Alpha and Omega Semiconductor Q1 2024 Earnings Call Transcript

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November 6, 2023

There are 8 speakers on the call.

Operator

Good afternoon. Thank you for attending today's Alpha and Omega Semiconductor Fiscal Q1 twenty twenty four Earnings Call. My name is Cole, and I'll be the 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 conference over to our host, Yujia Zhai, please go ahead.

Speaker 1

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2024 Q1 financial results. I am GSI, Investor Relations Representative for AOS. With me today are Stephen Channing, 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.

Speaker 1

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 December quarter. Finally, we'll have the Q and A session. The earnings release that was distributed over the wire today, November 6, 2023 after the market closed.

Speaker 1

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. The 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.

Speaker 1

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 SEC. We assume no obligations to update the information provided in today's call. With that, I will now turn the call over to our CEO, Stephen Chan. Stephen?

Speaker 2

Thank you, Yujia, and good afternoon, everyone. I will begin today with a high level overview of our results and then jump into segment details. We delivered fiscal Q1 results in line with our guidance. Revenue was $180,600,000 Non GAAP gross margin was 28.8 percent and non GAAP EPS was $0.33 These results were driven by strong shipments across notebooks, desktop computing and smartphones for fall device launches and the Q4 holiday season. I am pleased that our team delivered solid execution amid macroeconomic headwinds and inventory corrections in some end markets.

Speaker 2

We have been managing our business through various cycles and coping with an ever changing business environment, but our principle remains unchanged. AOS is committed to building towards long term growth. We are steadily extending the reach of our business into future and new applications and broadening our product portfolio to address increasing global power trends. As an example, we are leveraging our core technology IP and strength in advanced computing, battery, motor and power supply and continue to invest in new adjacent markets like data centers for AI, Automotive and Energy Generation. In addition, we are taking products deeper into our existing core markets with more integrated solutions that will drive higher BOM content.

Speaker 2

By investing in new adjacent markets as well as going deeper into our core markets, we believe we will be well positioned to emerge stronger than ever on the other side of this cycle. The rebound in PCs and smartphones is encouraging following multiple quarters of inventory correction. However, we remain cautious about a sustained broader recovery as we are seeing signs of demand constraints in other end markets, which are feeling the effects of the persistent high interest rate environment and geopolitical uncertainties. Moreover, gaming, which has been a significant revenue driver for us, is now going through an inventory correction as we indicated last quarter. While we cannot be immune to the macroeconomic headwinds, it is important to reiterate that our core fundamentals remain strong.

Speaker 2

Many of our strategic investments over the past years has better positioned us for sustainable growth. We are excited to have a record number of Tier 1 customer partnerships and growing market share in strategic applications across many of our end markets. We continue to expect to navigate the current environment better than the broader market that we serve. With that, let me now cover our segment results and provide some guidance by segment for the next quarter. Starting with Computing, September quarter revenue was down 21.2% year over year, but up 35.1 percent sequentially and represented 38.9 percent of total revenue.

Speaker 2

These results were driven by solid recovery in shipments across notebook, tablets and desktop computing applications. The recovery has been driven by high end driver ICs and MOSFETs for powering CPUs. Looking forward into the December quarter, we expect this segment to be down low single digits following a strong September quarter. Turning to the Consumer segment, September quarter revenue was down 31.3% year over year and down 28.9% sequentially and represented 17.2 percent of total revenue. As we indicated last quarter, gaming is going through an inventory correction after an Extremely strong 12 months of shipments into the number one console manufacturer.

Speaker 2

Similar to what we saw in PCs and smartphones earlier this year, 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. However, we do see opportunities to increase BOM content within the current console platform as part of its refresh next year. Longer term, our relationship with this customer is very strong and we are already engaged in discussions for the next model design. For the December quarter, we anticipate a further mid-twenty percent decline in this segment.

