike Chang, CEO

This is Mike Chang. Let me follow up with Yifan and maybe give a little bit more depth. When we look into the future business, okay, especially looking at the challenging goal for 2023, what I can tell you is your technology in new product development and acceptance, which does take time and patience is crucial. We are encouraged during this difficult time, as our product starts to gain acceptance, which is tremendous encouragement for us. So, I agree with Yifan; we cannot fight with nature. This situation will affect us, but at the moment, we are hopeful that this should not extend more than one year.

Craig Ellis, Analyst

That's helpful Mike. And then if I could just follow up on that useful color, since you mentioned the long-term Technology Roadmap, where does wide-band gap silicon carbide fit into your long-term Technology Roadmap and where are you in development of those technologies?

Mike Chang, CEO

This is another slow cooker. We've been in R&D in this area for many years. Recently, we just released one silicon carbide product. However, I don't want to create too much excitement, because that kind of thing will take time for customer acceptance. So, you have the product ready, but it takes time for customers to accept it and expand usage. So, I can only tell you that we have the capability. We have R&D there, but I would consider it long-term. Yes.

Craig Ellis, Analyst

Thanks for the help guys.

Mike Chang, CEO

Thank you.

Operator, Operator

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

David Williams, Analyst

Thank you, and I appreciate the opportunity to ask the question, guys. Congrats on the solid quarter and the guide.

Stephen Chang, Executive Vice President

Thank you.

David Williams, Analyst

So, the gross margin came in a little better than we had expected and of course, above the guide. Can you maybe talk through any puts and takes there of the margin? Was that more mix related or just productivity out of the JV or what really led to the better margin profile this quarter?

Yifan Liang, CFO

Oh sure, I mean, the gross margin came in at the high-end of our guidance. So, we are pleased to see that. Since the majority of the increase in our revenue was from our joint venture, our non-GAAP gross margin performed well and production ramp-up costs sold actually, made the normalized non-GAAP gross margin already. The June quarter's non-GAAP gross margin was flat compared to the March quarter. So, are relatively stable compared to March quarter. In terms of product mix and factory utilizations, the reduction in the production ramp-up costs accounted for margin increases if we did not factor in the production ramp-up costs. So, that will be the margin gain there, but since we already normalized the non-GAAP margin, the June quarter's margin was basically stable compared to the March quarter.

David Williams, Analyst

Okay, great. And then maybe if you can just, maybe rank order the growth of the underlying trends that are going to continue to support the growth, if you kind of exclude some of the shorter-term trends that you're seeing. What are the largest maybe secular growth drivers that you see that will support you to that $1 billion run rate that you talked about?

Stephen Chang, Executive Vice President

Yes. Hi, David. I can take that question. We're definitely heading more and more towards diversification. To get to the $1 billion in revenue, we're expecting contributions from all the core markets. Of course, we'll continue to be strong in computing, and even in computing, we're finding ways to expand BOM content. We expect that with the future platforms coming from Intel and AMD, our BOM content will actually increase, and we are also looking into new sockets, like Type C, as well as some other areas that we are investing in. So, computing would definitely be strong. We have even the server market as part of the mid-term growth for computing. Communications has also been strong for us in the past and will continue to grow with strength in battery protection going into phones. We have a very good position looking ahead at that segment. We expect that to continue as we also look to supplement that with business from the telecom side. We also expect to see our power supply grow as well. Right now, in the short-term, it's been growing mainly with the PC boom because of the work from home situation. A big part of that is because we've been able to service the high voltage market we have ignored. Now, because we have CQ and the ability to support that, this is going to be a new area of growth for us to support not only power supplies for PCs, but for gaming systems for industrial power, and for solar and other applications. And of course, gaming and consumer are new areas, and we’re pretty pleased with that. Gaming will be a big part of consumer going forward, and so will our other existing business. We're on track to grow more than 40% year-over-year for the calendar year. The home appliance business based on IGBT's in our module solutions will continue to grow. So, in the end, we are growing by diversification. We can't count only on just a few areas of the market. We've gotten big enough and established enough in our current applications, and we are expanding into new applications to help us get to that $1 billion.

