Alpha and Omega Semiconductor Limited (AOSL) Q2 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Alpha and Omega Semiconductors Fiscal Q2 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to So-Yeon Jeong. You may begin.

Thank you. Good afternoon everyone, and welcome to the Alpha and Omega Semiconductor’s conference call for fiscal 2017 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. The 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 8, 2017, after the market closed. The release is also posted on our 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 $94.7 million, down 2.7% sequentially and up 18.6% year-over-year even under the supply constraint challenge that we started to experience during the December quarter. Our new products continue to show strong momentum during our typically lower season. In terms of product mix, MOSFET revenue was $69.8 million, a decrease of 2.2% from the prior quarter and an increase of 17.6% from the same quarter last year. Power IC revenue was $21.9 million, down 5% from the prior quarter and up 33.3% from the same quarter last year. Service revenue was $3 million, as compared to $2.9 million for the prior quarter and $4 million from the same quarter last year. In terms of segment mix, this quarter’s Computing segment represented 38.4% of the total revenue, Consumer 25.4%, Power Supply and Industrial 20.9%, Communications 11.9%, Service 3.2%, and others 0.2%. Gross margin was 23.3% for the December quarter, as compared to 22.5% in the prior quarter and 18.8% for the same quarter last year. The increase in gross margin quarter-over-quarter was mainly driven by the improved product mix. Operating expenses for the quarter were $19.3 million, compared to $18.2 million for the prior quarter and $15.2 million for the same quarter last year. The higher operating expenses quarter-over-quarter were primarily due to the increased variable compensations resulted from the better than expected company’s performance in calendar year 2016. Income tax expense was $1.1 million for the quarter, compared to $1.2 million for the prior quarter and $1 million for the same quarter last year. Net income attributable to AOS for the quarter was approximately $2.8 million or $0.11 earnings per share, as compared to $0.14 earnings per share for the prior quarter, and $0.07 loss per share for the same quarter last year. Non-GAAP EPS attributable to AOS for the quarter was $0.18 earnings per share, as compared to $0.19 earnings per share for the prior quarter and break even for the same quarter last year. Non-GAAP EPS excluded the effect of share based compensation expenses of $1.6 million for the December quarter, as compared to $1.3 million in the prior quarter and $1.1 million in the same quarter last year. We continue to generate positive cash flow. Cash flow from operations was $8.8 million for the quarter, compared to $9.3 million for the prior quarter and $16.8 million for the same quarter last year. EBITDAS for the December quarter was $12.2 million, compared to $12.3 million for the prior quarter and $7.8 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 $122.8 million, including $19.1 million balance at our Chongqing Joint Venture, as compared to $118.8 million at the end of last quarter and $81.9 million a year ago. Net trade receivables were $24.5 million, as compared to $27.1 million at the end of last quarter and $26.1 million for the same quarter last year. Day Sales Outstanding was 35 days for the quarter, flat as compared to the prior quarter. Net inventory was $70.2 million at the quarter-end, compared to $70 million for last quarter and $61.1 million for the prior year. Average days in inventory were 87 days for the quarter, compared to 83 days in the prior quarter. Net Property, Plant and Equipment balance was $122.7 million, as compared to $123 million for prior quarter and $112.1 million for the prior year. Capital expenditures were $6.4 million for the quarter. In January 2017, our Chongqing Joint Venture entered into a turn-key design and construction contract to build a manufacturing facility for assembly, test and 12-inch wafer fabrication for a total price of approximately $78 million, which will be paid in accordance with the payment schedule based on the achievement of certain milestones. We expect the construction work will start in mid-February and finish in a year to a year-and-a-half. 