Good day, ladies and gentlemen, and welcome to the Alpha and Omega Semiconductor conference call, Fiscal Q1 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference will be recorded. I’d now like to introduce your host for today’s conference, Ms. So-Yeon Jeong, of Investor Relations. Ma’am, you may begin your conference.

Thank you. Good afternoon everyone, and welcome to the Alpha and Omega Semiconductor’s conference call for fiscal 2018 first quarter 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 GlobeNewswire today, November 2, 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 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 the 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 information provided in today’s call. Now I’ll turn the discussion over to Yifan, our CFO, to provide an overview of the first 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 will 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 will reserve time for questions and answers. Revenue for the September quarter was $104.9 million, an increase of 7% from the prior quarter and an increase of 7.7% from the same quarter last year. Our diversified and new products across all segments continue to show growing momentum. In terms of product mix, MOSFET revenue was $83.7 million, up 9% sequentially and up 17.1% year-over-year. Power IC revenue was $18.1 million, flat from the prior quarter and down 21.3% from a year ago. Service revenue was approximately $3.1 million as compared to $3 million for the prior quarter and $2.9 million for the same quarter last year. Regarding the segment mix, this quarter’s computing segment represented 38.8% of the total revenue; consumer 24.6%; power supply and industrial 19.1%; communications 14.5%; service 2.9%; and others 0.1%. Gross margin for the September quarter was 26.3% as compared to 25.6% in the prior quarter and 22.5% for the same quarter last year. The increase in gross margin quarter-over-quarter was mainly driven by the improved product mix and higher utilization, partially offset by the cost increase in raw materials and foundry services, as we had mentioned in our previous earnings call. Operating expenses for the quarter were $22.9 million compared to $21.5 million for the prior quarter and $18.2 million for the same quarter last year. The increase in operating expenses quarter-over-quarter was mainly due to an increase of annual merit-based compensation adjustments that started in July, more variable compensation accrual…

Thank you, Yifan. AOS achieved another outstanding quarter and reached several important milestones. For the September quarter, we have surpassed the $100 million quarterly revenue mark for the first time. Driven by the new products across all market segments, the quarterly revenue came in at the top of our guidance range at $104.9 million, establishing an all-time record. The favorable product mix contributed to the 10th consecutive quarter of gross margin expansion. Our gross margin improved 380 basis points year-over-year, which resulted in a healthy bottom line. Earlier this year, I shared our strategic vision of how we can achieve the ultimate goal of becoming a total power semiconductor solution provider. The first step was to develop and introduce differentiated products in four target markets. The next step was to grow the business on the strength of our new product cycle and the keen product executions to turn into a larger, more sizable force in the market place. The strong product momentum and healthy business pipeline presented us with the exciting opportunities that will further expand the addressable markets and diversify our product offering. In support of our growth trajectory, we signed a joint venture agreement with Chongqing government in 2016. The JV project is moving well according to our plan, as Yifan mentioned earlier. We expect the JV to improve and to enhance our manufacturing capability and allow us to expand and diversify our market in China. I am very pleased to report that we recently took yet another critical step toward executing our strategic plan during the September quarter. We entered into a license agreement with STMicroelectronics, which will lead us to expand into new markets with digital multiphase controllers, primarily for applications in computer servers. By adding a multiphase controller product line to our power IC and…

Thank you, Mike. As we look forward to the second quarter of fiscal year 2018, we expect our December quarter’s revenue to be in the range of $100 million to $104 million. GAAP gross margin is expected to be approximately 26%, plus or minus 1%. GAAP operating expenses are expected to be in the range of $23.5 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 $0.9 million to $1.1 million. Loss attributable to non-controlling interest is expected to be approximately $1.8 million. Our share-based compensation should range from $2 million to $2.2 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 Jeremy Kwan from Stifel, Nicolaus.

This is Jeremy Kwan calling for Tore from Stifel Nicolaus. Looking at the STMicro digital power controller opportunity, it sounds like it could be a potentially nice new market for you guys. I know it’s still relatively new, but can you give us an update on this area in terms of progress in building the team and kind of what – the R&D ramp we can expect coming from this?

Thank you. We definitely are very excited about this new venture and with such a good partner with STMicroelectronics. At this moment, we have a lean skeleton which we just recruited, and we also actively recruit the rest of the team. So it’s just the beginning, but with a very strong healthy footing.

Great. Can you give us a sense of maybe the relative size of the team you want to build, whether that’s in terms of engineers or –?

Okay. The team – how shall I say? I will say probably 30 plus members, yes, the team will be. That’s about our current plan. We are still far away from that.

Okay. And in terms of the support you might expect to receive from STMicro, is there any other transfer of expertise maybe to help you kind of accelerate that R&D program?