David Williams, Analyst

Right, that's very helpful. Thank you. And then Stephen maybe or Mike, on the digital controller front, you’re obviously making some very nice progress, shipping in the Q. How do you think that layers? And as you move forward, what does that ramp look like? Is it slow and steady? Or could we expect to see maybe a nice more hockey stick approach as you get into the middle part of next year?

Stephen Chang, Executive Vice President

We expect it to be more slow and steady. We do expect the client portion of the business to grow a little sooner and faster, just because of the nature of the shorter design cycles for going into client computing. The longer ones are going into server platforms and telecom platforms, which we are engaged in, but they simply take more time to build design in as well as to ramp up. So, I think steady is probably the right word for that. These kinds of business takes longer to design in, but it's much stickier and will stay for much longer because these platforms endure for a much longer time.

David Williams, Analyst

Okay. Any thoughts on the BOM content addition that you can pick up?

Stephen Chang, Executive Vice President

Oh, the content can be pretty large, but it really depends on the end application. There are different scales of base stations and servers. It depends on how many rails they are looking down to use digital power for. But it can be on the tens and twenties of dollars per system, but there's a pretty wide range depending on the application.

David Williams, Analyst

Okay, that’s fair. And one more if I can. Just kind of thinking about the health of the inventory, can you maybe talk about the different puts and takes? How do you feel in terms of the inventories that's maybe in the channel? And are you shipping to consumption or are you seeing any type of bills that will help your 1Q guide?

Mike Chang, CEO

Sure. Our channel inventory right now is what I consider pretty healthy. It's within the targeted range of two to three months. It is close to the midpoint of that target range. So, we don't have much concerns about channel inventory at this point.

David Williams, Analyst

Okay. Thanks so much, guys. I appreciate it, and best of luck on the quarter.

Mike Chang, CEO

Alright. Thank you.

Stephen Chang, Executive Vice President

Okay. Thank you.

Operator, Operator

Your next question comes from the line of Jeremy Kwan from Stifel. Your line is open.

Jeremy Kwan, Analyst

Thank you, and let me add my congratulations to the excellent results and outlook, and especially the cash flow generation.

Mike Chang, CEO

Thank you.

Stephen Chang, Executive Vice President

Thank you.

Jeremy Kwan, Analyst

I guess the first question, maybe regarding the follow-up on some of the seasonality questions. It seems like some of the growth near-term has been driven a lot by the consumer, gaming, graphics cards, and some of the cell phone builds. Could you see potentially a stronger seasonal trend coming up in the next couple of quarters because of that? Are there certain design wins that can make up for some of that potentially increased seasonality?

Stephen Chang, Executive Vice President

Sure. First, I want to comment that because of COVID, there's not much of a normal seasonality this year, but there has been a lot more disruption because of how COVID has affected our customers, both their demand and their production. Computing typically, as a Q3 September quarter, has done major peak seasons. This year, we basically saw that peak season pulled in from September into June, partly because March was a disaster quarter for our computing customers; their factories were located in China, and many were in the epicenter where COVID was starting. But because of work from home and strong demand, the June quarter was strong and the September quarter remains very healthy. We really need to wait and see how this plays out over the longer timeframe. Right now, Q4 also looks okay. Going into smartphones, I would say it's probably dependent on how well each of the major players are doing. Some, one of our customers launched a new phone back in the March quarter and didn’t pull back production until June. But as we enter September, they are starting up production heavily again, anticipating possible factory shutdowns that may occur in the coming cold season. Overall, we see demand very healthy from all three vendors going into the second half of the year. The newer areas for us are gaming as well as graphics cards. Both of these are relatively new for AOS. So it's not really seasonal; it’s tied to their platform releases launching in the second half. Graphic cards typically last around two years, and gaming systems last longer, around six to seven years. So, we’re at the beginning of these cycles and have additional business layering on top of our current business.

Jeremy Kwan, Analyst

Yes, that's very helpful. Thank you, Steven. And maybe just a quick follow-up on the comments that some customers, especially in the smartphone industry, are building ahead of potential shutdowns later on. Is that something you see pretty widespread within cell phones, and do you see that across other industries?

Stephen Chang, Executive Vice President

I see – this particular vendor is probably just one customer mainly doing that. I wouldn't say it's necessarily reflective of the entire market or industry. But at least, they're doing much more than other ones are. The other major vendors are seeing their normal seasonality coming, so we see all three vendors asking for product right now.

