Good day, ladies and gentlemen, and welcome to the Alpha and Omega Semiconductor Fiscal Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Ms. So-Yeon Jeong. Ma’am you may begin.

Thank you. Good afternoon, everyone and welcome to the Alpha and Omega Semiconductor’s second fiscal quarter of 2015 conference call. This is So-Yeon Jeong, Investor Relations Representative for the company. I'm here with Yifan Liang, our CFO, and Tony Grizelj, our VP of Discrete Product Line. Dr. Mike Chang, our CEO, is joining today’s call from China. If we experience any technical difficulties from China, Yifan and Tony will take questions during the Q&A session. This call is being recorded and broadcasted live over the Web, and can be accessed for seven days following the call via a link in the Investor Relations section of our website at www.aosmd.com. The earnings release was distributed by the GlobeNewswire today, February 3, 2015 after the market close. The release is also posted on company's website. Our earnings release and this presentation include certain non-GAAP financial measures. We use non-GAAP measures because we believe this provides 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 the comparable GAAP measure is included in our earnings release. We would like to remind you that during the course of this conference call, we'll make forward-looking statements, including discussions of 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 obligation to update information provided in today's call. I’ll also note that we’ll be presenting at Stifel conference in San Francisco on February 9 at 8:35 a.m. Pacific Time. We’ll also attend Northland’s Growth Conference in New York on March 18. Now, let's hear from Yifan, who will provide an overview of the second fiscal quarter of 2015 financial results. Yifan?

Thank you, So-Yeon. Good afternoon and thank you for joining us. Today on our call, I will discuss the key financial results for the quarter. Then I will turn it over to Mike, our CEO, who will review the company's business highlights and I will follow-up with our guidance for the next quarter. Revenue for the December quarter was $81.3 million, a decrease of 7.8% from the prior quarter and an increase of 6.6% from the same quarter last year. MOSFET revenue was $61.2 million, down 5.7% sequentially and up 3.8% year over year. Power IC revenue was $16.1 million, down 15.9% from the prior quarter and up 21.8% from the prior year. Our product revenue quarter over quarter reflected seasonal decline as we expected. Service revenue was approximately $4 million as compared to $4.2 million for the prior quarter. In terms of segment mix, this quarter’s computing segment represented 46.7% of the total revenue, consumer 19.2%, power supply and industrial 17.4%, communication 9.7%, service 4.9% and others 2.1%. Gross margin was 18.7% for the December quarter as compared to 20.6% in the prior quarter and 17.9% for the same quarter last year. The decrease in gross margin quarter over quarter was mainly due to the lower factory utilization as a result of lower revenue and fab shutdown along the holidays for annual repairs and maintenance. Operating expenses for the quarter were $15.6 million as compared to $16.4 million for the prior quarter and $12.3 million for the same quarter last year. The lower operating expenses quarter-over-quarter primarily due to the cost savings from the company’s office shutdowns during the holiday season in the quarter. Income tax expense was approximately $1 million for the quarter as compared to $1.2 million for the prior quarter, reflecting a tax benefit from the…

Thank you, Yifan. The December quarter was an active quarter for AOS. We continued to focus our effort on executing our business plan and working aggressively to launch new products into both existing and untapped market. For the December quarter, the financial results came in line with expectations. Our cash position improved seven quarters in a row as we have continued to generate healthy operating cash flow and free cash flow. The strength of the AOS balance sheet together with cash generation capability provided us with the financial flexibility to invest for future growth opportunities. Power IC remains a focus for us. Let me start there first. Our strategy has been to develop chip packaged product to deliver small size and high efficiency solution with quick time to market. We have been diligently executing our strategy and have introduced highly competitive product. Some of the recent market trends are helping to facilitate the growth. In computing, we see more and more demand for our EZBuck and driver/MOS product as our customers are integrating ICs and MOSFET to save more space. In LCD TV, we’re seeing more processing power needed for the latest smart TVs and 4K TVs, where our high efficiency EZBuck solution adds value. While our Power IC revenue will fluctuate on a quarterly basis as it is exposed to computing and consumer segments, it is notable that we grew the business 19% in calendar year 2014. We expect a double digit growth again in this calendar year. As I’m about to review the major business segments, let me highlight that much of the new design win activities are being driven by the new products introduced from our Oregon fab. That is starting to bear fruit as planned. I’m pleased to report that we have successfully introduced key strategic…

