Earnings Call Transcript - AOSL Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Alpha and Omega Semiconductor Fiscal Second Quarter 2021 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Gary Dvorchak. Thank you. Please go ahead, sir.

Gary Dvorchak, Investor Relations Representative

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2021 second quarter financial results. I'm Gary Dvorchak, the Investor Relations representative for AOS. With me today are Dr. Mike Chang, our CEO; Yifan Liang, our CFO; and Stephen Chang, our President. 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.

Mike Chang, CEO

Thanks, 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 an excellent quarter and finish to the calendar year 2020. In the December quarter, we saw solid shipments across most of our product categories, leading to results ahead of expectations. We grew revenue by 35% year-over-year to $159 million. We achieved higher utilization at our manufacturing facilities. We continued to be disciplined with our spending. All of this led to records in non-GAAP gross margin of 31.4% and non-GAAP EPS of $0.65. Yifan will go into more details on our financial performance later. I am really pleased by our team's execution. The operational controls and efficiencies that we have implemented are positively impacting our bottom line. For investors who may be new to our story, our mission is to become a leading designer, developer, and global supplier of a broad portfolio of power semiconductors. This mission drives our strategic focus and the work we do.

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 December quarter. Our business momentum has accelerated over the past several quarters due to our advanced product portfolio, marketing strategy, and growing production capacity. As we stated previously, our strategy is now to create advanced total solution products in close partnership with our customers. These products leverage our expertise in power and move beyond commodity parts into multi-socket optimized solutions that make our customer products more reliable and efficient. For example, our recent design wins in a gaming system and in a new PC graphic card platform, as well as our high growth in home appliance applications and battery protection solutions, demonstrate how we have deepened strategic partnerships with tier-one global OEM customers. We expect to accelerate growth by winning new customer engagements with an expanding pipeline of new products and increasing BOM content.

Yifan Liang, CFO

Thank you, Stephen. Good afternoon, everyone, and thank you for joining us. Before I dive into the financials, I want to highlight some key milestones at the JV Company, which Stephen alluded to a few minutes ago. We started the construction of the JV Company four years ago as we anticipated additional capacity requirements based on our longer-term growth plan at that time. The 12-inch fab commenced its production in July 2019 and the assembly and test facility started a bit earlier. The JV Company’s production ramp in the past year has played a significant role in our recent business growth. In the December quarter of 2020, the JV Company achieved positive EBITDA for the third consecutive quarter. We are very encouraged by the progress the JV Company has made in its production ramp. Beginning in the December quarter, we no longer report the production ramp-up cost as a non-GAAP item. We expect the JV Company to generate another sequential volume growth in the March quarter and approach the Phase 1 target run rate in the September quarter. Beyond Phase 1, the JV Company will provide us with flexible capacity management and geographic diversification of our supply chain. As part of our next phase of the growth plan, we are planning the Phase 2 expansion and will offer more details in the quarters ahead. Now let’s turn to financial results. Revenue for the December quarter was $158.8 million, up 4.8% from the prior quarter and up 34.8% from the same quarter last year. In terms of product mix, DMOS revenue was $118.5 million, up 3.6% from the prior quarter and up 19.3% year-over-year. Power IC revenue was $37.4 million, up 8.5% from the prior quarter and up 122.2% from a year ago. Assembly service revenue was $2.9 million as compared to $2.7 million last quarter and $1.7 million for the same quarter last year. Non-GAAP gross margin for the December quarter was 31.4%, up from 29.0% in the prior quarter and up from 28.3% in the same quarter last year. The quarter-over-quarter increase in non-GAAP gross margin was mainly driven by the higher utilization and operational efficiency as well as favorable product mix. Non-GAAP gross margin excluded $0.8 million of amortization of purchased IP for both December and September quarters. In addition, non-GAAP gross margin excluded $0.4 million of share-based compensation charges for the December quarter and for the prior quarter as well as for the same quarter last year, respectively. Non-GAAP operating expenses for the December quarter were $31.5 million compared to $28.6 million for the prior quarter and $25.7 million for the same quarter last year. The quarter-over-quarter increase primarily reflected higher variable compensation accruals based on the better than expected results for calendar year 2020. Non-GAAP operating expenses for the quarter excluded $2.8 million of share-based compensation charges and $0.8 million of legal expenses related to the government investigation. This compares to $2.5 million of share-based compensation charges and $1.1 million of legal expenses related to the investigation for the prior quarter as well as $2.1 million of share-based compensation charges for the same quarter last year.

