Alpha and Omega Semiconductor Limited (AOSL) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Alpha and Omega Semiconductors Fiscal Q4 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 follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would like to introduce your host for today’s conference Ms. So-Yeon Jeong. You may begin.

Good afternoon, everyone, and welcome to the Alpha and Omega Semiconductor’s conference call for fiscal fourth quarter and year-end financial results. Our fiscal year ended June 30, 2017. 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, August 9, 2017, 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 the 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’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 obligations to update the information provided in today's call. Now, I’ll turn the discussion over to Yifan, our CFO to provide an overview of the fourth fiscal quarter and the fiscal year 2017 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 and for the fiscal year ended June 30, 2017. Then I’ll turn the call over to Mike, our CEO, who will review the company’s business highlights. After that I will follow-up with our guidance for the next quarter. Finally, we’ll reserve time for questions-and-answers. Revenue for the June quarter was $98 million, an increase of 5.1% from the prior quarter and an increase of 7.2% from the same quarter last year. Our diversified new products continue to show growing momentum. In terms of product mix, MOSFET revenue was $76.8 million, up 8.4% sequentially and up 10.8% year-over-year. Power IC revenue was $18.2 million, down 5.6% from the prior quarter and down 5% from a year ago. Service revenue was approximately $3 million as compared to $3.2 million for the prior quarter and $2.9 million for the same quarter last year. Regarding the segment mix, the June quarter’s Computing segment represented 40.9% of the total revenue, Consumer 24.6%, Power Supply and Industrial 17.9%, Communications 13.3%, Service 3.1%, and others 0.2%. For the fiscal year 2017, revenue was $383.3 million, up 14.2% from last fiscal year. Gross margin for the June quarter was 25.6%, as compared to 24.3% in the prior quarter and 21.3% for the same quarter last year. The increase in gross margin quarter-over-quarter was mainly driven by the improved product mix. For the fiscal year 2017, gross margin was 24% as compared to last fiscal year’s gross margin of 19.6%, representing an increase of 440 basis points. The increase in gross margin year-over- year was primarily due to the better product mix and higher utilization. Operating expenses for the quarter were $21.5 million, compared to $19.7 million for the prior quarter and $16.9 million for the same quarter last year. The increase in operating expenses quarter-over-quarter was mainly due to the growing expenses associated with our Chongqing joint venture, higher professional fees and legal fees related to the fiscal year-end audit and other business activities, increased R&D engineering expenses to support our growth, and higher share-based compensation charge. Operating expenses for the fiscal year 2017 were $78.7 million compared to $64.3 million for the fiscal year 2016. During the fiscal year 2017, we strengthened our R&D, Sales and Marketing teams to support new product introduction and customer penetration. The variable compensation also increased along with the improved business and financial results. We think that our current R&D and Sales and Marketing structure can support the further growth in our core business. On the other hand, we will continue to invest in the Chongqing joint venture to bring up the production. Income tax expense was $0.8 million for the quarter as compared to $0.5 million for the prior quarter. Income tax expense for the fiscal year was $3.7 million compared to $4 million for the last fiscal year. Net income attributable to AOS for the quarter was approximately $4.1 million or $0.17 earnings per share, as compared to $0.14 earnings per share for the prior quarter and $0.08 earnings per share for the same quarter last year. Net income in the June quarter included $2 million share-based compensation charge as compared to $1.7 million in the prior quarter. Net income attributable to AOS for the year was $13.8 million or $0.56 earnings per share as compared to $2.9 million loss or $0.13 loss per share for the prior fiscal year. Non-GAAP EPS attributable to AOS for the June quarter was $0.25 earnings per share as compared to $0.21 cents earning per share for the prior quarter and $0.13 earnings per share for the same quarter last year. Non-GAAP EPS attributable to AOS for the fiscal year was $0.83 earnings per share as compared to $0.08 earnings per share for the prior year. We continue to generate positive cash flow. Cash flow from operations was $13.5 million for the June quarter compared to $11 million for the prior quarter and $13.8 million for the same quarter last year. Cash flow from operations for the year was $42.6 million compared to $40.2 million for the prior fiscal year. EBITDAS for the June quarter was $14 million compared to $12.6 million for the prior quarter and $10.3 million for the same quarter last year. EBITDAS for the year was $51.2 million as compared to $33.1 million in fiscal year 2016. Moving on to the balance sheet. We completed the June quarter with cash and cash equivalents balance of $115.7 million, as compared to $116.2 million at the end of last quarter and $87.8 million a year ago. Net trade receivables were $28.4 million, as compared to $22.5 million at the end of last quarter and $26.6 million during the same quarter last year. Day Sales Outstanding for the quarter was 32 days compared to 35 days in the prior quarter. Net inventory was $76.3 million at the quarter-end, up from $73.3 million for last quarter and from $68.8 million for the prior year. Average days in inventory were 92 days, flat as compared to the prior quarter. Net Property, Plant and Equipment balance was $139.4 million, as compared to $117.3 million last quarter and $116.1 million for the prior year. Capital expenditures were $14.8 million for the quarter. Capital expenditures for the fiscal year were $55.6 million, including $30.8 million from AOS and $24.8 million from our Chongqing joint venture. 