Alpha and Omega Semiconductor Q2 2024 Earnings Call Transcript

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February 6, 2024

There are 8 speakers on the call.

Operator

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

Operator

Please proceed.

Speaker 1

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2024 Second Quarter Financial Results. I'm Steven Pelayo, Investor Relations Representative for AOS. With me today are Steven Chang, our CEO and Yifan Liang, our CFO. This call is being recorded and broadcast live over the web. A replay will be available for 7 days following the call via the link in the Investor Relations section of our website.

Speaker 1

Our call will proceed as follows today. Steven will begin business updates, including strategic highlights and a detailed segment report. After that, Yifan will review the financial results and provide guidance for the March quarter. Finally, we will have the Q and A session. The earnings release was distributed over the wire today, February 6, 2024, after the market closed.

Speaker 1

The release is also posted on the company's Web Our earnings release and this presentation include non GAAP financial measures. We use non GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures. A reconciliation of these non GAAP measures 2 comparable GAAP measures is included in the earnings release. We remind you that during this conference call, we will make certain forward looking statements, including discussions of the business outlook and financial projections. These forward looking statements are based on management's current expectations involve risks and uncertainties that could cause our actual results to differ materially.

Speaker 1

For a more detailed description of these risks and uncertainties, Please refer to our recent and subsequent filings with the SEC. We assume no obligation to update the information provided in today's call. Now I will turn the call over to our CEO, Stephen Chang. Stephen?

Speaker 2

Thank you, Steve. Welcome to Alpha and Omega's fiscal Q2 earnings call. I will begin with a high level overview of our results and then jump into segment details. We delivered fiscal Q2 results in line with our guidance. Revenue was $165,300,000 Non GAAP gross margin was 28% and non GAAP EPS was $0.24 The bottom line finish at the high end of our guidance, primarily driven by overall operational control.

Speaker 2

These results were driven by continued recovery across notebooks, desktop computing and smartphones offset by ongoing inventory correction in gaming and weak demand for quick chargers and solar. Looking back on the full calendar year 2023, it was undeniably a challenging period for our entire industry. AOS revenue experienced a significant decline of 19% following a record breaking 2022. This drop was primarily due to the inventory correction in PCs and smartphones that commenced in late 2022 and broader macro headwinds. In the second half of calendar twenty twenty three, our performance was further hampered by inventory corrections and slowdowns in demand across other segments.

Speaker 2

While revenue declined in calendar 2023, I think it's important to recognize the challenges resulting from the post COVID semiconductor cycle are nearing completion And we are approaching the recovery phase of the next cycle. Over our 23 years history, we have navigated many boom and bust cycles in this industry emerging each time stronger and more resilient on the other side. Looking forward, We expect stabilization across most of our business lines, notwithstanding normal seasonality. While near term visibility is limited, We remain cautiously optimistic about a broader market rebound in the second half of calendar twenty twenty four. Fundamentally, we are extremely well positioned for future growth as the market recovers.

Speaker 2

Today, our market position is stronger than ever. Supported by our leading technology, more diversified product portfolio and Tier 1 customer base in all of our business segments. More importantly, whether it's AI accelerators, digitalization, advanced connectivity, electrification or the transition to a low carbon society, Power Management lies at the core of these trends. We remain committed to executing our technology roadmap, introducing innovative new products and solutions to our customers and focusing on long term growth drivers that will allow us to surpass industry growth rates and establish ourselves as a sustained outperformer in the long run. With that, let me now cover our segment results and provide some guidance by segment for the next quarter.

Speaker 2

Starting with Computing, December quarter revenue was up 12.3% year over year and up 2% sequentially and represented 43.4 percent of total revenue. These results were ahead of our original expectation for a low single digit decline sequentially and were driven by a continued recovery and stabilization in shipments across notebook and desktop computing applications. The recovery has been driven by high end driver ICs and MOSFETs for powering CPUs. Looking forward into the March quarter, we expect the segment to be down mid single digits on normal seasonality and the impact of Chinese New Year. Notably, the inventory correction in graphics cards is coming to an end and tangential markets such as AI accelerators are becoming a meaningful portion of our data center related business.