Speaker 2

Next, let's discuss the Communications segment. Revenue in the September quarter was down 1.3% year over year, were up 80.2% sequentially and represented 17.2% of total revenue. These results were driven by strong shipments to the number 1 U. S. Smartphone manufacturer for their phone launch and continued strong demand from Chinese smartphone OEMs for their high end devices.

Speaker 2

Looking ahead, we anticipate this segment to remain at current healthy levels, driven by continued strong shipments to Chinese OEMs ahead of their winter and spring launches. Now let's talk about our last segment, Power Supply and Industrial, which accounted for 23.1 percent of total revenue. September quarter revenue was slightly below our prior expectations, increasing 2.1% year over year and 0.5% sequentially. These results were driven by strong shipments for quick chargers for peak season 2, our Tier 1 U. S.

Speaker 2

Smartphone customer, but offset by weakness in power tools. For the December quarter, we expect this segment to decline in the low teens sequentially, mainly due to reduced quick chargers following the peak season and lower solar demand. In closing, we delivered a solid fiscal Q1. We are closely monitoring market dynamics and macro headwinds. However, our fundamentals are strong and we are focused on positioning the company towards growth beyond our $1,000,000,000 revenue target on the other side of the cycle, driven by our leading technology, more diversified product portfolio, Tier 1 customer base in all our business segments and expanding manufacturing capability and supply chain.

Speaker 2

With that, I will now turn the call over to Yifan for a discussion of our fiscal first quarter financial results and our outlook for the next quarter.

Speaker 3

Thank you, Stephen. Good afternoon, everyone, and thank you for joining us. Revenue for the quarter was $180,600,000 up 11.8% sequentially and down 13.4% year over year. In terms of product mix, DMAS revenue was $121,500,000 up 27% sequentially and down 16% over last year. Power IC revenue was $52,700,000 down 10.5% from the prior quarter and 15.4% from a year ago.

Speaker 3

Assembly service revenue was $700,000 as compared to $600,000 last quarter at $1,600,000 for the same quarter last year. License and engineering service revenue was $5,600,000 for the quarter versus $6,300,000 in the prior quarter. Non GAAP gross margin was 28.8% compared to 28.5% in the prior quarter and 35.4% a year ago. The quarter over quarter increase Non GAAP gross margin was mainly driven by the mix improvement. Non GAAP operating expenses were $40,800,000 compared to $39,100,000 for the prior quarter $36,600,000 last year.

Speaker 3

The quarter over quarter increase was primarily due to higher R and D engineering expenses and professional service fees. Non GAAP quarterly EPS was $0.33 compared to $0.19 last quarter and $1.20 a year ago. Moving on to cash flow. Operating cash flow was $13,800,000 including $8,600,000 of and deposits. By comparison, operating cash flows was negative $28,200,000 in the prior quarter and positive $36,700,000 a year ago.

Speaker 3

EBITDAS for the quarter was $23,300,000 compared to $17,700,000 last quarter $45,500,000 for the same quarter last year. Now let me turn to our balance sheet. We completed September quarter with a cash balance of 193 $6,000,000 compared to $195,200,000 at the end of last quarter. Net trade receivables were $34,400,000 compared to $22,400,000 at the end of the prior quarter. Day sales outstanding were 18 days for the quarter versus 19 days for the prior quarter.

Speaker 3

Net inventory was $187,800,000 at quarter end compared to $183,200,000 at the end of the prior quarter. Average days in inventory were 129 days compared to 140 days in the prior quarter. CapEx for the quarter was $12,500,000 compared to $19,200,000 for the prior quarter. We expect CapEx for the December quarter to range from $10,000,000 to $15,000,000 Now I would like to discuss December quarter guidance. We expect revenue to be approximately $165,000,000 plus or minus $10,000,000 GAAP gross margin to be 27.1 percent plus or minus 1%.