Operator, Operator

We have our first question from the line of Craig Ellis from B. Riley Securities.

Craig Ellis, Analyst

Congratulations on the strong calendar 2020 and start to '21. I wanted to start with a higher-level question, and maybe I'll direct this to you, Stephen.

Mike Chang, CEO

Thank you.

Craig Ellis, Analyst

Yes. Sure, Mike. Yes, business has come a long way, and it's been an incredible journey with the 300-millimeter fab and nice to see that doing so well here with the $6 million EBITDA. My first question is just around the nature of order visibility that the company has at present. We've heard from some companies that their visibility extends well into the second half. For some, it's already extending all the way through calendar '21. Stephen, maybe you can just comment on order visibility you have across the main end markets. Where is it comparatively longer? And where might visibility be a little bit shorter?

Stephen Chang, President

Sure. This year appears to be a continuation of last year's nonseasonal patterns. Overall, our backlog remains strong, and Yifan will provide additional insights later on. The market continues to be quite tight. Focusing on key segments, Computing remains robust. Although we are coming out of what is typically the peak season, we still anticipate a strong performance heading into the March quarter this year. Generally, demand is high across most of our segments. However, we may not have complete visibility through the end of the year since we believe we are still in unusual times and some segments may experience corrections. Currently, we are in an allocation stage, working to effectively serve our customers while also safeguarding our revenue.

Yifan Liang, CFO

Yes, I agree with Stephen's comments. The backlog has remained healthy and stable throughout the quarter. At this point, we don't have clear visibility into the second half of this calendar year. There are many dynamics and risks at play, so we want to approach this with some caution.

Craig Ellis, Analyst

Stephen, could you provide more details about the allocation statement mentioned in the prepared remarks and your previous response? How extensive are they? Additionally, can you share any insights on when these allocations began to take shape and their current status as we enter February?

Stephen Chang, President

Sure. I believe the allocation issues in the market likely began in the latter part of last year. While our third quarter was quite strong, it wasn’t just our performance; the entire industry was experiencing various shortages, whether in raw materials or extended lead times. We manage our operations effectively, but we are not unaffected by these challenges. Ensuring a secure supply chain is a top priority for us, as it is for other companies in this industry. We are also noticing strong demand across market segments, contributing to a high backlog, which reflects both the industry shortages and the increased demand driven by COVID and other robust segments.

Craig Ellis, Analyst

And if demand is strong and if there are allocations, why wouldn't the JV fab Phase 2 start to ramp up earlier to alleviate that demand? Can you just talk about where products are being sourced that are related to some of the tightness? And why there wouldn't be a pull-in on the Phase 2 ramp, if there is tightness?

Stephen Chang, President

Yes. I'll speak generally first on that. CQ is ramping pretty well, especially compared to the beginning of last year. We're very fortunate and happy to see that CQ is ramping and ready to support us with the growth. So we will be depending on this JV more going forward. Yifan, would you like to provide some more details on the expansion?

Yifan Liang, CFO

Sure. We have been continuously ramping the JV Company. I mean, over there, as you can see, started from last calendar year's June quarter, September quarter, December quarter continued to ramp. And then we do expect in the March quarter, we'll continue to ramp, but it takes time for a brand-new fab to ramp. So at this point, we do expect we can ramp up Phase 1 target run rate by the September quarter of this year.

Craig Ellis, Analyst

That sounds good. And then last question for me before I jump back in the queue. We've heard from a number of companies and it's widely reported that there has been an increase in various types of input costs and that is triggering some more tactical pricing moves from all types of semiconductor suppliers. What's the status of that type of activity at AOSL? And how should we think about whether either, a, you would be doing that or, b, to the extent that you're not, if there's an opportunity to gain either intermediate or long-term share gain from customers that are raising prices?