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. Good afternoon. I am pleased to report further improvement in the June quarter with healthy sequential and year-over-year growth in revenue, gross margin and profitability as our turnaround is gaining strength. Driven by the strong demand for our diversified new products, AOS delivered record quarterly revenue of $98 million, and exited fiscal 2017 with great momentum and confidence, setting record revenue of $383 million. We also achieved the ninth consecutive quarter of gross margin expansion led by a favorable product mix. The gross margin of 25.6% came in above the high end of the guidance ranges, marking 130 basis points sequential increase and 430 basis points year-over-year growth. We posted $0.25 earnings per share on a Non-GAAP basis for the quarter, which brought a solidly profitable closing to the fiscal year 2017 with a Non-GAAP EPS of $0.83. The tight supply conditions remained in the June quarter. We took proactive and solid steps to ease the capacity constraints by adding some key tools and expediting transfer activities during the June quarter. While these actions are expected to gradually alleviate capacity constraints starting from the September quarter, we observe that the rising demand for our products will outpace our capacity for the next few quarters. As the tight supply conditions prolonged, we start to see the cost increase in raw materials and foundry services. Not all of these increases can be passed down to our customers in the spirit of our mutual long-term partnership with our customers. Nonetheless, we have been and will continue to effectively prioritize our business to manage our own inventories, channel inventories, customer demand, and margin. Now, let's move to a detailed review of our business beginning with Computing segment. It represented 40.9% of total revenue in the June quarter. We posted a 4.6% sequential increase and 23.9% growth year-over-year. The increase from a year ago was driven by the BOM content gains with the Skylake and Kabylake, the SAM expansion into graphics cards and Vcore applications, and the share gains at notebook battery applications. While the demand for our products continues to strengthen, we are trying to manage our mix to support our customers as well as to optimize our business. In fact, a big portion of the steady improvement of gross margin came from this segment as we have been increasing the shipments of our high value new products. As a result of ongoing mix management and supply chain control, we expect the Computing segment to maintain the same level of revenue in the September quarter. Second, Consumer segment. It was 24.6% of the total revenue. It grew 17.5% sequentially and decreased 6.1% compared to the prior year. Our shipments to TV applications remain flat sequentially due to the wafer shortage at third party foundries. However, the emerging shipments of our new products for various applications including gaming, drones, and home appliances, all of which were developed and shipped from our own fab, resulted in a healthy sequential growth. We think that the tight capacity at third party foundries will likely persist. Our own fab capacity that is just starting to open up cannot expand fast enough to satisfy the demand for our new products. In accordance with our disciplined mix strategy, we expect to maintain a stable Consumer revenue level for the September quarter. Third, Power Supply and Industrial Segment. It was 17.9% of the total revenue, which was down 4.4% sequentially, and down 12.3% from the same quarter last year as we continued to be more selective about allocation. We recently introduced the high performance αMOS5TM High Voltage MOSFET platform; this will enable future high voltage product offerings to fulfill the higher power density in smaller and more efficient packages. These new products will replace the traditional high voltage products that tend to carry low margins. The initial revenue contribution from new high voltage products addressing industrial power applications will start from the September quarter. We anticipate that this segment will demonstrate a healthy sequential growth. Lastly, the Communication segment. The revenue was 13.3% of the total revenue, representing a growth of 2.6% sequentially and 25.1% year-over-year. Telecom networking products gained further market share based on the strong demand for our medium voltage MOSFET products. Our AlphaDFN products for smartphone battery management applications and surge protection products are well positioned with key customers, and we continue to expect the demand for these products to rise during the second half of 2017. Accordingly, we expect to see a solid growth in this segment next quarter. In closing, we are pleased with the improvement we have been making so far. In the fiscal year 2017, we demonstrated the benefit of our turnaround strategy as we continued to generate strong financial results, strategically invest for future and adhere to our prudent capital management. Against the backdrop of tight supply, we are putting forth best effort to maintain a good balance between customer relations and business optimization. Looking ahead, we are confident that we can continue to expand our business and improve profitability as we are seeing more sustainable growth opportunities. Now that our CFO, Yifan, to give you the guidance. Yifan?