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. Our turnaround efforts continue to produce positive results. For the December quarter, typically a low season for us, our gross margin exceeded the top end of the guidance range, while the revenue of $94.7 million came in near the high end of our expectations. This time last year, I said that we hit an inflection point as our new products were gaining traction at design-in and design-win levels, and since then our relentless efforts to execute AOS product roadmap enabled us to achieve an 18.6% growth in revenue compared to the same quarter a year ago. Also, we continued to expand our gross margin by virtue of a favorable product mix of higher margin products. As a result, we posted non-GAAP earnings per share of $0.18 for the quarter. I am pleased with our strong execution in the December quarter despite supply constraints at our third party foundries. The solid December performance marked a successful conclusion of the recovery plan that our Board had commenced a few years ago. During the course of calendar year 2016, which was the last phase of our recovery plan, we have been putting all our efforts and focus to deliver meaningful revenue growth and profitability. Our results speak to the substantial progress we have made. The revenue grew 14.6% to $366.4 million in calendar year 2016 from $319.7 million in 2015, and the gross margin expanded about 390 basis points to 21.8% in 2016. The bottom line swung to $0.50 earnings per share on a non-GAAP basis in 2016 from a loss of $0.28 per share in 2015. I am encouraged by the confidence and capability of our team to steer further improvement and growth in the coming years. While on the subject, let me take a few moments to share my near-to-mid-term vision for AOS. Consistent with our ultimate goal of becoming a total power semiconductor solution provider, AOS has been evolving from a relatively small MOSFET provider for a single market to a diversified and reliable supplier addressing four different target markets. The next step in our journey is to steadily grow to be a more sizable force in the power semiconductor market. It will serve as a firm foundation upon which our business model can fully demonstrate its scalability and leverage. Our business strategies are well aligned to reach the goal in 3 to 5 years, and the entire team at AOS remains committed to drive the objectives we have identified. Now, I will review our performance and initiatives in each business segment. First, Computing segment: It represents 38.4% of the total revenue in the December quarter. The Skylake ramp and the shipment of graphics card continued to improve, and contributed to a counter seasonal strength. We posted a 3.9% sequential increase and 24.7% growth year-over-year. Our products designed in for Skylake are compatible for Kabylake platform with similar BOM content, which brings a smooth and seamless transition to the next platform. Furthermore, our recent strides in graphics card application continued to make good progress as we have benefited from the GPU market expansion. We continue to strive to broaden our BOM content and customer engagement. With the slowing decline in the Computing market, we expect to see our devotion coming to fruition in the next year or so. Second, Consumer: The revenue was 25.4% of the total. It decreased 12.1% sequentially, due to anticipated seasonality, but grew by 16.1%, compared to the prior year as we expanded revenue from ultra high definition TVs and other diversified applications. Our shipments to key TV customers were pulled into the September quarter to prepare for the holiday season and China Golden Week holidays, resulting in a seasonal decline in the December quarter. This segment is more exposed to the wafer shortage from third-party foundries that are operating at full capacity. However, we expect that the progressive shipments of the new products from our own fab will help us maintain the Consumer segment’s revenue level in current calendar year. Third, Power Supply and Industrial segment: It was 20.9% of the total revenue, which was down 3.2% sequentially, but up 16.3% from last year, as our products for the quick charger applications were well adopted by top-tier Chinese and Korean smart phone customers. Under the tight supply environment, we will continue to take a two-pronged approach in managing this segment. With regard to growing applications, we will continue to expand the footprint and BOM content with our new products. For legacy products, we will manage the product to optimize our margin. All in all, we expect to maintain the revenue level in this segment for 2017. Last, Communications segment: The revenue was 11.9% of the total revenue, representing a decrease of 1.3% quarter-over-quarter. Compared to the same quarter a year ago, however, it grew 29.6%. A majority of the growth was propelled by the increased shipments of our AlphaDFN products supporting Smartphone battery management applications. In addition, we penetrated into new sockets and gained market shares with our surge protection products during the quarter. As the demand for AlphaDFN product line increases, we expect the Communication segment to continue to grow. In calendar year 2017, while our main challenge is to manage our mix to ease the supply constraints and improve gross margin, we still expect a healthy growth. As we are entering the next chapter of AOS journey, we are optimistic that the continued execution of our business strategies will accelerate our expansion. We believe that these efforts will create a firm foundation for sustainable growth in the years ahead. With that, I’ll let our CFO, Yifan to give you the March guidance. Yifan?