Stephen Chang, President

We are noticing a general increase in the cost of raw materials, affecting both physical supplies and services. This trend is evident in lead times and reflects a tight overall market supply chain. As a result, we are adjusting our pricing to account for these cost increases. However, we are committed to not overburdening our customers during this process. Our focus is on building long-term relationships, particularly with our Tier 1 customers, and we are being careful and selective in how we apply these price adjustments.

Operator, Operator

We have our next question from the line of David Williams from Loop Capital.

David Williams, Analyst

First off, Stephen, congratulations. It's great to see you making progress, and also congrats on the fantastic results. You are really building on your success, and it's nice to watch the growth. So congratulations there.

Stephen Chang, President

Thank you, David. Appreciate it.

David Williams, Analyst

I wanted to discuss the additional capacity at the joint venture. I understand that you are still in the ramping phase and haven't fully reached your goals yet. Do you think there is a chance, as you suggested before, that you could optimize the capacity at that facility? What do you believe is the current run rate? Also, could you remind us about your full ramp-up and if there have been any changes regarding the revenue ramp?

Yifan Liang, CFO

We have been increasing production at the joint venture fab. We will continue to ramp up, and there is still some capacity available, which is positive for us. We are aiming for around $157 million in the March quarter, with a possible variation of $3 million. This figure takes into account some production reductions during the quarter due to a few factors. One factor is the Lunar New Year, which typically results in lower output at our factories. Additionally, we will have a one-week shutdown at our Oregon fab for scheduled annual maintenance, which will also affect production output. Overall, we are still seeing ongoing progress in ramping up for the joint venture company.

David Williams, Analyst

Okay. Great. Could you provide some insight into how your customers are positioning themselves? Are you noticing that orders are coming in with longer lead times? Are customers placing orders now for the third and fourth quarters? Additionally, regarding visibility, do you think it is generally improving despite the ongoing volatility in the market, with demand remaining strong? I'm trying to gauge how confident you feel about sustaining this high level of demand. As we approach the second half of the year, do you anticipate a potential decline as the impact of COVID diminishes? How are you preparing for that possibility?

Yifan Liang, CFO

Okay. Let me take it first. I mean, the backlog right now, yes, it is strong. Then we are monitoring it very closely. So the March quarter and some June quarter's already filled up. I will not rule out some double ordering in those situations. So we are monitoring order patterns and then triangulating with our design wins at customers so that we don't need to ship a whole lot to certain customers that cause other customers lying down. So that's what we are doing on a daily basis right now. So overall, I mean, things could change. I mean, I will not comment on the second half of the year.

Stephen Chang, President

Yes, to provide more details, we are currently examining our strong backlog and customer demand closely. We are identifying which areas of the business we need to support, focusing on strategic initiatives, our key customers, and important products. This allows us to be selective about our support. However, we are aware that we do not have long-term visibility, so we are carefully observing any shifts in the market. We want to ensure we take advantage of the opportunities that may arise.

David Williams, Analyst

Okay, great. I have one more question if you don't mind. The gross margin improved nicely this quarter, exceeding 30%, which is encouraging to see. How do you anticipate that trend will develop moving forward? Can we maintain those same incremental margin rates, or do you expect a significant decline? Also, could you discuss the factors that contributed to this? I understand it relates to utilization and some mix. Was the mix more related to specific products or perhaps the integrated circuits compared to some of your discrete products that might have influenced the margin?

Yifan Liang, CFO

We are very pleased with the historically high non-GAAP gross margin of 31.4% in the December quarter. This shows that we can meet our 30% gross margin target for the calendar year 2021. The performance in the December quarter has increased our confidence in reaching our near-term goal. Yes, we are on track to achieve that 30% gross margin target for 2021. For the March quarter, we anticipate a gross margin of 29.5%, give or take 1%. This is mainly due to lower production output caused by the Lunar New Year and a one-week shutdown at our Oregon facility for annual maintenance. This is why I provide guidance; I aim to reach the high end of our projections. We are quite confident that we can meet our near-term margin target.

