Good day, ladies and gentlemen, and welcome to the Alpha and Omega Semiconductor Fiscal Q2 2018 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] And as a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Ms. So-Yeon Jeong, Investor Relations. Ma’am, you may begin.

Thank you. Good afternoon, everyone, and welcome to the Alpha and Omega Semiconductor’s conference call for fiscal 2018 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 7, 2018, 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 for both historical and forecast financial information. 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 will reserve time for questions-and-answers. Revenue for the December quarter was $103.9 million, down 0.9% sequentially and up 9.7% year-over-year. Our new products continued to show strong momentum during the seasonally lower quarter. In terms of product mix, MOSFET revenue was $85.1 million, up 1.7% from the prior quarter and up 21.9% from the same quarter last year. Power IC revenue was $15.8 million, down 12.9% from the prior quarter and down 27.9% from the same quarter last year. Service revenue was $3 million, as compared to $3.1 million for the prior quarter, and $3 million from the same quarter last year. In terms of segment mix, this quarter’s Computing segment represented 42.6% of the total revenue, Consumer 20.3%, Power Supply and Industrial 20.1%, Communication 14%, Service 2.9% and others 0.1%. Non-GAAP gross margin was 27.4% for the December quarter, as compared to 26.6% in the prior quarter and 23.6% for the same quarter last year. The increase in non-GAAP gross margin quarter-over-quarter was driven by the improved product mix and operational efficiency. Non-GAAP gross margin excluded $0.4 million of share-based compensation charge for the December quarter, as compared to $0.3 million in the prior quarter and $0.2 million for the same quarter last year. Non-GAAP operating expenses for the quarter were $21.3 million, compared to $21.2 million for the prior quarter and $17.9 million for the same quarter last year. Non-GAAP operating expenses excluded $3.6 million of share-based compensation charge, as compared to $1.7 million in the prior…

Thank you, Yifan. I am pleased to report another solid quarter. Driven by the continuing momentum of our new products in the December quarter, revenue and gross margin came in at the high end of the guidance ranges, resulting in $0.32 earnings per share on a non-GAAP basis. Our operating expenses, as you can see, were slightly higher than our guidance range. This reflects, primarily, the investments we are making to bring to fruition the two growth initiatives we have discussed in past calls. One of these initiatives is our joint venture in Chongqing, China. Let me start with an update on this initiative. As the demand for our new products has increased in the last year or so, we have experienced and expect to continue to experience supply and manufacturing constraints. These capacity constraints have caused us to forgo potential revenue, on an annualized basis, in the order of tens of millions of dollars. We believe this joint venture will provide us with the needed manufacturing capacity to meet the demand for our products and to support our longer-term revenue growth. Recently, the joint venture has completed construction of its building. Now, it is our turn to fulfil the operational requirements for pre-production including equipment installation, qualification, trial production and staffing. When completed, the Chongqing joint venture will consist of an assembly and test facility and a 12 inch fab. This fab will be one of the very few 300-millimeter fabs in the world dedicated to power semiconductors. Our fab is being built in phases, and we are now gradually equipping the phase 1 cleanroom ahead of our original plan. When the phase 1 cleanroom is fully ramped, it can support approximately $150 million of additional annual revenue. We expect this 12 inch fab to provide three key benefits.…