Thank you, Mike. As we look forward to the third quarter of fiscal year 2015, we expect our March quarter revenue to be in the range of $76 million to $80 million. GAAP gross margin is expected to be 16.5% to 18.5%. GAAP operating expenses are expected to be approximately $16.6 million plus or minus $1 million. Tax expenses are expected to be about $1 million to $1.2 million. Our share based compensation should range from $1 million to $1.2 million. As usual, we're not assuming any obligations to update this information. With that, we'll open up the floor for questioning. Operator?

[Operator Instructions] And we do have our first question from the line of Tore Svanberg from Stifel.

Hi, this is Evan Wang calling in for Tore. Thank you taking my call. On your last earnings call you were comfortable with the backlog supporting revenue to the low end of guidance, I was wondering if you can add some color as to what happened during the quarter to get you to about the midpoint?

Yes, Evan, in deed and yes at that point we felt comfortable with our backlog in the range of our – low end of guidance. And during the quarter, the backlog came in steadily and then we reached midpoint or slightly over midpoint where we end up with. So that’s a typical seasonality compared to the prior quarter, the September quarter which is normally our peaking quarter. So this quarter’s drop is within the normal range of seasonality. But if you look at it year over year, yes, the December quarter still represented 6.6% year over year growth.

Could you talk about which area was stronger in the December quarter or was the strength pretty much spread across?

That’s pretty much spread across each segment. I mean, particularly we saw some – the timing of the shipment in the computing area, so we probably saw some market data report, the December quarter shipment was not that much, but remember, keeping in mind, our June quarter, we grew over 9%; in the September quarter, we grew again over 7%. So we’re a component company, so those market data is typically showing the OEM shipments. So there is a timing difference there.

Can you also put your March quarter guidance in perspective of where you are in the backlog right now?

Yes, as we present today, I feel comfortable with our backlog in the range of our low end of the guidance. So I’m hoping to shoot to that midpoint.

Okay. I’d like to ask another question about your OpEx. Looks like you’re guiding your OpEx to be higher next quarter. Could you give us a little bit more information, your thoughts behind those numbers?

Sure. The March quarter, we guided operating expenses higher than the December quarter, yes, partially because in the December quarter, we had fab shutdowns and office shutdowns along the holiday season. So in the March quarter, we don’t have that luxury any more. And for the Chinese New Year, our factory is going to be still running by most of the operators and workers go back to their hometown, so that we wouldn’t have [indiscernible] much lower than the normal capacity. So overall, yes, in the March quarter, we don’t have shutdowns, so back to our normal pace. Plus, we’re now in the process of rolling out our several key new products. As Mike mentioned in his speech, we’re rolling out Low Voltage platform, a new platform and then Power IC is rolling out new products, and then almost every product line that we’re rolling out a new product. So right now, our R&D expenses, we need more R&D wafers to support our new product launch.

Okay. Great. Thank you very much.

[Operator Instructions] We do have a question from the line of Craig Ellis from B. Riley.

Thank you for taking the question. Tony, nice to have you on the call and Mike thanks for joining us from China, good morning to you. The first question I have is just clarifying the fiscal third quarter’s revenue guidance. When I look back a year ago, the business was down 1%, the midpoint of guidance looks like its closer to down 4%. So is there anything that’s unusual in the quarter from an end market standpoint that you’re seeing Yifan, particular headwind in any of the key end markets or from a product standpoint?

Right now, 3%, 4% down for the March quarter, I think, is within a range of normal seasonality. Any seasonality has a range of fluctuation. At this point, we saw some big variations from different sources in terms of PC market and consumer market in terms of the March quarter outlook. So we factor in those factors, considerations into our guidance. But on an overall basis, even at the midpoint of our March guidance, we’ll still grow year over year.

Thanks for the clarification. And then staying on the top line, but a longer term question, when I look at some of the comments around some content gain in PC, share gain, some of the trends in some of the other application areas, either Mike or maybe Tony, can you just help us understand as we look at calendar 2015, what’s some of the drivers are for year on year growth for AOSL, either by end market or from a product standpoint looking relative to the prior year, does all that add up to positive growth in to the extent that you can put any qualitative color around that, that’d be helpful.