Operator, Operator

Next is Jeremy Kwan from Stifel, Nicolaus.

Jeremy Kwan, Analyst

Let me add my congratulations on the very strong results and also even on your expanded leadership role.

Stephen Chang, President

Appreciate it. Thank you.

Jeremy Kwan, Analyst

Can you provide more details about the allocation situation? Are you putting customers on allocation as well? Are suppliers placing you on allocation for items like substrates or raw materials? Also, can you share more insights into where the shortages are?

Stephen Chang, President

Sure. It's occurring on both sides, and it's not just us; it's a situation affecting the entire industry. Currently, our capacity along with foundries, back-end processes, and raw materials is showing general shortages across the market. This situation also impacts our customers downstream. At the same time, demand has increased significantly. I mentioned that our backlog is quite high, far exceeding our capacity. Consequently, our customers are also experiencing allocations due to our constraints. There are limitations on both fronts.

Yifan Liang, CFO

Good thing is, Jeremy, that we have the majority of the manufacturing operations in-house. So that's a better part than a fabless company.

Jeremy Kwan, Analyst

Yes, this situation definitely provides you with a competitive advantage. Can you provide more details on the pricing trends you're experiencing from your suppliers? I know you've mentioned some pricing changes for your customers, but you aren't fully passing that along. Could you elaborate on the scale of this effect and whether it influences things further down the line?

Yifan Liang, CFO

Pricing increases from suppliers vary significantly; some have not increased at all, while others have seen small to moderate increases. It's a mixed situation. Our focus remains on nurturing long-term relationships with our customers, so we are working to offset or minimize the impact of these cost increases for now.

Jeremy Kwan, Analyst

Got it. And maybe if I can switch gears a little bit to the $10 million customer deposit that you got. Is this included in the $35.7 million operating cash flow on the AOS side?

Yifan Liang, CFO

Yes, this is part of the $35 million operating cash flow because we recorded it in the long-term liability account.

Jeremy Kwan, Analyst

Got it. Okay. Now, regarding the Communications side of the business, you mentioned that Chinese smartphones play a significant role in the growth you’ve experienced. Could you provide some insight into the size of that impact? Specifically, what percentage of the revenues from the Communications business is attributed to these Chinese smartphone wins?

Stephen Chang, President

I would say it's not as large as the major global customers that we typically serve. However, the key point here is that these are not new customers; the China customers are returning clients. They had worked with us in the past, but we initially focused on prioritizing our global business due to allocation. Now that our capacity has increased, particularly with the new JV fab, we are able to re-engage with these customers and grow our business with them. In terms of size, they don't match the global customers, but they are significant enough to mention. We believe this will play an important role in our future growth as we aim to become a leader in this space globally.

Jeremy Kwan, Analyst

Great. And then, I guess, speaking of the JV, it's nice to see that hit operating cash flow breakeven. We noticed that the CapEx also increased a little bit meaningfully. Is this the last of the Phase 1 spending? Or is this kind of maybe a little bit preparation for what you plan to do in the Phase 2? And until you announce the plans for Phase 2, what can we expect in terms of the CapEx going forward for the JV?

Yifan Liang, CFO

Certainly. Capital expenditures can vary over time based on payment terms and the timing of purchases. Some require down payments, while others involve additional payments after qualifications and dry runs. Currently, we are planning for Phase 2 expansion, which will allow for some flexibility. Additionally, the current Phase 1 clean room has remaining space that we can utilize to address bottlenecks and increase overall output. We will share more specific details in the upcoming quarters.

Jeremy Kwan, Analyst

Could you clarify how much the Joint Venture Phase 1 is being utilized? Previously, your target was that the Joint Venture would assist in reaching the $600 million run rate. Currently, you are ahead of that for this and next quarter. Where is this extra revenue coming from? Are you managing to maximize output from the Oregon fab? How much more capacity is available on the Joint Venture side?