As we expect the cleanrooms of our Chongqing joint venture to be completed in the March quarter, we are excited that our joint venture will enter into the pre-production stage. During the March quarter, we expect to install equipment, conduct qualification processes, and perform trial productions. To support this, we also add headcount. A large portion of the pre-production costs cannot be capitalized under GAAP accounting. Because these expenses do not reflect our normal business and operations, we plan to exclude such pre-production expenses in our non-GAAP operating expenses. With that, here are our expectations for the third quarter of fiscal year 2018. Revenue is expected to be in the range of $99 million to $103 million. Gross margin is expected to be approximately 26% plus or minus 1%. Non-GAAP gross margin is expected to be approximately 26.3% plus or minus 1%. Non-GAAP gross margin excludes $0.3 million of estimated share-based compensation charge. Operating expenses are expected to be in the range of $26.5 million plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $22 million plus or minus $1 million. Both GAAP and non-GAAP operating expenses include expenses of $1.5 million to $1.7 million expenses relating to the development of our digital power team. By the end of the March quarter, we expect to have hired nearly 2/3rd of the digital power team that we plan to build. Non-GAAP operating expenses exclude an estimated share-based compensation charge of approximately $2.2 million and estimated joint venture pre-production expenses of approximately $2.5 million. Tax expenses are expected to be in the range of $0.8 million to $1 million. Loss attributable to non-controlling interest is expected to be around $1.9 million. Non-GAAP loss attributable to non-controlling interest is expected to be around $0.7 million. The $1.2 million difference is due to the exclusion of estimated pre-production expenses in non-GAAP operating expenses. 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 Edgar Roesch with Sidoti. Your line is now open.

Yes, hi. Good afternoon or evening. One question, if I may, on…

Hi.

Hi. How are you?

Good.

Nice quarter. I wanted to ask one question, if I may, on capacity. I thought about the high end of your quarterly revenue rate is about $105 million at this point. First of all, is that about in the right range? And then in which quarter might we expect that to step up?

Okay, sure. Yes, as we approach an almost $105 million in revenue in the September quarter, this December quarter more reflected some holidays. I mean, when you have holidays, major holidays, the production is just less [ph] than the normal capacity, so that a couple of million dollars are lost there. In terms of March quarter, and that's about the same situation in the March quarter, we'll have the Chinese New Year's in February. So that would give some inefficiencies in the production side. In terms of another step-up in the capacity, we are expecting in the - starting in the June quarter, we should be able to see some increase. And then the rest of the increase probably come in, in the September quarter. So that's our current capacity expansion plan in our Oregon fabs. So right now, we're doing some de-bottlenecking to open up some capacity from our own fab. So going forward, we hope our joint venture will start to take over starting calendar year '19.

Great. And then the last step-up, I believe, was about $5 million and sort of peak quarterly shipment potential. Would you expect a larger step in this next increment?

In the June quarter, I would say probably in the same magnitude and then another similar step-up in the September quarter.

Thank you for that. And I did join a little bit late, so I apologize if you covered any of this. But a couple of questions on your new high-voltage aMOS5 product line. And if you could help me understand a little bit. I know it wasn't this past quarter but September quarter launch. But whether that addresses new applications or whether it improves on a previous generation of AOS products and maybe where you expect the largest revenue wins, whether it's the home appliance or industrial business?

Okay. This is Mike. Okay. Thank you for your question. aMOS5 will have two purpose. One, which is what you said and which I will rephrase, there's some old product there. But mostly, it's for the new application, okay, which is - one is in the industrial and also in the good energy side there and then the - and also in some degree in the TV area also, yes. So this is really - we have a lot of expectation from these newer market. And so far, it's got a good track record, yes.

That’s great. I’ll get back in queue. Thank you.

Thank you.

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

Thanks for taking the question. And congratulations to the team on a very good December quarter execution.

Thank you.

Yes. You’re welcome. I wanted to start with the follow-up to a point that I think Mike made in his prepared remarks with regards to high single digit revenue growth potential this year. As we look at 2018, and the company, I think, has targeted mid to high-single digit growth. As we look at the end markets that the company participates in, PC, consumer, industrial and power supply and communications, which of your end markets would be growing above the high single digit rate and which of the end markets would be more likely to grow below high single digits?