This is Mike Chang, let me first comment the product introduction because I believe this is the one which is really fundamentally driving the market, the business. And Tony, once I finish, can you comment from the market point of view?

Sure.

Okay. So first, okay, I mentioned briefly in the statement that we’re very excited about our new Low Voltage release, that’s a new platform, and really we have a significant improvement over our existing product there. And the design win activity is pretty encouraging, the traction has started, and many customers, almost all the customers value that and some are already in. And this is mainly for the newer Intel platform, because it can also replace some of the existing one. So we believe, okay, either second quarter, or for sure the third quarter this would take this one. Then our Power IC also have many newer product coming to the – from EZBuck to low switch to the [indiscernible] which is also various position designed by our key customers. And another one, of course, is IGBT, which is also taking shape, IGBT. Normally it takes a little longer for customer to really put into high volume production, but somehow we firmly believe in the second half of this year it would take shape there. So there is a lot of new products getting to the field and we are really excited about it. So Tony, can you add some color for marketing?

Sure. Let me add some color by segment and Craig thank you for asking the question. As we spoke a little bit about in the computing segment, one of the drivers we expect in the second quarter or in the second half, I should say, is the new Intel Skylake platform which will be requiring some new power requirement, supplier rails that will be required compared to the running platform. This one, we’re promoting our new Low Voltage platform as well as our Power ICs and the initial response from the customers has been positive. This gives us a good position that we see in the new platform and also some growth opportunities for these sockets. In the consumer segment, Mike talked a little bit about some of the smart TV and the 4K TV trends that require higher current and we’re well positioned there with our Power IC product at our existing customers and we’ve been able to grow some new customers namely in Japan and also in China and Taiwan for these new TV platforms that are growing in volume and also increasing the content. And lastly, the power supply segment, we do see some opportunities for high end power supplies that require high efficiency, they’re driving the demand for our advanced high voltage product as well as our mid voltage product that go into secondary side of the power supplies.

So with that, Tony, are you saying that in each of those areas, in your PC end market, in your consumer end market and then the industrial end market that we should see revenues grow year on year given the content gain and the program wins that you have with your new products?

That’s what we see right now, we expect the overall growth in each of these segments, in this calendar year as we’ve also gained in the previous calendar year.

Okay, thank you for that.

Let me make one minor comment which maybe more qualitative than quantitative, every year, every few years we introduce a new platform for new products, and it’s routine. But this year, the new product there, really see the excitement, see excitement from our field people, see excitement from our customers. So this – we’re really excited about that.

Okay, thanks for that. Lastly for Yifan, Yifan CapEx is tracking in line with the plan that you had for fiscal year. As we look at the calendar year for 2015, can you provide any color there? And if the business grows, does that mean that current CapEx to sales intensity will be sustained or is this fiscal year really more of a one-off step up in CapEx?

For this fiscal year first, we previously guided $15 million to $20 million CapEx, I think we’re on track. So the December quarter is roughly the average of those CapEx throughout the year. For the calendar year 2015, yes, as Mike and Tony mentioned, we have a lot of new products that we’re going to introduce, some of them either additional special equipment and we need to add it in. So I would expect for this calendar year our CapEx is going to maintain at $15 million to $20 million on an annual basis.

Our next question comes from the line of Tom Sepenzis from Northland.

Thanks for taking my questions. I was wondering if you can just talk a little bit about gross margins. In prior conversations the idea has been, as you drive the top line which you’re doing year over year again, the gross margin should start to resemble with it, they did in prior years as you filled the fab, but it’s still sub 20% here versus the 25% to 30% we saw a few years ago. So I’m just wondering with the new products, do you expect that you can actually get gross margins on a more proactive trend here?

Yes, Tom, as we introduce more new products I would expect our new products contribute – our revenue line to our margin line also. This gross margin is affected by many factors, by the mix, by the innovation and by the factories – operations cost, so there are many factors. I would expect the gross margin improvement comes from the first is utilization, because at this point, at $80 million revenue level, the dominant factor is in the steel utilization. As we grow to a higher revenue level, those new products and the mix management would kick in. So I’d expect yes, I think our previous historical quarters, the gross margin at $95 million range – gross margin at that time, that’d be a good proxy at this point.