Speaker 3

We anticipate non GAAP gross margin to be 28.5 percent plus or minus 1%. GAAP operating expenses to be in the range of $48,000,000 plus or minus $1,000,000 Non GAAP Operating expenses are expected to be in the range of $40,300,000 plus or minus $1,000,000 Interest expense to be approximately $1,100,000 and income tax expense to be in the range of $800,000 to $1,200,000 With that, we will open the call for questions. Operator, please start Q and A session.

Operator

Thank you. We will now begin the Q and A session. Our first question is from Jeremy Kwan with Stifel. Your line is now open.

Speaker 4

Yes. Good afternoon and thank you. Maybe a first question on the gaming market that you talked about maybe potentially hitting a new normalized run rate. Can you just help us understand how big is gaming as a percent of the consumer revenue? What it was at the peak and Maybe where you expect that to kind of settle out?

Speaker 4

And finally, where you might see this new normalized run rate? Where could it go, I guess, as we push the mid to end of this gaming cycle?

Speaker 5

Sure, Jeremy. Yes, Gaming is an important segment for us and we're excited about the segment in generally because there's quite a bit of content going into these Systems and pretty much like a specialized PC. So all the solutions we have going into PC also goes into gaming. The console that we sell into generally has a lifetime of up to about 7 years. And right now, we're in about year 4 of that on a 7 year life cycle.

Speaker 5

And it's about this time, if you look at the previous consoles that the Annual shouldn't start to drop some. And that correction was taking place now. And just like we saw correction in some of the other markets That we're in. Even gaming has to go to that correction. But right now, it's in the middle of that correction.

Speaker 5

So when we say that it's going to revert back, We believe that it's going to be above the current rate, but below the peak from a few quarters ago. So I would say somewhere in between is probably about right. And we continue to work closely With this particular console maker and with opportunities also to design in more content. But overall, I think at the peak, to answer your question, It was up to maybe about almost half of our total consumer segment. Right now, maybe it's somewhere around 30% or something in that range, 20% to 30% of the consumer business.

Speaker 5

But that's Just during the correction, we do expect it to bounce back up again.

Operator

Our next question is from David Williams with Benchmark. Your line is now open.

Speaker 6

Hey, good afternoon. Thanks for taking the question and congrats on navigating this challenging environment.

Speaker 5

Thanks, David.

Speaker 6

Yes, so a couple of quick things. You talked a little bit about the data center and AI opportunity there In your script and I know this is an area you've been working on for some time, but just you've talked about having good controllers and power stage to address this market. Wondering if there's anything new there that you can share or just generally how you're seeing your opportunity in that market?

Speaker 5

It's how we're seeing it. We're getting some business today. The Type of applications in terms of the circuit topologies that AI addresses is very similar to that being used in graphics cards. And actually any kind of point of load such as for the CPU, Especially for graphics card because you're basically powering a highly parallel processor. And we have good Solutions from controller to the power stage that can address high computing applications, including artificial intelligence type of hardware.

Speaker 5

So for us, we do have some small business now. We do see the potential for a lot more going forward. But for us, we're also Working on transitioning from addressing client side to moving over to the data center AI side. So That and all those efforts are in process.

Speaker 6

Great. Thanks for that help. And then Maybe just on the PC side on the client side, can you talk a little bit about the content increases between Raptor Lake and Meteor Lake? And if you should begin to see those benefits Pull in during the December period as we get ready for that next release slated for the end of the year.

Speaker 5

Generally, yes, we're starting to see As Intel is rolling out their platforms, we are seeing more opportunity for sure for more dollar content. And as you mentioned before, we are in the process of deploying our new controller solutions into the marketplace. And that it will take some time to for our customer base to adopt those. But once adopted, yes, we believe that dollar content, what used to be $2 or $3 is coming up to $3 to $4 and even on some Certain bonds going above $5 a content. And PCs themselves, they are we are pleased to see the Bump up in the September quarter.