Jeremy Kwan, Analyst

Got it. Great. And then maybe just, can you give us an idea of linearity in the quarter, and maybe your backlog and visibility for the upcoming September quarter?

Yifan Liang, CFO

Sure, Jeremy. Our backlog has been healthy and steady since the month of March. If you recall back to the March folder towards mid-March, I saw the surging demand started and then backlog started fitting in. I guess this reflected the recovery of supply chains and the surging demand due to working from home and learning from home. And also, it's our company-specific design wins. Of course, under this challenging and volatile pandemic environment, we want to be vigilant and cautious and monitor the dynamic changes carefully. Right now, our backlog can support our September guidance.

Jeremy Kwan, Analyst

Okay. Can you give us a comparison on a relative basis, maybe this quarter versus prior quarters? Some of the other analog peers have reported very high backlog coverage. Just wondering if that's the same case for you guys?

Yifan Liang, CFO

It has been steadily increasing, yes, better than last quarter, and position I will say.

Jeremy Kwan, Analyst

Great. And Yifan, just looking at the balance sheet, I noticed other assets were down about $26 million. Is this the VAT refund, the value-added tax getting converted into cash?

Yifan Liang, CFO

Yes, yes. Exactly.

Jeremy Kwan, Analyst

Okay. So then, is that – that's the full amount. So, about $26 million, if we look at, because your operating cash flow had a very nice bump from the March quarter to the June quarter. So, if you take that out, would that be roughly the operating cash flow for excluding the refund?

Yifan Liang, CFO

Yes. I mean, for AOS, when we separate AOS from the JV, AOS generated about $20 million operating cash flow, $11 million of free cash flow in the quarter. JV, yes, that – about $25 million in refund they got from the local government related to that value-added tax. Last couple of years when they imported the equipment, they had to pay value-added tax. So, that one has been cumulated for a couple of years. In the June quarter, they got a refund pretty much all of them from the government. They were using those receivables from the VAT tax and against that they borrowed from a local bank against those VAT receivables. So, when they gathered the refund, they also repaid about $15 million to $16 million of loans. So net-net, yes, they did get more working capital.

Jeremy Kwan, Analyst

Got it. And did you say, is all the VAT tax hasn't been fully refunded by now? Or is there still some waiting to be collected?

Yifan Liang, CFO

That's pretty much all refunded already.

Jeremy Kwan, Analyst

Great. And then just a question, as the JV has been ramping, I think Mike said earlier that you guys are expecting to hit the target around this time next year. So presumably, you probably need to invest ahead of that. So can you talk to us about CapEx plans and also just for the JV, what – it looks like the operating cash flow is still not quite break-even at this point. Do you have targets for when you might expect to hit operating cash flow break-even and also on a free cash flow basis?

Yifan Liang, CFO

For AOS, our CapEx spending is pretty much in the range of the normal range like, I would say, 6% to 8% of our revenue. For the joint venture, yes, right now, we are doing some planning work for the next round. But right now, our main focus is to ramp up the 12-inch fab first. So that will have a longer-term planning for the JV.

Jeremy Kwan, Analyst

So – sorry, so were there any CapEx or breakeven targets that you can give us?

Yifan Liang, CFO

Well, this target we're seeing along with our business growth and expectations. So, that's kind of a – you'll have to wait and see.

Jeremy Kwan, Analyst

Got it.

Yifan Liang, CFO

We will disclose that when the time comes.

Jeremy Kwan, Analyst

Great. Okay.

Mike Chang, CEO

This is Mike. Can I, maybe putting in a few words about this JV?

Jeremy Kwan, Analyst

Yes, please. Thank you.

Mike Chang, CEO

Okay. I think, first off, we need to differentiate, okay, this JV was a sort of a purpose-driven, it's a strategic investment to match our business growth plan. So, it's not a purely financial investment. Therefore, we really look into what our business grows and that we tailor this venture to support that, meanwhile supporting central growth too. There is a primary and secondary. The primary deal is to support its growth. So, I just wanted to differentiate it a bit.

Jeremy Kwan, Analyst

That's very helpful. Thank you. I understand it's strategic for AOS as a standalone and the cash flow implications are into consideration, but it's not the primary one.