Do you have any sense as to what quarter out in the future, how far we’re looking to that $95 million revenue quarter?

Tom, as you know, we don’t give out guidance that far. We only guide one quarter at a time. But we do expect we’re going to grow this calendar year year-over-year. So you can do the math and that we have our seasonality. So with all those new product introductions, I’d expect a yes there, get some – growth rate higher than the industry average.

Okay. So you would expect year over year growth for the remainder of the calendar year on a quarterly basis?

Yes.

Tom, if you don’t mind, let me add a little color, is it okay? You mentioned margin, of course the margins are very keen to us, okay. For existing product, the margin will heavily depend on loading because the ASP set or continuing erosion, the new product is the hope, okay. So with new product there you get a new standard, a new lab of ASP, the margin in that way improves. So as I mentioned, we have quite a few new product platforms to serve each segment. As those new products take shape to replace old one, that will be the major drivers on top of the eroding factor. So we are keen on two things. One is the new product, one is loading factor, of course, the new product also helps loading. So it’s much of a positive compounded expectation, hope.

So the new level [indiscernible] that’s going into the Intel Skylake platform, does that have – is the entire ASP and higher margin or is it just a greater number of components that are needed for that Skylake platform, how should we be looking at that? Is it just like a higher addressable content number or higher ASP and higher margins as well?

I cannot say higher ASP because [indiscernible] application, the ASP always going down. But because of better product, right, the margin will be higher. Also, then you have more sockets to put in there. So all of those help, positive factor.

Let me add to that, Mike, some of those new sockets that are coming up the customer workspace is shrinking while their power and efficiency requirements are going higher. So they do need higher performance MOSFETs or DriverMOS in a smaller workspace. And typically those are the higher value products that are required in the new platform which with our new Low Voltage platform, we’re addressing very well.

And then in terms of the IC business, obviously that was down in the December quarter and it’s going to be down again, is that just seasonal weakness, is there anything that we should we worried about in terms of that business growing, or is there something new in the market?

The Power IC business in this December quarter, yes, it was down compared to the September quarter, but it’s like seasonal, because it’s in computing and consumer segment. If you look at it year over year, it was still over 20% higher than last year. On a calendar year basis, as Mike mentioned, Power IC grew close to 20%, like 19% year over year.

I was just asking because it dropped obviously quicker than the discrete business. I have one more question and then I’ll let...

Let me just comment just this one. We guys are pretty excited about our Power IC business, we see a steady growth, because [indiscernible]. So we gained some growth last year and this year we’ll continue to gain double digit growth. Even though, you still cannot walk away from the seasonality, probably the compounded, because you’ve the PC in seasonality, TV [indiscernible] Q4, Q1. But overall-wise, it will continue throughout this year.

Yeah, the year over year the Power IC business probably up in the 20%, 25% growth rate for the year, right?

Yes.

Okay. And then lastly just in terms of the guidance and then the quarter just reported, looking like fiscal 2015 will be another flat in terms of earnings year over year?

Right now, we’ve not guided the June quarter yet.

Okay, all right. Thanks.

And we have a follow-up question from the line of Craig Ellis with B. Riley.

Thanks for taking the follow up question, which I want to target on gross margin, I just want to make sure I understand the dynamic that you see playing out between the volume benefit in the fab and the new product benefits with the product set. So when I look back at the last five years, incremental gross margins have been in a fairly consistent 35% to 55% range. Are you saying with the volume and the new product benefits that you’ll be more consistently in the high end of that range with your incremental gross margins or that in fact the range should actually move higher and above the mid-50s as we look forward over the next one to two years?

Initially why you started growing again, then adding volume to the fab and then initially with the improvement from the innovation perspective and some product mix. And then if we get to a point fill out an auto fab and then the additional effect will be from the new product and also the mix management. So we can pick and choose at that time, we would have more room.

At this time, I’m showing no further questions. I’d now like to turn the call back to the company for any closing remarks.

This concluded our earnings call today. Thank you for your interest in AOS. We look forward to talking to you again next quarter. Thank you.