Thank you, Mike. As we look forward to the third quarter of fiscal year 2017, we expect our March quarter’s revenue to be in the range of $90 million to $94 million; GAAP gross margin to be approximately 22% plus or minus 1%; GAAP operating expenses to be in the range of $18 million to $20 million; Tax expenses to be about $1 million to $1.2 million; Loss attributable to non-controlling interest to be around $1.2 million to $1.3 million; Our share-based compensation to be in the range of $1.6 million to $1.8 million. As per our regular practice, we’re 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 Craig Ellis of B. Riley. Your line is open.

Thanks for taking the question and Mike as you wrap up the turnaround initiatives successfully congratulations on the journey travel and all that the team’s accomplished.

Thank you.

You're welcome. What I wanted to do is, start with more of an intermediate to longer-term question on revenue. We’ve had three consecutive quarters for revenue has grown double digits year-on-year and in some cases it’s occurring as the company has success either with new product platforms or in penetrating new application areas like graphics cards. The question is, is double-digit year-on-year growth sustainable and if it is, where would you see growth to be highest across your portfolio?

This year is a very interesting year. From one side the business is good. Unfortunately for the other side, the supply constraint is really severe. So, this year we still expect a healthy growth, but unfortunately it won't be double-digit.

What percent of the business currently is impacted by supply constraints and are there risks that supply constraints will move beyond the quick charge of products in some of the display products. So what percent of revenues are those two and is there a risk that the supply issues impact more of your portfolio?

Maybe let me answer in a different angle, which will still address your question. Our internal supply covers about over 55% to 60%. So in other words 40% is under mercy of our supplier. Our supplier they also know how to support us, it is not just anybody competing for the things, so that’s the challenge here. So, we are thankful that we have our own fab and Oregon, otherwise it would be really, really difficult.

So, are you able with your fab and Oregon to pre-build for the seasonally stronger period, maybe Mike or tactically how are approaching the supply situation as you look out beyond the current quarter, which is seasonally softer for most of the business and into the seasonally strong period, mid-calendar year?

Our Oregon fab’s also had a full capacity, however we are actively expanding our capacity, but that is a time because the equipment coming is not like [indiscernible] there is less auto time installation, so we will see some relief in the data parts here.

Okay that's helpful. Moving to gross margin, gross margin has been improving at 300 basis points to 400 basis points a year, it sounds like the businesses going to be running at full utilization even as some of your new product platforms start to pick up, so how should we think about the sustainability of the 300 or so basis point year-on-year gains in gross margin, is that still possible as we look at calendar 2017 versus calendar 2016?

Craig, this is Yifan , let me answer this question. Yes in the calendar year 2016, if you look at versus the calendar year 2015, yes our gross margins improved close to 400 basis points. It was because of the combination of utilization improvement and the in product higher margin contributions. So going forward as you said, yes our internal relations right now is close to the full capacity right now. So, going forward the more contributions on the margin improvement that would be from the mix management and our new product contributions. In the short to mid-term and we are targeting mid-20% right now, so we will see our goal, eventually our goal is almost to 30% range.

That's helpful Yifan. A clarification there then, if utilization is going to stay high, what would cause gross margins to decline? I think it’s about 150 basis points to 180 basis points quarter-on-quarter in the fiscal third quarter?

Fiscal third quarter, March quarter is more like, because March quarter is Chinese New Year, you have a long holiday over there in China, so we have budgeted in some efficiencies from the factory side, so the new foundation that wouldn't be as high as prior quarters.

Okay, and then the last question regarding the variable comp expense item in OpEx in fiscal 2Q, is that something that pays out when certain operating income or growth thresholds are met and is there anything incorporated for that in the fiscal third quarter, and how do we just think about the way that’s structured as we think about our longer-term modeling?

Okay sure. Internally we operate on the call in calendar year basis, even though we report on the fiscal year. So this December quarter is an additional variable conversation accruals and they are ready for the whole calendar year, additional. For other years in calendar year 2016 we had been accruing some, but since the December quarter's performance that was better than expected, so we need to accrue additional conversation. In the March quarters, in OpEx and guidance that we have already factored in for the calendar year, the expectations, so we do include some variable conversations.

All right, thanks gentlemen.

Thank you.

Thank you.

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

Hi, and thanks for taking my question. I will echo the congratulations on another good quarter.

Thank you.

Thank you, Tom.

Okay. I was just wondering the OpEx, particularly as seen in the December quarter quite a bit and just in terms of where, is that going to stay that high or is there a one term one-time event, maybe you could just explain, why that was up so significantly, I think it is billing in, in March?

If you look at on a non-GAAP basis, I think the December quarter's OpEx increased about $800,000 compared to the September quarter. It was primarily due to the addition of variable compensation accruals because we’ve performed better than expected. So, those criteria’s were tied to the revenue growth and in operating income growth in both numbers. Going forward yes our March quarter we factored into New Year’s bonus plan. We accrue to some extend of that target. So, right now it is reflected in our March quarter's guidance. And on the other hand we also since we saw business and growth opportunity, so we are investing in OpEx and in R&D and the sales marketing areas, so those will increase in [indiscernible] also.

Great, thank you. And then in terms of building, the add-on to the fab or additional capacity over the next year and a half, are you targeting the same markets, the same end-products that you are currently in or are you going to be targeting new or extending product categories with that capacity?

Most of it would be for new one. Mostly, some was still for continuity because we had to support our customers. So, mostly for new one.

