Alpha and Omega Semiconductor Limited (AOSL) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to Alpha and Omega Semiconductors’ Fiscal Second Quarter 2016 Earnings Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise, but later we will conducting a question-and-answer session, instructions will follow at that time. [Operator Instructions] I would now like to introduce your host speaker for today’s So Yeon Jeong. You have the floor ma’am.

Thank you. Good afternoon, everyone, and welcome to the Alpha and Omega Semiconductor’s conference call for fiscal 2016 second quarter financial results. This is So-Yeon Jeong, Investor Relations representative for the Company. With me today are Dr. Mike Chang, our CEO, and Yifan Liang, our CFO. This call is being recorded and broadcasted live over the Web and can be accessed for seven days following the call via the link in the Investor Relations section of our website at www.aosmd.com. The earnings release was distributed by globe newswire today, February 3, 2016, after the market closed. The release is also posted on the Company's website. Our earnings release and this presentation include certain 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 that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. We would like to remind you that during the course of this conference call, we will 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 obligations to update the information provided in today's call. Now, I’ll turn the discussion over to our CFO to provide an overview of the second fiscal quarter financial results. Yifan.

Thank you, So Yeon. Good afternoon and thank you for joining us. To begin, I will discuss financial results for the quarter. Then I’ll 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. Finally, we’ll reserve time for questions-and-answers. Revenue for the December quarter was $79.8 million, a decrease of 2.0% from the prior quarter and a decrease of 1.8% from the same quarter last year. Our new products continue to show growing momentum during our typical lower season. In terms of product mix, MOSFET revenue was $59.4 million, flat compared to the prior quarter, and a decrease of 3.0% from the same quarter last year. Power IC revenue was $16.4 million, down 6.4% from the prior quarter and up 1.8% from the same quarter last year. Service revenue was $4.0 million, remained flat as compared to the prior quarter and the same quarter last year. In terms of segment mix, this quarter’s Computing segment represented 44.4% of the total revenue, Consumer 21.2%, Power Supply and Industrial 19.9%, Communication 9.4%, and Service 5.1%. Gross margin was 18.8% for the December quarter, as compared to 18.5% in the prior quarter and 18.7% for the same quarter last year. The slight increase in gross margin quarter-over-quarter was mainly driven by the new product contribution and our continued effort on cost control. Operating expenses for the quarter were $15.6 million including $0.4 million impairment charge, compared to $15.8 million for the prior quarter and $15.6 million for the same quarter last year. The lower operating expenses quarter-over-quarter were primarily due to the office shut down and more vacation taken during the holiday season. Income tax expense was $1 million for the quarter, compared to $1.2 million for the prior quarter and $1 million for the same quarter last year. The lower tax expense quarter-over-quarter reflected additional R&D credit catch-up as a result of the R&D credit bill passed by the Congress in December last year. Net loss for the quarter was approximately $1.6 million or $0.07 loss per share, as compared to $0.09 loss per share for the prior quarter and $0.05 loss per share for the same quarter last year. Net loss in the December quarter included $1.1 million share-based compensation charge as compared to $0.8 million in the prior quarter and $1.3 million for the same quarter last year. It also included $0.4 million impairment charge of long-lived assets for the December quarter. Non-GAAP EPS broke-even for the December quarter and the same quarter last year, compared to $0.05 loss per share for the prior quarter. We continue to generate positive cash flow. Cash flow from operations was $16.7 million for the December quarter as compared to $7.8 million for the prior quarter and $7.4 million for the same quarter last year. EBITDAS for the December quarter was $7.8 million compared to $6.9 million for the prior quarter and $7.9 million for the same quarter last year. Moving on to the balance sheet. We completed the December quarter with cash and cash equivalents balance of $81.9 million, as compared to $72.9 million at the end of last quarter and $120.6 million a year ago. During the quarter, we repurchased approximately 0.6 million shares for a total amount of $5.0 million. Net trade receivables were $26.1 million, as compared to $37.2 million at the end of last quarter and $26.7 million for the same quarter last year. Day Sales Outstanding for the quarter was 36 days compared to 44 days in the prior quarter. Net inventory was $61.1 million at the quarter-end, down from $62 million for last quarter and from $70 million for the prior year. Average days in inventory were 87 days for the quarter compared to 86 days in the prior quarter. Net Property, Plant and Equipment balance was $112.1 million, as compared to $117.4 million last quarter and $118.6 million for the prior year. Capital expenditures were $4.8 million for the quarter. Our expectation for fiscal year 2016 capital expenditure remains in the range of $15 million to $20 million. With that, now I would like to turn the call over to our CEO, Dr. Mike Chang, who will provide the business highlights for the quarter. Mike.