Speaker 2

In summary, we are not immune to seasonality and broader market conditions, But solid rebounds expected in graphics cards and continued contributions from AI related products demonstrate the diversity of our Computing segment. Turning to the Consumer segment. December quarter revenue was down 50.2% year over year and down 24.4% sequentially and represented 14.2% of total revenue. As we indicated last quarter, Gaming is undergoing an inventory correction after extremely strong shipments into the number one console manufacturer between mid calendar 2022 and mid calendar 2023. Similar to what we saw in PCs and smartphones in early calendar 2023, Given the speed of the current correction, we believe demand will revert back to a new normal in a couple of quarters, factoring in that the console is now in its midlife part of the platform cycle.

Speaker 2

Further, We see opportunities to increase BON content within the current console platform as part of its refresh this year. Longer term, we believe our relationship with this customer is very strong and are already engaged in discussions for their next model design. For the March quarter, we anticipate stabilization in this segment and are forecasting a low single digit sequential decline. Next, let's discuss the Communications segment. Revenue in the December quarter was down 18% year over year and down 6.6% sequentially and represented 17.5% of total revenue.

Speaker 2

Shipments to the Korea and China based Smartphone OEMs were strong. However, this was more than offset by a pullback in shipments to the Tier 1 U. S. Smartphone customer. Note that customer had strong shipments in the September quarter in 2023 ahead of their fall device launch.

Speaker 2

Looking ahead, due to strong shipments from Chinese OEMs, we anticipate this segment to remain flat sequentially, outperforming seasonality. Now let's talk about our last segment Power Supply and Industrial, which accounted for 21.1% of total revenue. December quarter revenue was down 15.4% year over year and down 16.6% sequentially. These results were driven by reduced quick chargers following our peak season shipments to our Tier 1 U. S.

Speaker 2

Smartphone customer in the September quarter and continued weakness in solar. Power tools were a notable standout in the December quarter, further solidifying their strong growth and contribution throughout calendar 2023. For the March quarter, We expect this segment to further decline in the mid teens sequentially, mainly due to reduced quick chargers following the peak season and lower solar demand. While power tools will also see a seasonal decline, we expect strong sequential growth in our e mobility segment driven by deepening customer relationships for e bikes and e scooters. In closing, we delivered fiscal Q2 in line with our expectations.

Speaker 2

While we are not immune to the macroeconomic headwinds, there are indications that the cycle has bottomed and we are looking forward to the recovery phase. Therefore, it is important to emphasize that our core fundamentals remain strong, a testament to the strategic investments we have made over the past years. These investments have positioned us well for growth and we continue to focus on driving the company towards growth We are our $1,000,000,000 revenue target on the other side of the cycle. Supported by our leading technology, more diversified product portfolio, Tier 1 customer base in all of our business segments and expanding manufacturing capability and supply chain. With that, I will now turn the call over to Yifan for a discussion of our fiscal second quarter financial results and our outlook for the next quarter.

Speaker 2

Yifan?

Speaker 3

Thank you, Stephen. Good afternoon, everyone, and thank you for joining us. Revenue for the quarter was 100 and $65,300,000 down 8.5% sequentially and down 12.4% year over year. In terms of product mix, Demos revenue was $108,800,000 down 10.5% sequentially and down 20.9% over last year. ROIC revenue was $50,300,000 down 4.6% from the prior quarter and up 0.6% from a year ago.

Speaker 3

Assembly service revenue was $700,000 as compared to $700,000 for last quarter and $1,200,000 for the same quarter last year. License and engineering service revenue was $5,500,000 for the quarter versus $5,600,000 in the prior quarter. Non GAAP gross margin was 28% compared to 28.8% in the prior quarter and 29.5% a year ago. A quarter over quarter decrease in non GAAP gross margin was mainly impacted by ASP erosion and increased inventory reserve, partially offset by the improved product mix. Non GAAP operating expenses were $37,900,000 compared to $40,800,000 for the prior quarter $32,800,000 last year.

Speaker 3

The quarter over quarter decrease was primarily due to lower R and D engineering expenses and more vacation taken during the holidays. Non GAAP quarterly EPS was $0.24 compared to CAD0.33 last quarter and CAD0.67 a year ago. Moving on to cash flow. Operating cash flow was negative $23,500,000 including $11,000,000 of repayment of customer deposits an $11,300,000 deposit that we made to secure second carbide wafer supply. By comparison, operating cash flow was $13,800,000 in the prior quarter and $300,000 a year ago.