Okay. Great. And then in terms of component shortages that you're seeing, is there any level of specificity that you can get there, it sounded like it was in the smart phone battery, but also potentially some shortages and the television panel market, so little bit about what shortages you are - or say you expect those might build?

Well yes Tom, the shortages is kind of the way to end the more on our consumer segment areas than others segments. And also from the product lines perspective and Power IC probably relatively got a more pressure because we tend to purchase more from the outside boundaries for our partner, Power IC products.

Thank you very much.

Maybe from the real [ph] policy point-of-view, our policy almost is the core packaging. So each part has a three or four chips. So any chip is short that part will not be ready to deliver. So you see the impact.

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

Yes, thank you. First question on the shortages, where do you think this is coming from, I mean, I obviously understand with your own capacity, but is demand just stronger than what people expected or is this because of the changes in the competitive landscape for instance two of your competitors becoming one, maybe you could just talk a bit more about the dynamics there on why it’s happening?

This is a very good question. We have been searching for a while, you can conjugate it to all of them, but on the hand, we don’t see a very clear cause of that. Suddenly there is a big demand or some [indiscernible]. This maybe just on small participation and then because there is a whole market been so careful for so long, everybody is very controlled, the inventory short [indiscernible] saw a little bit of hesitation because of fixed wing. But that is what we, I will recon now because really we don't see any big search in anymore market here. You know all the market I [indiscernible] like a few percent, whatever [indiscernible] in such a degree. You know maybe some people have a better picture, but we are [indiscernible] for a while already.

That is very helpful. And in an environment like this of course you know people start to worry about double ordering and things like that, how are you managing that particular topic in light of you adding capacity to kind of catching up the demand?

For this a area, which is like, actually in the semiconductor BOM buster which is kind of life okay. So we actually are watching very carefully about a booking, a cordial booking and of course watching the cancellation pattern very closely. On the Oregon fab, our internal capacity as we mentioned in the last question [ph], or do, what I would put mostly offered our new product, which is actually strategically in line with our overall plan anyway.

Also Tore, just to add on one more point, we invest some more CapEx in our own fab and it is more like that we saw our design-ins, design-wins and then with our customers. So not just is based on how much in backlog right now I have. Yes, I wouldn’t expect there are some double bookings backlog, and then logically we should expect some and you know when the supply overall, supply chain is tied, so our fab expansion - first of all it is going to be modest, not like the organic more CapEx investment. On the other hand, yes we also look at our own internal design-ins and design-wins.

Understood. The strength you saw in computing, I think you said that was related to graphics cards or GPU is, is this sort of a new secular cycle for you or you think it’s more sort of temporary and then computing on a going forward basis will probably continue to be flat to down?

Well that’s one of the factors contributing to our computing segment as in the graphics card and then you know, which regarding to a quarter to couple of quarters ago, so in this area that we expect our product, a new product continue to roll with the major graphics card suppliers. So we are going to design in on to more projects with them. Overall, PC market, yes if you look at markets that we survey companies and projections and looks like the March quarter is going to be the first quarter either or not decline year-over-year or slightly up year-over-year, so that was probably going to be first time for long period of time for PC with that year-over-year decline. So, we are encouraged by it, but on the other hand we also remain cautious about the strength of this trend.

Let me add a few line on this area from our business strategy point of view. I think you’ve heard about when we all along here we say that we will stick in the PC area computing area, okay no matter what, mainly because we knew that PC is going down, but it won't disappear in the few years, and we have a very deep involvement in this area. And the reason we say, we will maintain our business level, mainly because we see that opportunity we have not explored yet. So either some customer we have not fully engaged or not engaged enough and then we also see rather new product capability and opportunity. So this area we decided to stick-in and then we will maintain our business level here.

That makes sense. Just one last question, a little bit more longer term, so it looks like the JV construction is going to start here very soon, it will take about a year, year-and-a-half to complete the construction, what sort of gross margin implication should we think about as you - both as you start with the revenue contribution from that facility and then eventually as it start ramping into in full production will it have a meaningful impact on gross margin?

Okay sure Tore. This construction will start soon and then it will take about a year to year-and-a-half to complete and so by the time we can start our wafer supply and then they started rampings, so you are talking about at least 2 to 3 years out from now. So yes, we do expect this 12-inch fab to add some value to us in terms of technology-wise and cost-wise. And then we also, we are going to move a portion of our assembly facility to there, we will ramp that up. So, we will see some cost contributions from there. We will talk about it more when we are close to moving time.

That's fair. Very good. Thank you.

Thank you.

Thank you.

There are no further questions. Please proceed with any 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, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.