Thank you, Yifan. AOS delivered strong execution for the December quarter despite challenging market conditions, and posted better than expected revenue with improved gross margin. At the same time, we reduced internal and channel inventories and tightly managed capital spending. During the quarter, we continued to generate healthy cash flow, which enabled us to return about $5 million to shareholders under the existing share repurchase program. Our strategy of delivering differentiated products into diversified and growing markets continues to gain strong traction at design-in and design-win levels. Supported by these wins, we have successfully completed the second phase of the three-year recovery plan. Our main focus during calendar year 2015 was to pave the way for profitability by doing the following three things: First, accelerate new product rollouts. Second, improve BOM content and market share, and third, expand engagement with existing and potential customers. With the dedicated commitment of our employees as well as focused technology investments, we penetrated key customers with strategic products that target high volume applications. As we mentioned in the last earnings call, our China business grew significantly in calendar year 2015. As part of the China growth strategy, we announced last quarter that we entered into a preliminary agreement with the Chongqing authority to form a joint venture to establish a new manufacturing facility in Chongqing, China. We are currently in the process of negotiating the definitive joint venture agreement with the authority of Chongqing. We are now marching into the final phase of AOS recovery plan. We anticipate that our mobile products, especially the quick charger and battery management applications, will continue to ramp up. We also expect to begin volume shipments of our innovative Low Voltage MOSFET and Power IC solutions into the Skylake platform. This momentum indicates that we are at an inflection point to return to our growth path again. Now, let me switch gears and review our major business segments. First, Computing segment. It was 44.4% of the total revenue for the quarter. While it dropped 5.4% sequentially and 6.7% year-over-year as expected, taken as a whole, our year 2015 computing business softened by only 2% even though the whole PC market declined more than 10%. The better than industry performance was attributable to the above mentioned innovative new products. We expect the Skylake ramp to offset overall PC market decline in the March quarter. Our Computing business is a vital resource for cash generation and technology innovation. We will keep on leveraging our solid foundation of IP and strong customer relationship to expand market share and increase BOM content. Second, Consumer segment. The revenue was 21.2% of the total. It decreased 2.5% sequentially due to seasonality, but grew by 8.3% compared to the prior year. The increase was by virtue of the expansion into a major TV manufacturer in Japan. While we maintain a very strong position with the leading OEMs that we have already secured, we will leverage our technology and resources to replicate the success with more customers. For the March quarter, we expect to see a slight increase in the Consumer segment. Moving now to Power Supply and Industrial. It was 19.9% of the total revenue for the December quarter. This marks another 6.5% sequential growth after posting 8.5% and 10% increase in the September and June quarters, respectively. Compared to the year ago quarter, it grew 12.6%. The major growth driver in this segment was our new product family for quick charger application. We have made significant progress in design wins at multiple markets with leading customers in China and Korea, and we believe this momentum will extend to March quarter and beyond. Enabled by our technology and infrastructures, we expect to capture these growing opportunities with quick charger products. Next, Communications segment: It was 9.4% of total revenue, which was up 0.9% sequentially and down 4.7% from last year due to decline of traditional feature phones. As mentioned in the last call, we expanded the capacity for our AlphaDFN production during the December quarter to catch up with growing backlog. Indeed, the revenue from the AlphaDFN solution for smartphone battery management increased during the quarter; however, this growth was offset by the negative seasonality impact on feature phones. With improved capacity, we anticipate the revenue from smartphone battery management to rise at a faster pace in the March quarter. Looking ahead, we see encouraging signs for AOS. Bookings have improved over the December quarter. The positive book-to-bill ratio yielded some healthy backlog into the current quarter, which could lead to a counter seasonal March quarter. In closing, I'm pleased by the progress we're making in the multi-year recovery plan. Over the course of the past few quarters, we have taken significant strides in strategically introducing differentiated products, and securing design-ins and wins in emerging new sockets with market leaders. Although we are not immune from the current market turbulence, we remain confident that AOS can achieve meaningful revenue growth and return to profitability in calendar year 2016. With that, let me turn the call over to Yifan our CFO for the March quarter guidance. Yifan.

Thank you, Mike. As we look forward to the third quarter of fiscal year 2016, we expect our March quarter’s revenue to be in the range of $79 million to $83 million. GAAP gross margin is expected to be approximately 18.5% plus or minus 1%. GAAP operating expenses are expected to be in the range of $15.2 million to $17.2 million. Tax expenses are expected to be about $1.0 million to $1.2 million. Our share-based compensation should range from $1 million to $1.2 million as well. As per our regular practice, we are not assuming any obligations to update this information. With that, we will open up the floor for questioning. Operator.

[Operator Instructions] Our first question comes from the line of Tore Svanberg from Stifel. Your line is now open.

Thank you. This is Evan Wang calling for Tore. Congratulations on the great quarter and a great guide.

Thank you.

Thank you.