Mike Chang, CEO

Our costs would have been very prudent, right? So – yes. Thank you.

Jeremy Kwan, Analyst

Right. Great. Thank you. And then just one last question, to help us model the government investigation, is it still going to be $2.5 million for the remainder of the year? Or is there some drop-off that we can expect at some point?

Mike Chang, CEO

Well, this one is really hard to estimate depending on the activities. Right now, for the June quarter, our expenses were in the $2.5 million, $2.6 million range. So, I wouldn't think use $2.5 million at this point for the guidance. It's hard to estimate at this point.

Jeremy Kwan, Analyst

Okay, that's true. And that's all I had, and congrats again on the solid results.

Mike Chang, CEO

Thank you.

Yifan Liang, CFO

Thank you.

Stephen Chang, Executive Vice President

Thanks.

Operator, Operator

Your next question comes from the line of Craig Ellis from B. Riley FBR. Your line is open.

Craig Ellis, Analyst

Yes. A couple of them, and thanks for taking the follow-ups, guys. First, I just wanted to get your views on how you're looking at production optimization and demand planning? And I want to do it in the following context. I think when we started into calendar 2020, the company was optimizing its business for communication-centric growth. A lot has happened since you relied on your feet, and it looks like in the back half of the year, we're really going to see mid-year, late-year growth driven by gaming platforms and compute. So, good for you for realizing that; and I think the communications business has been fairly flattish from the first quarter. The question is, as we look at calendar 2021, so the second half of your fiscal 2021, first half of fiscal 2022, how do we think about the way you're optimizing your production and your demand planning? Is it going to stick with being much more of a compute and console incremental demand business? Or do you see the communications business coming back and contributing more to growth next year than it has over the last couple of quarters?

Stephen Chang, Executive Vice President

Yes, this is Steve, and I can address that. So, similar to what I was saying about the overall picture, in the long-term, we're heading more toward diversification. But in the short term, you're right. Right now, we're seeing big strong growth in PCs because of work from home and consumer demand, mainly from newer platforms in gaming. In the longer run, I do expect the other platforms to continue to grow. Communications, we do expect cell phones to provide the main foundation. And we have a very strong position looking ahead in each of the three major markets, and we will continue to be strong going forward. On the Power Supply side, we saw the beginning of some growth led by the PC market. So it's related to the ongoing boom in PCs. Because of the work from home situation, targeting the high-voltage market, this will help foster new growth opportunities.

Craig Ellis, Analyst

That's really helpful color, Stephen. And then the follow-up, I believe the company is spending about $3 million a quarter on its digital power R&D. So I’m trying to think through the dynamics that lead that business to breakeven on an operating basis. We've started to ship product into gaming core products. Do you feel like you've got visibility now to $6 million to $8 million in quarterly revenue for digital power, or when would you expect to get that visibility? So we'd be at a point where on an operating basis, we were breakeven on a quarterly basis?

Stephen Chang, Executive Vice President

I think it's still further out. We expect digital power to take time to establish as a first player going into the digital power market, but also as for the markets that we're targeting – where we want to penetrate, both servers and telecom, we’re still relatively new. It simply just takes time to build this business. That said, we're getting early traction on applications that we do know well going into the client side with graphics and PCs. We expect to see earlier traction there. However, it will not reach the breakeven point that quickly. I think a steady progress towards this will take a few years. This is just the beginning of revenue, coming from one customer right now, but we hope to expand this in the coming quarters.

Craig Ellis, Analyst

Make sense. Thanks, Stephen.

Mike Chang, CEO

This is Mike Chang. Can I add a few more words?

Craig Ellis, Analyst

Yeah. Go ahead, Mike.

Mike Chang, CEO

What Steven says is exactly true. However, I would like to also share some of our excitement. As you know, we are strong in clients. The telecom segment is kind of new for us, but we’re beginning to see some solid synergy among ourselves on the existing policies. Even though it may not get revenue as 'hey, what is this revenue coming from this power', it greatly contributes to the other side. So those benefits are significant.

Operator, Operator

There are no further questions at this time. I turn the call back to the presenters for closing comments.

Gary Dvorchak, Investor Relations Representative

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, everybody, for joining. That concludes your conference call today. Have a wonderful day. You may now disconnect.