Actually, we are very, very fortunate. We got a few topnotch guys in the field. They have the total knowledge on the scope what we intend to participate in. And of course, we very much appreciate our partner, STMicroelectronics, as a friend. They are very helpful. And so, I would say this is a beautiful team altogether. We are very, very happy here.

Well, Jeremy, let me add on a little bit of color on the license agreement. Based on this agreement, yes, we have the license and we also have some additional development agreements that ST will fulfill in the next few quarters. And then that would give us additional support to our team while we are building our own team right now. The – overall, this opportunity is very exciting. As we stated in our press release, it will address primarily the server market. And then along with our power IC and MOSFET products, so that we are targeting to provide total solutions to our customers.

Great. That’s very helpful. And just one last question on this, if I may. It does sound like a very potentially transformative opportunity for you guys. Can you give us maybe an idea of what – when we might expect initial product announcements you might be targeting and what potential market size opportunity that you’re trying to address with this? Thank you.

As we reported, we’re going to expect to introduce a product in between two to three years. And the market size so far, immediately we are looking for at least a $300 million size, which of course can be extended to even more, definitely. But we will do one step at a time, so that’s what the current picture is, yes. Did that answer your question?

Our next question is from Ed Roesch.

So first question is just on the wafer cost increases. I know that that impacted you, but it seems like you passed them through pretty effectively because the gross margin still trended up nicely. Do you see any moderation at all in the ramp up in those costs?

Yes. Actually, as we stated in the last earnings call, yes, starting in the September quarter we saw the wafer cost, and plus some other raw material costs also increased starting in the September quarter. This September quarter, actually that impact is only partially flowed through, because we still have previous quarters’ inventory that consumed in this quarter. So those inventories were purchased at a lower cost. So actually, we are expecting starting in the December quarter we may see even more pressure on this cost.

Let me also add a little bit, okay? This raw material increase which we had to face too, but on the other hand it’s almost next to impossible to pass down this increase to our customers if we want to be here, to be long. So what we do is really actively introduce or replace with new product, which brings the benefit to both customer as well to ourselves to offset this headwind. So going forward, as Yifan mentioned, the challenge will be tougher, but we just have to manage it.

Okay. Thank you for that clarity. And then looking at the communication side and maybe on the computing side, have you seen USB power delivery designs really pick up? And when would you expect to see some shipments related to those designs in your business?

Actually, we already start to engage in shipping, of course very small. We are at the beginning. And we do expect next year come to see quickly. But on the other hand, on the quick charge area, which as you know we already participate there, the area will continue to grow, which we are pretty well in a very healthy position.

Ed, it is more like if you see significant increased adoption of the PD Type-C. And I would expect in the second half of next year is when it will probably get to a more meaningful level.

Yes.

Right now it’s more like our customers are started in some designs. And on the USB PD standards, it’s kind of getting adopted by nearly all the customers. So I wouldn’t – if you ask us some meaningful impact, that’s probably, I would say, toward the second half of next calendar year.

Okay. And would you – is it fair to characterize it as mainly a communications driver, or do you think on the computing side that that could also be significant for you?

I think both, yes.

Yes, both.

Okay, great. And then looking at inventory, I know the days were in check but it was up 13% year-over-year to about – nearly double the sales increase. And I know you have some more expensive wafers, probably, in there. But are you also feeling like you’re getting caught up a bit on quantities? Because you certainly had a nice revenue outlook for this December quarter. Can you comment a little bit on that inventory increase, please?

Okay, sure. The major increase in the inventory is actually in the raw material and the production whip. Yes, the cost increased some, and that also reflected – contributed to the overall inventory increase. And the quantity wise increased slightly, but not so much, yes. And then right now if you ask me, I would rather to have more inventory to support us.

Our next question is from Tom Sepenzis from Northland.

I was wondering if you could provide some color just – there was a nice jump in the communications business in the quarter, and I just wanted to make sure I know what all the variables are there that’s driving that.

Okay, sure. In the communications area, as you have been seeing in the past few quarters, yes, we grew nicely. Our AlphaDFN products got well accepted and recognized in the market field for those battery management applications. And we grew and continue to grow nicely. In this quarter, also contributing to this quarter’s growth in the communications segment are some sockets from networking and also for the surge protection sockets. So those are the areas that were picking up some additional shares.

And did you say that you expect that to continue to grow through the December quarter?

I would say maintain it in that range, yes. Right now the December quarter is the – we enter into a little bit lower season. And also, right now overall supply is tight. And so we got limited by the overall production, what we can do.

Sure. And then on that, how far along are you in terms of adding additional capacity to your current facility? And when do you think the capacity bottleneck starts to dissipate for you guys?