As we look forward to the first quarter of fiscal year 2018, we expect our September quarter’s revenue to be in the range of $101 million to $105 million. GAAP gross margin is expected to be approximately 25.5% plus or minus 1%. GAAP operating expenses are expected to be in the range of $22 million plus or minus $1 million as we expect the Chongqing joint venture related expenses continue to increase to support our joint venture’s development plan. Tax expenses are expected to be about $1.1 million to $1.3 million. Loss attributable to non-controlling interest is expected to be around $1.6 million. Our share-based compensation should range from $2 million to $2.3 million. As part of our normal 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 with Stifel Nicolaus Your line is now open.

Hi, this is Jeremy [Kwan] calling for Tore. Congrats on the record revenue and expanding margin. If I could just going back to the capacity challenge, can you give us an update in terms of how much you anticipate you are going to spend in terms of the CapEx to alleviate that constraint and how many -- you can give an update as far as how much you expect to spend in the next couple of quarters on that. Thank you.

Okay, sure. Yes, right now we are expanding our capacity so we'll see some initial ramp starting this terminal quarter and gradually we expect it can support more our revenue. So for the fiscal year 2017, we spent about $30 million in CapEx. For the next fiscal year 2018 we expect slightly higher probably $30 million to $35 million a range that's we still see our demand on our new products still increasing. So still outpace our capacity for the next few quarters so we will increase our capacity for the next fiscal year.

Very good. And of the $30 million is that includes any of the China JV spending?

Say it again?

For that $30 million for fiscal 2018, $30 million to $35 million, are that include any spending on China, in China JV?

No, sorry, yes, I should clarify it. Yes, that's $30 million to $35 million is for AOS only CapEx. Joint venture is increasing yes for sure because we have capital injections from Chongqing and France and from AOS so we are polarizing on our schedule for the Chongqing joint venture construction right now.

Great. Can you give us an estimate for the CapEx and the China JV and when you might expect some initial volumes to start ramping there?

Okay. The initial capitalization for the joint venture is $330 million, that's including cash contributions and some equipment we'll contribute and some IPs, so total CapEx, yes, we'll see the initial construction for the facility is around $78 million and $80 million range. We are going to move some of our assembly and test equipment from our Shanghai facility to the joint venture as our capital investment contribution. And then we'll also use some cash to purchase some equipment for our 12 inch fab in the joint venture. So the timeline wise this construction started in the March quarter, the past March quarter, right now this in the middle of the construction right now. And we expect a year and to year and half to completing the facility. So basically toward mid next year range. Then we'll start ramp initially for assembly and test and then followed by our 12 inch fab.

Great. Thank you. And question for Mike. You mentioned on the computing side, you expect flat quarter-to-quarter growth due to supply constraint. Can you give us an idea if you weren't constrained what the potential could be in that segment of the business?

Right now that segment is quite broad okay from the low switch or the way we call whatever okay. So some of the product was very low margin. And we want to actively replace with high margin new product there. But then I think you hear from Yifan, okay our own capacity even though we invest $30 million this year but the only progressively so the capacity we are not catch up where we wanted. That's why we say we'll make a similar level next quarter.

Got it. Okay and do you have an idea of how much proportion of revenue is new product versus maybe like older products from three years ago and do you have sense of that, you can give us --

I think I would say between 30% to 45%.

Thank you. And our next question comes from the line of [Ed Roche] with Sidoti. Your line is now open.

Hi, congratulation on great quarter. So my first question you mentioned the benefit of product mix on the gross margin. Power IC were actually I believe down in the mix, so is it fair to say that the real mix benefit was related to product allocations and kind of steering your products to the best potential margin opportunities by end market?

Yes. That's also addition to that you saw our MOSFET product line increasing pretty good and then we rolled out quite a bit new products for that product line. For the new products, they tend to carry a higher margin so even though yes we are constrained on the Power IC product line, it is in quite a bit of them are from third party foundry. So but overall new product contribution plus mix management, yes, I would characterize as the gross margin improvement.

Let me also just comment a little bit since you mentioned Power IC, okay, our Power IC business or product line is quite unique towards high power application. Therefore our products mostly are the co packaging with [folder and also the dmos] in other word for each of our product there is three or four parts inside there. And you can imagine the difficulty in getting all those four parts or three parts allocate or whatever it is, that's where they are suffering. We have two new products as well; it's just harder to managing in this condition.

Right because of the co packaging, I got it. And then can you just help us quantify may or directionally give us some help where more products on allocation and the fiscal fourth quarter versus the March quarter or about the same?