Speaker 5

There will be seasonality at play as the ecosystem goes through another I guess seasonal pattern. But in general, we are excited about the additional bond content that comes with these new platforms.

Speaker 6

Great. And then last one here for Yvonne, if you could help me just a little bit on the gross margin side. And during the peak part of the cycle, margins had a nice lift from the optimization efforts that you had there. And Is mix still the biggest driver of the margin? If we're kind of looking back at last quarter, it seems like the discretes were lower than the power IC And we're really the largest percentage of revenues we've seen in some time.

Speaker 6

But we saw a slight improvement this quarter and I guess we've had a kind of reversion where Your Power IC business is lower, but your discretes came up. And I'm just trying to understand and maybe square how the Power Discrete business compares to the Power ICs in terms of margin and how we're getting that lift kind of given that the balance sequentially? Thank you.

Speaker 3

Sure. Ian, in general, the Power IC products carry at a higher Margin for us. But given that, it doesn't means that we don't have higher margins in the Products in the discrete segment. So in the September quarter, the product mix improved slightly. And then I mean, few basis points up.

Speaker 3

And then even though the Power C revenue got hurt by the gaming drop, So but on the other hand, we shipped more to Vcore in those areas. And so Generally, which provided some higher margins for us. So I mean overall, I mean, mix is a Big portion of our gross margin improvement.

Speaker 6

Okay. Great, great. But utilization better this quarter, was that a tailwind?

Speaker 3

It's in the similar range as in last Quarter because for our internal productions, generally, our Oregon fab is at a Pretty good utilization level. Our back end is a little bit lower. So on the mix Overall, I mean, utilization is roughly same as last quarter.

Speaker 1

Thank

Speaker 7

you.

Operator

Our next question is from Craig Ellis with B. Riley Securities. Your line is now open.

Speaker 7

Yes. Thanks for taking the question, guys. Stephen, I wanted to go back to a comment in the prepared remarks Regarding demand, it sounds like you retain a pretty cautious stance overall and understand it's a really challenging macro. But What I was hoping you could do is talk a little bit about the environment that you see, as you look into the Q1 Calendar fiscal Q3, qualitatively where things looking more encouraging or more challenging? And can you talk about where you're more confident that inventories are now back to normal levels versus being in excess Outside of maybe gaming, which is going through a pretty visible correction.

Speaker 5

Sure. Seasonality, I think, in terms of affecting the segments more impacts the PCs and smartphones a little more. The PC market, as we mentioned, this September quarter was a strong quarter and we saw resumption of Orders for products, including ICs and other higher performance sockets that we didn't see in the first half of the year. And so that's kind of clear signs that the inventory correction is starting to die down. I can't say that we're out of the woods yet, But it's great and very encouraging to see the fresh orders for some of our good products.

Speaker 5

And going To the looking 2 quarters out, as you're suggesting into the March quarter, yes, we do expect to see some seasonality at play. Typically, that March quarter is the lowest season for PCs in any kind of year. And we do believe that there will be some correction, But nothing like the big correction that we saw at the beginning of this calendar year. So we believe that BC will Take a little longer overall to get back to a fuller recovery, but we're already in a much better state than what it was just a quarter or especially 2 quarters ago. So going forward, PCs will go through seasonality, but we believe that it's getting heading back towards a little more of a normal seasonal pattern.

Speaker 7

And it sounds like you're starting to see some encouraging signs of life in the Android smartphone market within communications. And Obviously, great to see your lead customer from the U. S. Performing well. But can you talk about the potential for next year to see better growth if you get more of a recovery out of the Android market?

Speaker 7

And when will we see that and how big could it be?

Speaker 5

Sure. The great thing about our smartphone business is that We are in multiple and all the big end customers here in the U. S, in Korea and in most of the China customer base as well too. And right now, It's launch season on the U. S.