Okay. Yes, in the September quarter, you saw our revenue grew 7% quarter-over-quarter, and that was because of the expansion of our capacity. So we expanded some in the September quarter. And then I would expect for the next couple quarters our capacity probably will stay at this level, relatively. And then a next wave of expansion will come in probably more toward – a couple quarters later.

Great. And did you say – well, two questions on the product with – the products with STMicro and servers. What’s the impact for ASPs and gross margins for those products? And did I hear you right when you said you wouldn’t expect revenue for at least two to three years on this?

Right. Meaningful revenue, yes. And we do expect that probably takes a couple years, two to three years to materialize, yes. In terms of ASP, yes, the controller’s ASP is higher, yes definitely. And the margin, we would expect that it’s higher, at least higher than our corporate average for sure. And then the nice thing is that we can sell total solutions, so not just the controller and revenue. It can also bring in our drivers and MOSFET along with the controller revenue. So that’s the piece and where we see the synergy.

Then we also - just to inject a little bit more, just to follow what Yifan said, currently our product, in a way, pretty much at the low end of the food chain. So basically we don’t have too much say at the beginning in the system. With a digital power controller over there, then we can participate with four total solutions there. Then we can suggest what’s better for a customer and enable the better use of our technology in more ways.

Our next question is from Craig Ellis from B. Riley.

This is actually Plamen Sirakov calling for Craig Ellis. First, a follow up on the OpEx question. Could you clarify or possibly provide more color on how should we think about the step up in R&D related to the licensing agreement over the next couple quarters? And is the OpEx trend we’ve seen over the last year or last couple quarters indicative of that trajectory? Or how should we – and how should we look at that step up function?

Okay, sure. OpEx in terms of the increase there for the digital controller piece, we are in the process of assembling a team. So in the September quarter was the minimum amount, so in the December quarter we factored in some, yes. And we have already hired a few people, and then we’ll continue to do the recruiting. Next quarter I would expect I can give you more color on the OpEx for the digital controller product line. Then in terms of the trajectory, I would expect our current – for the AOS piece of the OpEx, I would expect going forward two or three quarters that would be stable other than this digital power piece. And on the other hand, we also include the joint venture’s startup expense also in our G&A. So for that piece, I would expect continued increase for the next few quarters, because as you can see we are gearing up to get us ready to do the trial production. So we are hiring people and training people and get equipment, machines, and get materials in. So right now there’s a lot of activities in the joint venture happening. So I would expect that if you compare my guidance, the midpoint guidance, with our – September’s actual number, that’s the incremental piece and that’s primarily from the Chongqing joint venture’s startup expense increase.

Okay, that’s very helpful. And my last question relates to the supply environment tightness. Could you possibly characterize your market share position given the supply availability and how the current market dynamics are playing across your end markets?

Sure. Overall you saw – depends on which segment. You saw in certain segments we definitely gained share, and then – if permitted by our supply capacity. Some areas you saw got hit a little bit because of the supply limitation. So overall in the computing and the communication areas, I think if you look at it year-over-year, we grew nicely. And then we are rolling out a new high voltage platform, alpha-MOS5 products, as we speak. So we would expect then gradually that platform will pick up more revenue into next year, next calendar year.

Okay, that’s very helpful. And just one last thing. Did you mention that computing is a – or you’re expecting computing to be up next quarter, or was that flat?

Yes, I would say maintain or to slightly up in range. That’s largely – we saw pretty good demand on our products. Only thing is if we can supply. And we saw pretty healthy demand especially in the notebook areas. And so overall, yes, we’ll do whatever we can to manage the product mix.

And in overall – area, somehow maybe you can look at divide by two lines. One is what our internal manufacturing can support. One would depend outside it. That somehow have cut our performance of all ways.

We do have a follow up question from Mr. Jeremy Kwan from Stifel Nicolaus.

Yes, I just wanted to follow up in terms of the capacity question. It sounds like you expect the capacity tightness to persist for the next couple quarters. And on the CapEx side of things, do you expect – should we see a continued higher level of spending for the next few quarters to alleviate that?

Yes. For the overall fiscal year ‘18, I would expect CapEx in the range of $30 million to $35 million, yes. And we have seen our new products and design-ins, design wins in the pipelines, so we do need to expand – continue to expand our capacity to support our business growth. Yes, for the next few quarters, I would expect that CapEx will be up there.

And then in terms of the long term trend, when do you expect it to kind of moderate down? And what should that level be on a steady state basis?

Okay. In the long term, I would expect, once the joint venture production capability goes up, then gradually I would expect that, yes, AOS side of the CapEx investment maybe starting tapering a little bit. But we still need some CapEx to maintain on the maintenance basis.

I’m not showing any further questions at this time. I’d like to turn the call back over to management for any closing remarks.

Okay. 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.