Sure. In terms of the growth driver in calendar year 2018, first of all, we're expecting, yes, the growth from our Communications segment, and you saw in kind of '17, we had a pretty good growth. We would expect a similar growth in calendar year 2018 in our battery pack management applications and telecom areas. Another higher growth area is in the Power Supply and Industrial area. So we would expect - and just a moment ago, Mike commented on the aMOS5 high-voltage platform we just rolled out last quarter or so. We would expect to continue to get some good traction from there. And other product lines also contribute to this, the Power Supply and Industrial area concern [ph]. We do have some application sockets, and we are doing some great design wins and - design wins. In terms of below the high single digits, we would expect Computing probably will be slightly below high single digit growth. And then, I mean, just that overall PC market that we still assume the volume will continue to modestly decline. And then by offsetting that, we are growing our market share in the high ASP and high margin sockets. And then our new products are performing pretty well against the competition. The flattish segment is in the Consumer segment area. So in this area, we continue to expect it will be subject to supply constraint. And then - but on the other hand, our - we expect our IGBT product line will continue to take the momentum. In calendar year '17, our IGBT product line crossed the $10 million revenue mark. So that's a significant first milestone. So we do expect that we can continue to grow this product line. This product line can address a pretty broad market with pretty big size.

That's helpful, Yifan. And if we stay on just some of the longer term trends and look at 2018 a little bit differently, from an incremental content gain standpoint because for a number of years, AOSL has done a good job adding content in each end market. But if we look at the top 3 or 4 areas per content gain that would contribute to revenue growth across all end markets, what would they be?

I will say in the mobile area, the smartphone, our products are pretty competitive. Performance wise, it's pretty good. Another one is in the computing area, and we would expect some continued content gain from our high ASP, high margin products, and so in those areas. And then in some - like the power supply area, I mean, this is kind of related to the mobile, but it's on the power supply side and then on the adapter and charger side. So from our high-voltage and quick-charging and mid-voltage product lines. So that's about the top, like, application areas we expect to grow.

Okay. That makes sense. I wanted to move on to some manufacturing and gross margin-related questions first. Stellar gross margin performance in the December quarter. I was a little bit surprised in there that gross margin is down 110 basis points sequentially in the third quarter. Was there anything unusual, either in the fiscal second quarter or in the fiscal third quarter, that accounts for a fairly substantial decline given that the revenue guidance is down less than $2 million sequentially at the midpoint?

Well, this is - I mean, the gross margin in March quarter compared to December quarter is - I mean, if you look at the guidance range, it's similar to December guidance range. And then March quarter is more - we accounted in some inefficiencies from the Chinese New Year. I mean, the Chinese New Year is a lot longer than U.S. Christmas and those holiday seasons. So you know the situation over there. I mean, almost a week prior to the holiday and a week after holiday, pretty much most of the workers and operators will go back to their hometown. So we would expect some productivity loss. And that's pretty much the major factors we consider.

Okay. And then staying on manufacturing, helpful responses to earlier question regarding your internal supply. How would you characterize foundry supply availability at present relative to what you saw last year in the middle of the year? Is it as tight? Has it tightened further or is it actually a little bit more favorable to AOSL versus what it was in mid-2017?

It's either the same or getting worse.

And is that across all foundry parts, Mike? Or is that in just select processes or with select foundries?

I can only speak for the power semiconductor field. That's where we are engaged in. The other areas, I really cannot comment.

Okay. But for all the products that you're sourcing externally, things are a little bit tighter right now is your point?

Right, right, right.

Yes, yes.

Of course, maybe there are some they are comfortable, a little bit okay. But mostly, it's very difficult.

Okay, got it. I think that’s it team. Thank you very much.

Thank you.

Thank you.

Thank you. [Operator Instructions] And your next question comes from the line of Jeremy Kwan with Stifel, Nicolaus. You line is now open.

Yes. Hi, guys. It's Jeremy Kwan for Tore.

Hi.

Mike. Hi, I was wondering if you could give us a little more color in terms of the -- it sounds like the TV market impacted the Consumer business a bit here due to OEM production being limited. How are you seeing that shifting or changing? And when do you see maybe those issues clearing up?

From what we see so far, unfortunately, that's about the same. And the good thing is, okay, our - we will open some other OEM customer, one thing. And second, as we mentioned a couple of times, okay, the IGBT segment really helps us in the Consumer. So overall, I think the Consumer area should maintain flat there, yes.

Great. I guess I'm switching gears now. Yifan, if you could help me understand a little bit more on the China JV side. The preproduction expenses of $2.5 million, is this something that you see ongoing? Or do you see it increasing throughout the course of the year? And how does that impact things from a cash flow perspective?