Speaker 5

Side. On the Korea side, they're preparing for a launch for February. And Even in China, there's still been quite a bit of decent demand for the high end phones, which we are participating in. So, it's I think it's good to see the diversification at play. Overall, smartphones is still system shipments are still In the recovery mode, but overall, we do play fairly well in all of these high end phones.

Speaker 5

So that helps to give us some, I guess, momentum or at least going into the March quarter. Again, it's just like PCs, there will be some seasonality at play. But at the same time, Right now, we do see a strong demand or decent demand, I would say, coming from the China

Speaker 7

That's helpful, Stephen. Thank you. For my last question, before hopping back in the queue, I'll just direct it to Yifan. Yifan, oftentimes in the Q1 we see either Lunar New Year or I think annual maintenance impacts to fab utilization and therefore gross margin. As we look ahead to calendar 1Q, Would those historic dynamics be in play?

Speaker 7

Or for some reason, would things potentially play out differently early next year? Thank you.

Speaker 3

Sure, Craig. I would expect, yes, and then I mean the March quarter is It's a typical Lunar New Year season and then and also we also Arrange some maintenance around it. So I would expect utilization Will be kind of lower than the September quarter, even lower than the December quarter.

Speaker 7

That's helpful. And then maybe I could sneak in one more that relates to gross margin. TI seemed to indicate That pricing was normalizing, so picking up a little bit, but not getting aggressive. How would you characterize the pricing environment that's out there right now guys?

Speaker 3

Yes. This calendar year, I would say, yes, the Pricing environment returned to historical normal trends, I would say after last couple of years favorable environment. I would characterize as Traditional pricing environment.

Speaker 7

Thank you, Itan. Thanks, Stephen.

Speaker 3

All right. Thank you.

Operator

We have a follow-up question from Jeremy Kwan with Stifel. Your line is now open.

Speaker 4

Yes. Thank you. And maybe a quick follow-up to that pricing Question. Just wondering a couple of things. First, I guess, a couple of quarters ago, I think maybe even a year ago now, you You mentioned increased local competition from Chinese suppliers on your low to mid end of your portfolio.

Speaker 4

I was wondering if you could give us an update on that and kind of how that Has that how much of that has impacted pricing? And secondly, How often do you and your customers renegotiate pricing? Is it something that is set at the beginning of the year? Or is it kind of an ongoing basis? Any insight you can offer would be helpful.

Speaker 4

Thanks.

Speaker 5

Sure. Pricing is always ongoing and it's always up where we are in the balance of supply versus demand in the overall global economy. So certain customers will negotiate every quarter, Certain ones we can negotiate once for the whole year, but it really just depends on how the overall industry is staring. In terms of competition, it's really good to see again the presumption of some of the high performance sockets and that kind of gives us a lot more room in terms of leverage in the face of competition, there's basically less competition for higher performance products. So that helps to kind of normalize the situation.

Speaker 5

I would say competition, local competition is fierce. So when we engage with them, we also have Be aggressive as well and which we are, but they're not also they're not everywhere and we will adjust our pricing based on where we need to be To be competitive.

Speaker 4

Great. And maybe if we could just look at China again with the JV there. Can you tell us what insight you may have in terms of your I guess, your how much capacity you have at the JV available to you? Maybe talk about some of your the pricing trends that you're seeing from them. Any insight you can offer would be very helpful.

Speaker 4

And also funding requirements.

Speaker 3

Okay, sure. Yes. CQ JV, they have already ramped up their production a year, Couple of years ago. So right now they are in the process of raising additional funds to further expand their capacity. On the EBITDA level, they already achieved breakeven.

Speaker 3

So Even though in the September quarter, we recorded all portion of their June quarter's loss. But on the cash side, Right now, they are self funded. In terms of capacity, yes, we still have Same capacity as before. So nothing changed there.