Fourth quarter, March quarter, yes, I mean right now is what not all products on allocation. Certain product and then we manage it, we factor in several considerations, our own capacity, third party foundries capacity and then margin and a customer relationship, partnership, we consider all factors since we cannot ship them all so we will do the strategically we are allocating them. Our overall goal is to try to meet as much as our customers demand as possible. We don't want to see customers lying down those situations. So that's why we are managing our own inventory and channel inventory and demand to the best we can.

Actually the potential customer line used to our top priority to support. We will make any effort to make sure that our customers not lying down.

Okay, thank you. And then hearing from some other players in the power semi space, it saw some correction in the handset end market or a communication end market during the June quarter. You had a nice year-over-year increase but sequentially wasn't -- it was a little more modest increase. Did you see any of that effect as well?

Yes. I mean that's conditions right now we saw. In the first quarter also I would characterize as some kind of demand and kind of soften a little bit. And then June quarter picked a little bit so that's on the handset front. For our own case that the -- we also gained some shares in the telecom and networking space. So but not entirely offset in handset adjustments but we do expecting -- we saw that the picking up in second quarter. So we do expect in the second half of this calendar year our smartphone business starts to picking up.

Thank you. And then one last one. So thank you for the guidance on non controlling interest portion of the income statement. Do you think that it will be really until fiscal 2019 before that flips from sharing the operating loss or expenses to sharing on operating profit or do you have any sense of -- could that be an FY'18 event or is that probably still beyond the scope of next year or this coming year?

Well, I can't say it and that's probably way beyond next fiscal year. Next fiscal year, is it the one -- from the construction timeline almost toward the end of next fiscal year we will probably finish up the facility. So then we'll start moving in equipment and install them, ramp, that will take some time. So, yes, I'd say probably beyond fiscal year 2019.

Thank you. And our next question comes from the line of Tom Sepenzis with Northland Capital Markets. Your line is now open.

Hey, how are you? I'll echo my congratulation on another good quarter. I am just wondering in terms of the supply issues that you guys are facing or you are seeing in your end markets. Do you have any view as to when that might end? Or when that might be alleviated?

This question bothers every night every day, okay. And for whatever reasons this time, this cycle seems to lot much longer than we used ever see even in my career. This moment we see this at least begin to see -- we can see no sign of softening and some people say maybe to next -- mid or next year because right now everything is speculation. So only we can see, look at the end -- towards the end of the year obviously as a short supply condition.

Well, Tom, another factor is we do see good demand for our new products. In the last year or so we rolled out some new products which are gaining momentum. So supply constraint is also on the other hand because demand is strong on our new product. That's also is another factor. Yes, in addition to the overall supply situation on the market.

Sure .And then I think you mentioned during the prepared remarks that you are going to absorb some of the costs of the new -- or the rising ASPs for your customers. Did I hear that correct? And if so, should we expect gross margins to kind of flatten out moving forward or will they continue to improve as the mix improves?

Yes. There are several factors here that impact on gross margin. I mean one is our new product is gaining momentum so they carry on higher margin. And second thing is yes we are doing mix management in response to the supply constraint and also as Mike mentioned earlier, we are seeing cost increase in raw materials and foundry services. So all-in-all, if you put other factors together, we expect in all margin in the near term stay at this level, up and down a little bit but by in large on the same level.

Great. And then lastly just housekeeping, I got the rest but I missed the percentage of revenues that was power and service.

To the service revenue 3.1%

And power?

Is it service revenue right, you said?

Right and power, what was the power, I missed the power too.

Power supply is 17.9%

Thank you. Our next question comes from the line Craig Ellis with B. Riley. Your line is now open.

Yes, thanks for taking the question guys. And congratulation on good execution. I'll just start off on the top line and touch on the capacity topic but do it in a different way. So are the company is investing in capacity to increase output? Can you quantify what the incremental revenue dollar of the capacity expansion is worth say over the next quarter or two? Are we talking about another few million dollars in revenues that can be coaxed from the fabs? More than that, less than that, just give it some sense for what the incremental revenue benefit is from the investment you are making.

Okay, sure. We guided $101 million to $105 million for the September quarter. So for our guidance we -- it's reflected in our capacity situation at this point. And, yes, for the capacity can support to the level and for the next few quarters we will continue to add in some equipment in OC then to support next high season next year. So that's our plan.

Okay, that's helpful, Yifan. Thank you. And then a follow up that's an intermediate term revenue question. Given how tight capacity has been and given that you have high demand from your customers, would you expect that you could see an above seasonal fiscal 2Q and 3Q which are typically seasonally softer quarters as your capacity in your shipments catch up with some of the demand that's out there for those higher margin new products.