Yes, it’s great to hear that your new products giving a lot of traction. On that note should - the gross margin be in the upper half of your guidance of the 7.5% to 19.5% range or is there something in the mix that you can talk about that will give us a better idea where that could end?

Thank you, Evan. This March guidance reflected several things; one is our new products and continuing to grow as we discussed which will contribute to our gross margin improvement. On the other hand, the March quarter is Chinese New Year and then our factory operations would get some pick up during this long holiday season. All-in-all, we guided at 18.5% plus or minus 1% I mean we could get to the upper portion of the guidance.

Okay, great. And also if you could put this in a perspective of your recovery plan. At the end of recovery plan, do you have sort of a target gross margin in mind, you think where you could be and with this gross margin improvement contributing significantly to your return to profitability?

Yes. I mean return to profitability in calendar year 2016 is our goal as Mike just mentioned. We will update our model for 2016 calendar year approximately in the May time frame. So last year, we published one for indication of our final phase of our recovery plan, which is in calendar year 2016. This year based on the market information the industry and our internal new product and pipelines and customer's feedback and so we are going to give guidance toward May this year. Especially, if you look at our last year’s model, it will give you some indication along with the revenue growth. We do expect our gross margin will improve along the way mainly from the two angles. One is our new product contribution, the other one is I would expect our utilization will continue to grow. So overall, yes, we expect that we can grow our gross margin line as well.

Okay, great. On your share repurchase program where are you right now, and what’s the balance in the program?

Okay. Evan, if you recall last July, we had completed a Dutch tender offer for $30 million. The original repurchase on the program was authorized for $50 million, throughout the years, throughout the quarters we also repurchased some under on our 10b5 plan. So like this December quarter, we’ve repurchased a $5 million. As of now, we still have about $8 million balance in our program. So we will continue to evaluate and I’m sure our Board will evaluate along the way.

Okay, great. I have just one more question here, but it's about the quick charge. Where do you think the quick charge ramp is at this point and how long could the cycle last and it sounds like you are continuing to get design wins and share gain? And so do you see a peak within the next few quarters where the cycle be longer?

Quick charger ramp is still at early stage, last year the spenders and they just got adopted to some quick charger manufactures and started producing quick chargers last year. So we are one of the early players in this market, so we have the right solution and strong a IP behind this for the unique requirement of quick charger. So then I mean we do expect this year from time-to-time from quarter-to-quarter this adoption rate of quick charger will increase. So overall, we feel confident that we can continue to grow this business.

Can you just talk at all about what percentage of your Power Supply and Industrial bucket is quick charger represents?

The increase pieces primarily from the quick charger applications. Yes and we don’t disclose that level of granularity it shown and then but the increase piece is pretty much all from under quick charger application.

Okay, great. Thank you very much.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Tom Sepenzis from Northland Capital. Your line is open.

Yes. Hi, thanks and I’d like to do a congratulations on the quarter and the execution?

Thank you.

Thank you.

Welcome. In terms of the guidance from March, what kind of visibility do you have there?

At this point, our bookings have been improved over December quarter and the book-to-bill ratio is encouraging pretty healthy at this point. Our current backlog positions has been reflected in our guidance which could lead to a counter seasonal March quarter. So I feel pretty comfortable with our guidance.

Okay. And then in terms of the PC business that was down sequentially in December, what do you think it’s going to happen here moving forward, is that the new products kind of overcome by the drop in the overall market or do you expect to see growth in that business again or how should we be modeling that or thinking about that looking out 12 months or so?

Okay. In the December quarter, our PC revenue dropped a little bit, but on the other hand and if you look at our AOS sales we’re actually up so and then we reduced our channel inventory, because right now is in the transition period and when you have this Skylake platform is ramping up and started ramping up and then we don’t want to ship a lot of old model parts into the channel. So right now it’s in a transition period and so we do expect and we can shipment in the March quarter to Skylake that would be increasing the March quarter. So overall we think in the March quarter, yes, overall we would expect the PC unit shipment probably and continue to go down, but on our portion in the Skylake and BOM content left and volume increases, so that would offset the overall PC shipment decline. So overall we think March quarter would be like even out and by those plus, minuses. Over the year, we’ve continue to assume this PC in the marker to decline at a similar space as previous years and then on the other hand, our new Low Voltage platform and our Power IC solutions are well-positioned to fall in business Skylake and even with platforms so with the - from the BOM content of this Skylake platform we do expect on our overall PC revenue either, we can maintain at the flattish to slight increase for the calendar year 2016.

Great thank you. And then can you talk a little bit about the IGBT products and how that’s coming along and there’s been a number of new competitors topping up using Silicon Carbide and I am just curious as to whether you’ve seen that and how that compares to the product that you have and if you think that graph moving forward or that you are in different segments of the market?