Speaker 4

Got it. And I guess if we could look at your CapEx, I know you guided for $10,000,000 to $15,000,000 for the December quarter. Can you I think this is most of your enhanced, I guess, CapEx funding that you talked about a year ago. Can you just give us a quick update where we are in that process? How much more do you still have left?

Speaker 4

And maybe even what guidance you can offer for fiscal 2025?

Speaker 3

Okay, sure. I mean, CapEx wise, I mean, right now, I would characterize as we Well, in the normal CapEx spending period. And then I mean, Normally, we would target 6% to 8% of our revenue. Our And Oregon fabs expansion had completed. So right now not a whole lot of CapEx Payment remaining.

Speaker 3

So right now, we don't have a major Project for any factory expansions at this point.

Speaker 4

Great. And just one last question. The licensing revenue, it's nice to see that come in pretty steadily here. How much of can you give us like a how much is baked into the guidance for the December quarter? And also if you could help walk through the impact in gross margin.

Speaker 4

Is there engineering costs associated with the license revenue and how that does kind of flow through the financial theme, that would be great.

Speaker 7

Okay, sure.

Speaker 3

Listen, Revenue recognition for the licensing and engineering service It's more depends on the actual engineering hours and our teams spend versus expected the total hours for this 24 month period. So It's fluctuating from quarter to quarter. So it's hard to say. Right now, for the December quarter guidance, we estimated similar On a level of licensing and engineering revenue.

Speaker 4

And the impact of gross margin?

Speaker 3

Sure. Yes, the margin for the Licensing and Engineering Service, yes, it is definitely at a higher margin than our product Margins, we don't break down by specific product line or Product elements here.

Speaker 4

Got it. Thank you.

Operator

We have a follow-up question from David Williams with Benchmark. Your line is now open.

Speaker 6

Hey, thanks for letting me get back in here. Just curious on the appliance side, Stephen, I know you've talked about that being an area of opportunity for you And but it's largely greenfield today. Just kind of curious what you're seeing in the appliance market? Is that improved or worse or anything in particular there you should be optimistic about?

Speaker 5

Right now, it's still a bit slow because it's tied to the overall housing and real estate market globally and that slowed down quite a bit in the past year or so. So overall, we're not expecting too much in the shorter term. Overall, in the longer term, this is still a core part of the business. Again, the key thing here is we're selling our IGBTs as well as our modules based on those IGBTs. We can do it.

Speaker 5

We have a solution that is smaller than the competition. But it does have to contend with overall macro, at least For that sub segment. So in the shorter term, yes, I don't see too much too exciting in the shorter term. In the longer term, this is a $2,000,000,000 plus market and we're just scratching the service.

Speaker 1

Okay. All right. Great.

Speaker 6

And then just the last one for me here is just the cadence of orders through the quarter, was there any change maybe between the beginning and the end

Speaker 3

of the quarter or Of the order? Backlog, I think, this quarter That's been steady. And then I mean, some fresh orders came in after a period of Time of inventory correction. I mean, by and large, order positions Has been reflected in our December quarter guidance.

Speaker 6

Okay, great. Thanks again for the time.

Speaker 3

Thank you. Thanks.

Operator

We have an additional follow-up from Jeremy Kwan with Stifel. Your line is now open.

Speaker 4

Thank you. Just one last follow-up. On the operating cash flow, it included the customer deposit repayment. So if we exclude this, would it be $22,400,000 operating cash flow for the quarter? Correct.

Speaker 4

Got it. And how much remaining is in your customer deposits at this point?

Speaker 3

We still have about $75,000,000 ish customer Deposits at this point, yes, then we would expect the next calendar year will probably return around $30,000,000 also.

Speaker 4

Great. Thank you.

Speaker 3

All right. Thank you.

Operator

There are no additional questions waiting at this time. So I'll pass the conference back to the management team for any closing remarks.

Speaker 3

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.

Speaker 5

Thank you.

Operator

That concludes today's conference call. Thank you for your participation. You may now disconnect your line.

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