Yifan Liang, CFO

The overall increase in our production comes partially from the Oregon fabrication facility, as we have enhanced our product mix and introduced newer products that yield higher revenue per wafer, along with some Power IC products. We observed significant year-over-year growth. The IC products, particularly related to the IC drivers, are sourced from third-party foundries rather than from our Oregon facility. Regarding the joint venture fabrication facility, there is still some capacity to expand. Currently, we have ramped up to approximately 67% to 70% of its potential, leaving around 30% capacity for growth.

Operator, Operator

We have Craig Ellis again from B. Riley Securities.

Craig Ellis, Analyst

I just wanted to follow up on a few points that we talked about at different times in the past. In the past, the company has mentioned that there could be potential for design wins with follow-on gaming system products. I'm wondering if there's any update to the potential for such?

Stephen Chang, President

Yes, the potential is still there, but the timing for the decision has not yet been determined. I believe that will likely come around the middle of the calendar year. We are preparing for it, and we hope to increase our share in existing sockets. However, at this moment, there isn't much news, and the timing is not right for that.

Craig Ellis, Analyst

And then on the gaming card side, I think the company has mentioned good participation at the high end of the gaming card line. What's the opportunity for following that up with content in mid-range cards, which I think are rolling out through the first quarter?

Stephen Chang, President

Sure. I think that's currently in progress and some of that was already occurring at the end of the last quarter. Yes, we do intend to participate as part of our customers' rollout. Currently, graphics cards are being released over a two-year period before the next platform is introduced. In the meantime, they are developing additional models based on those chipsets.

Craig Ellis, Analyst

And how would you characterize the content differential for AOS between a mid-range and a high-end card, Stephen?

Stephen Chang, President

There's still a significant amount of driver MOS being utilized. The high end could vary quite a bit. While we're not quoting specific dollar amounts, I would estimate that perhaps half to two-thirds of the bill of materials content of a high-end card will also be present in the mid-range card. That range is fairly broad.

Craig Ellis, Analyst

Yes. And then lastly, guys, just given the real strong December and the strong above seasonal March guide, great to see those. Really, the question is, with fab Phase 2, sounding like it's not starting up in fiscal 3 or 4Q. Does that mean that we're looking at a pretty steady, stable revenue profile as we go through the calendar year? Or would we be able to see that Phase 2 ramp up, so that there would be more meaningful sequential growth coming through as we get into the back half?

Yifan Liang, CFO

We may have some incremental expansion, I mean, at the JV Company. Right now, as I mentioned, the Phase 1 clean room still has some space there. So we would place some equipment there to solve some bottleneck areas so that we can get some incremental output. I mean, overall, in terms of bigger expansion, again, we need to get the clean room expanded. So that will take some time.

Operator, Operator

We have a follow-up from Jeremy Kwan from Stifel, Nicolaus.

Jeremy Kwan, Analyst

I have two quick questions. First, can you provide an overview of your channel inventories and the situation with your distributors? Additionally, what lead times are you quoting to them and your customers, and how does that compare to last quarter? Secondly, regarding the joint venture, it appears you are rolling over some of the debt. Can you update us on the capital plans, whether new financing is needed, and the current status of the joint venture?

Yifan Liang, CFO

Okay. Sure. In terms of our channel inventory, right now, channel inventory is below the low end of our target. We target in 2- to 3-month channel inventory. Right now, it's below the low end of the target. Right now, we don't see much channel stuffing at this point. In terms of JV's second phase, yes, we are in the process of doing our planning work. So we have some options on the table, and we could raise money from banks and from the market, and we'll evaluate all the options there. So we will disclose more, I would say, in the quarters ahead.

Jeremy Kwan, Analyst

What changes have you observed in the lead times from your suppliers and the lead times you're providing to your customers?

Yifan Liang, CFO

Lead time from our supply side is getting longer, reflecting tightness in the overall market. Our lead time to customers is currently well on allocation. If we cannot supply, we will inform our customers. Overall, the lead time is generally longer than what we would consider normal.

Operator, Operator

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

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.

Mike Chang, CEO

Thank you. And God bless you all.

Stephen Chang, President

Thank you.

Operator, Operator

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day.