Speaker 3

EBITDAS for the quarter was $20,700,000 compared to $23,300,000 last quarter $31,800,000 for the same quarter last year. Now let me turn to our balance sheet. We completed the December quarter with a cash balance of $162,300,000 compared to 100 $93,600,000 at the end of last quarter. Net trade receivables decreased by $2,500,000 sequentially. Day sales outstanding remained at 18 days for the quarter.

Speaker 3

Net inventory increased by $4,000,000 quarter over quarter. Average days in inventory were 141 days compared to 129 days in the prior quarter. CapEx for the quarter was $9,100,000 compared to $12,500,000 for the prior quarter. We expect CapEx for the March quarter to range from $8,000,000 to $12,000,000 Now I would like to discuss March quarter guidance. We expect revenue to be approximately $150,000,000 plus or minus $10,000,000 GAAP gross margin to be 23.5 percent plus or minus 1%.

Speaker 3

We anticipated non GAAP gross margin to be 25% plus or minus 1%. The quarter over quarter decrease in gross margin mainly reflects the lower factory utilization due to the seasonality and the Lunar New Year holiday. GAAP operating expenses to be in the range of $46,700,000 plus or minus $1,000,000 Non GAAP operating expenses are expected to be in the range of $39,500,000 plus or minus $1,000,000 interest expense to be approximately $1,000,000 and income tax expense to be approximately $1,100,000 With that, we will open the call for questions. Operator, please start the Q and A session.

Operator

Absolutely. We will now begin the Q and A session. The first question comes from the line of Craig Ellis with B. Riley Securities. Please proceed.

Speaker 4

Yes. Thanks for taking the question. And I had one for Stephen, and one for Yifan. So Stephen, starting with you, like the color on how you're looking at the year and the fact that you see A cyclical recovery coming in a much stronger second half. Can you just provide some further color on how that could play out on the top line?

Speaker 4

I'm not looking for Specific guidance, but any sense on how the linearity plays out or what can happen as we look out And each quarter, the 3rd and 4th calendar quarter of the year, if you expect both of those to be up materially versus first half, would help us see a little bit of the things that you're seeing.

Speaker 2

Sure. Thank you, Craig. Certainly, we are looking forward to the normal seasonality that will come in the September quarter, which is the peak season both for PCs as well as for smartphones. And in both of those markets, we continue to be well positioned at our customers. So comparing the first half to second half, I think it's a general generally, we do expect the second half to be stronger compared against the first half.

Speaker 2

And the question more of is whether the macroeconomic conditions overall is recovery. Right now, we are still relatively still in the we're hoping to be at the tail end of the overall broader correction. And depending on the macroeconomic conditions, if the market conditions are back to neutral or favorable, then we can expect to see also that the December quarter will also fall along with September. But right now, we're just looking our visibility isn't as clear that far down. We are preparing mainly for the September seasonal peak 1st.

Speaker 4

Got it. Thanks. And I'll direct the next one to Yifan. Yifan, I wanted to follow-up on the gross margin for the Q1. So the Lunar New Year impact is something that impacts the business every year, but I thought the impact was closer to 150 to 200 basis points or 100 to 200 rather than the 300 basis points.

Speaker 4

So can you just detail the factors that are causing gross margin to decrease by 300 basis points sequentially quarter on quarter, how much is the lower utilization for Lunar New Year and what are The other factors and then beyond that, how would you expect gross margin to recover off of the 25% level if we have the type of environment that Stephen was talking about, which is much better calendar second half demand? Thank you. Sure.

Speaker 5

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

Operator

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

Speaker 6

Hey, good afternoon. Thanks for taking my question. I certainly appreciate it. A lot of great color there, but just wondering if maybe you can give us a little color On some of the areas of weakness that you're seeing, I know you expanded some during the call, but just anything, I guess, trying Square, the recovery in the second half. And is that really velocity of orders?

Speaker 6

Or maybe just any color there to help us get More comfortable that the second half recovery does materialize? Thanks.

Speaker 2

Sure. And David, yes, for a stronger second half, We're counting not only on the seasonal factors, but also on the macro picture. And the picture when looking at our end markets and many of our end markets have been going through On the inventory correction, the PCs and smartphones started earlier. And sorry, more recently, Graphics also and gaming went through that as well too. We believe that now actually we're at the tail end of that.