I would say probably yes and this year kind of seasonality is kind of truncated by this supply situation and our new product penetration. So, yes, probably we will see last seasonality within this coming low season.

Thanks Yifan and then lastly on revenue before I move on to margins. Is it the company's been on a very nice growth track? Clearly you are doing what you can do to expand your capacity. It stands with the beginning of fiscal 2018, is it -- how should we think about the puts and takes with the company's longer term growth some near term capacity constraints but clearly some strong demand growing in markets, does all that add to in your mighty fund business that's capable of growing mid single digits or higher single digits, how do you think about how it nets out for the company on a longer term basis as we think about top line growth potential.

Okay, sure. Last year we guided this fiscal year 2017 we guided high single digit growth and we ended up and exceeded our goal. For fiscal year 2018, I'd expect, yes, we'll probably can do around high single digit because we are off from higher base right now. For the longer term I'd expect we can do in high single digit, that's our target in our model, outperformed industry norm.

Okay, that's helpful, I appreciate that. And then moving on to gross margins. When topic that came up on another company's call earlier this week was just industry pricing and as you would say the industry pricing has been improving, I think we've seen that in other parts of the supply chain. So as we think about it was sales gross margin, is it possible that there is some industry benefit that could accrue to gross margin over the next two to four quarters beyond the company's specific things that are happening with products. And if so, how material could that be for AOSL?

Well, for the pricing overall I mean we see less erosion currently. As Mike mentioned the increased in cost and raw material and wafer services and not all of them we can passed on to our customers and we are doing some mix management on our side but we also treasure the long term strategic partnership with our customers. So by in large really expecting our new products will continue to contribute to the gross margin improvement. I'll think it will be offset against the increased material cost. So by in large for the next couple of quarters we do expect our gross margin to maintain at a current level.

Okay. So if we are thinking longer term on that gross margin mighty fund, a lot of company had like biggest around 400 basis points of gross margin expansion last year. This year we'll start pretty fat and then there is potential supply mix up maybe to do a little bit more depending on what happen with external capacity. But we probably be working at something that's half or less the gross margin improvement of last year from this year. Is that fair?

Well, again, last year's 400 basis points improvement combination of new product and the mix management plus utilization contribution. So right now is going forward utilization contribution is pretty much gone. Right now our factories are full so the contribution will be only from the new product contribution and mix management. So right now we are facing raw material cost increase and third party foundry services cost increases. So I'd say for the fiscal year 2018, the gross margin improvement is probably much less than last year's 400 basis points.

Got it. And then lastly, just looking at operating expense fiscal fourth quarter was I think about $1.5 million above what I had model. Were there one time items or non recurring items that were included in operating expenses in the quarter? And if not, can you just give us a breakdown of the things that caused increase or how long will those things be in the model and are they more intermediate or longer term impacts to your operating expense?

Okay, sure. As I mentioned in script, I mean in the June quarter some increases came from the some professional fees and legal fees related to some business activities. Also I mean R&D expenses fluctuating from time to time. I mean that also contributed to some. So by in large if you look at in our fiscal year 2017, our operating expenses increased that because we strengthened our R&D sales and marketing teams to support our new product introduction and their customer penetration. So then our fiscal year results also indicated the benefit. At this point, we believe our R&D, sales marketing structure is adequate for our core business growth for the next fiscal year. I mean our goal is to grow our long term -- our business in long term. I mean right now we saw a lot of good business opportunities ahead of us. So we want to invest now then to harvest later in the future. So that's -- I'd say from this level for AOS core business will probably fluctuate around the current level. And then of course on the other hand, yes, we will continue to invest in our joint venture. We do need to bring it up to production next year.

And can you just quantify the incremental expenses from your first quarter guidance that will be needed for joint venture after production? Are we looking at an incremental $0.5 million - $1 million, what would be looking for in operating expense from here to fiscal 2018 if that facility gets closer to producing?

Well, you can see from our guidance on the non controlling interest, the loss attributable to the non controlling interest. So they own 49% of the Chongqing joint venture is a loss so that basically you can see in the numbers. So in September quarter compared to the June quarter that loss attributable to the non controlling interest right now based on our guidance, that would increase by $0.3 million range and so you can tell that probably our overall expense will increase around $0.6 million range for the joint venture.

Thank you. And I am showing no further questions at this time. So that does conclude today's Q&A session. Now I'd like to turn the call back to management for any closing remarks.

This concludes our earnings call for day. Thank you for your interest in AOS and we look forward to talking to you again next quarter. Thank you.

Yes, thank you to you all. And God bless 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.