Well, thank you. I think this is a very good question, okay. IGBT, we have very strong technology that’s the one thing I think we should all recognize, okay. The IGBT is using the higher power and lot of safety concern. So the design cycle is extremely long. So we have fought a very hard battle and it started to penetrate, so I think we’ll not see some great progress over there. So IGBT should be pretty bright going forward in the future and they just needed a little more patience. Let’s compare the IGBT with Silicon Carbide they are in a semi-category, the difference is in the cost under the performance. Silicon Carbide definitely is better than IGBT in any angle, but it costs more than 10 times. So until customer willing to pay the difference before [indiscernible] so we do have some Silicon Carbide product there, but they’re really more for the just like R&D purpose. Yes, the market we are targeting to - a little bit more volume instead of [indiscernible] is currently, but far away. I hope this answers your question.

Yes, thank you. And one last question in terms of seasonality since March year is looking better than expected June is typically up quite a bit sequentially because June and September are the stronger quarters. Would you expect them to still see strong improvement in June or is that going to be somewhat muted because March is doing better. How should we be thinking about that?

Okay. Well, typically that we only give guidance one quarter at a time and then given the current market turbulence and then a lot of uncertainties from China and other part of the world. I would say you would apply normal seasonality at this point because our visibility at this point is not that clear so we will give you guidance next quarter.

Great, thanks very much.

Thank you.

Thank you.

Our next question comes from the line of Christopher Longiaru from Sidoti & Company. Your line is open.

Hey, guys nice quarter.

Thank you.

Thank you.

My question has to do with I mean this is kind of a broader question but could you - I’ve been jumping around. So I apologize if you answered this, but did you say what your utilization was at the fab this quarter?

We typically we don’t disclose at that level, but we do expect our utilization for the March quarter will improve compared to the prior quarter.

Can you give us an idea of let’s talk the December quarter as a baseline, how much revenue dollar should fall through to operating income I mean because it sounds like you have a lot of things working for you over the course of the next 12 months to 18 months. But the utilization [indiscernible] boost on the way out. Can you give us an idea of how that flows through?

Sure. In our case this gross margin improvement can come from two major areas. One is our new product contribution and the other one is utilization. But I would say our gross margin improvement won’t be like a hockey stick. So it’s going to be gradual. I would expect along with the revenue growth we’ll see some benefit from utilization and then also on contributing some from our new products. So our new product I mean if you can - I would say for the incremental margins and then you can use roughly like [47%] as you build up your model I would think that’s a reasonable assumption.

So the additional products are coming around 40% plus gross margin?

Yes, I mean the contributions would come from both like a product mix and utilization.

Okay, and is there a point in terms of revenue where you have to start thinking about higher operating expenses, you’ve done a really good job on controlling your lowering operating expenses. But just in terms of revenue run rate where you have to consider an expansion, do you have that modeled internally and if so can you tell us what it is?

Yes, I mean to support our growth, we do need to invest in our R&D and sales and marketing areas. Typically, we targeted at this level, we target around like 17%, 18% of our revenue level that what we look for.

Thank you, guys. I’ll jump out.

Thank you, Chris.

Thank you.

Our next question comes from the line of Neil Gagnon from Gagnon Securities. Your line is open.

Good evening.

Hey. How are you?

The guidance for the March quarter, in fact it's wider than you normally give. Can you discuss some other reasons why it's so wide this time?

No, I think it’s in the same range like typically…

Yifan, I think you are back to the prior quarter it was a $2 million range and now you have given us a $4 million range?

No, it’s 79 plus, minus $2 million I think I believe that’s the similar one, yes last quarter I guided $77 million to $81 million for revenue.

You are maintaining the same wide range.

Right, yes. And then our gross margin normally a plus minus 1% so.

Okay. I can impression and listening to this call that your book-to-bill has been strong and it come this March quarter with more of it assured than normal, is that a correct reading?

Yes. I would say yes, you are upgrading it correctly, yes.

On Chongqing, when are you going to be able to layout for us, what you have there?

Right now we are in the negotiation process with Chongqing authority, that goals is to get in this definitive joint venture agreement signed. Last quarter, we disclosed so we can’t enter into this preliminary agreement. So right now we are negotiating so we will report to you when we signed a joint venture agreement.

Definitive joint venture might just come by the March timeframe or will we be thinking about June or later?

I don’t deal with commented both side are very careful especially when the channel, the government are crank down on this corruption so everybody are very careful word by word I think nobody want to go to jail. So it’s a little bit a longer than we expect, but that’s life.

Right. Gentlemen thank you.

Thank you.

Thank you.

[Operator Instructions] That’s all the questioners that we have in the queue at this time, so I would like to turn the call back over to management for closing remarks.

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.

Thank you.

Ladies and gentlemen, thanks again for participating in today’s conference. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone have a great day.