Speaker 2

PCs, Inventory couldn't control, I think, is tapering down. It's more of a factor of end demand that needs to come back. And this is where we need the PC refresh cycles to be healthier and the overall macroeconomic to help and raise consumer spending. And we also mentioned on the call that the inventory control for graphics also is starting to come to an end as well and we're starting we anticipate A comeback of that together also with the gaming, which is all which entered into inventory control about 2 quarters ago. And so those are nearing the end of inventory control and we're looking now more mainly to the end demand.

Speaker 2

And once that can pick up back to at least neutral and or back to growth, then that can point us to a stronger second half.

Speaker 6

Great. Thanks. And maybe, Yipan, back to the gross margin, maybe trying to give a little more color, maybe what Craig could ask there. But Can you I guess just how much of the impact are you seeing from utilization relative to just the leverage loss on the revenue side? And maybe what are the puts and takes there as we think about that gross margin longer term?

Speaker 6

It's certainly we expect that bottom out a little higher than this. So Just anything helps there. Thank you.

Speaker 5

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

Speaker 6

Thanks so much.

Speaker 4

I appreciate the colors.

Operator

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

Speaker 7

Yes. Good afternoon. Maybe if I could just touch on a different aspect of The gross margin question, it looks like inventories were up this quarter and it looks like it's going to be up again. Well, at least days of inventory are going to be up. Can you help us?

Speaker 7

How we should where we should expect inventories to go over the next couple quarters? And how much where do you see as a good operating level in terms of both days and or dollars?

Speaker 5

Sure. I mean, inventory balance at the end of the December quarter increased by like $3,000,000 or $4,000,000 And then yes, I mean relative to the overall inventory size, it's like a marginal. For the March quarter, we would expect inventory level maintained around a similar level, we already slowed down our own production And also some purchases sold. Going forward, I would expected inventory that will adjust it based on our expected business growth. And so if we need some additional production to support and then we'll ramp up some production depending on the bottleneck areas.

Speaker 5

So that's we manage on a daily basis.

Speaker 7

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

Speaker 5

Yes. The inventory reserve went up by a couple of $1,000,000 and also in the December quarter, so we took a higher reserve.

Speaker 7

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

Speaker 5

Well, that's kind of depends on the market conditions and then Overall environment, it's hard to say for inventory reserve. Generally, I would expect Probably back to the normal. I wouldn't see the additional inventory

Speaker 7

Got it. And also I appreciate you provided CapEx guidance for quarter, can you give us kind of an outlook for the year? Do you expect it to remain in that $10,000,000 range or can it be taken down a bit? And also the customer deposits, both the ones that you're returning back, how much is left? And for the silicon wafer deposit, is there do you see this as a one time thing or you have to secure additional supply down the line?

Speaker 7

Thank you.

Speaker 5

Okay, sure. Regarding our own CapEx and Yes. I would expect throughout this calendar year, our CapEx Right now, it is at what I call maintenance mode. We do our regular upgrade and solve some production bottleneck areas. And so We don't have a major plan to expand.

Speaker 5

Generally, we target 6% to 8% of our revenue as CapEx. So I would expect this year, KRW10 1,000,000 per quarter, That's probably in the ballpark. In terms of customer Deposits, yes, I would last year, last calendar year 2023, we returned about $30,000,000 of sold. So this calendar year 2024, we expect to return another $30,000,000 also of customer Deposits. In terms of our own deposit we made, that's a one time deposit.

Speaker 5

So I would not expect further or well, depends on the situation, but at this point, That's a onetime deposit.

Speaker 7

Quick follow-up on the deposit You said you're returning. How much is left after

Speaker 2

you do the

Speaker 5

$30,000,000 this year? At the end of December last year, we had about $60 some $1,000,000 in deposits on hand. So calendar year 2024, we'll return another $30,000,000 also.

Speaker 7

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

Speaker 5

There was something like assembly services on that a little bit. So that's probably it.

Speaker 7

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

Speaker 5

No, no. You're right. Correct. I mean, Assembly service and then we just do some services for some idle capacity, so not a major business for us.

Speaker 7

Okay. Thank you. I'll jump back in the queue.

Operator

Thank you. There are no additional questions left at this time. I will hand it back to the management team for closing remarks.

Speaker 5

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 2

Thank you.

Operator

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

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