Sure. This is $2.5 million that we guided for the March quarter, and that's - I think that one, it will - going up in the future quarters as we will get into more into the preproduction trial runs. And also, from the sequence of assembly house versus 12-inch fab, right now, the clean room for the assembly house is almost ready. So assembly piece will do the preproduction first. So later on, a little bit later, about a quarter or so later, our 12-inch fab will start preproduction activities. So I would expect some stack up preproduction expenses in later year of this year.

Great. And then I guess in terms of the digital power team, it sounds like you got the team exiting the March quarter. How do you see expenses there ramping up throughout the rest of the year? Is it - is that once you reach that 100%, is that going to stay as a baseline for the next couple of quarters after that? Or do you still see a need to increase staffing maybe as you move towards getting closer to trials and sales levels? Thank you.

Yes. For this calendar year, I would expect that most of the expenses will come from headcount and headcount-related expenses. So as I guided in the March quarter, so by the end of March, we'll, what, probably see like 2/3rd of the team probably will be there. So I would say another 1/3rd of the team, we still need to hire to build in the June quarter or maybe extend it to the September quarter.

And just one last follow-up related to the digital power. Can you give us an update in terms of - it might still be early, but do you have more of an idea of maybe what - when we might be able to see initial product and what - which Intel platform you're targeting at this point? Thank you.

This team, right now we're building up the digital power team. And then we're targeting and - we're developing new products for Intel's VR13.HC platform soon, which will be - we expect to be rolled out close to the end of this year or early next year also. So in terms of revenue from this digital, on the power team, I would expect -- give them a year or 2 to develop products and then a year or so to design and qualify with customers and so on. I would expect probably 2 to 3 years down the road, we can expect some revenues from this team.

Great. Thank you very much.

All right. Thank you.

Thank you.

Thank you. And we do have a follow-up question from the line of Craig Ellis with B. Riley. Your line is now open.

Yeah. Thanks for taking the follow up question. I wanted to go back to cash generation, the cash balance. The company's done, frankly, a stellar job of generating cash on a quarterly basis. The cash balance is up about $30 million in just the last 2 quarters. So it's at $146 million, so almost $6 per share. But in the last 6 months, the stock really hasn't responded to that cash generation capability and frankly, the $1.25 of increased value just from cash that is shown on the balance sheet. I know you've got the share buyback, but what are the levers, Mike, that you see that you have with the strong cash generation that you have to help create shareholder value? Because over the last 6 to 12 months, while the business execution has been good, the stock doesn't seem to be responding to that?

Sure. Great. I mean, how the market reacts to our stock, I mean, that one I cannot comment on. From the cash flow perspective, yes, the cash balance as of the end of September quarter, that's $180 million and that included some cash contributions from our joint venture partner, so not entirely created by AOS business. So that's -- it was $87 million contributed in the September quarter from our joint venture partner. The - right now, at the end of the December quarter, our cash balance included $57 million on cash balance from our joint venture. So joint ventures and cash, I cannot touch on. So it's for the joint venture's construction and purchase of equipment and other expenses. So from AOS side, right now, there's some - the cash and then you saw we are expanding a little bit our Oregon fab. So we're putting a little bit more CapEx and then support our business growth in kind of the year '17 and '18. So that's our first priority. At the same time, our board showed confidence in our business and our plans. So our board authorized $30 million in buyback in the September quarter. So we did buy back $6 million stock in the December quarter.

And can you just talk about your approach to the buyback, Yifan? Is it intended to be steady on a quarterly basis or more opportunistic based on a matrix approach to where greater amounts of repurchase activity if the stock dips lower? How should we think about the way you'll execute that buyback program?

Right now, this - right now, it's under 10b5 plan. So I would characterize that as steady, from time to time, we will buy back. But we don't rule out other opportunities. A couple of years ago, we had $50 million in the stock buyback. Initially, we did 10b5 plan repurchase. But in July 2015, we did $30 million of Dutch tender offers. So it was a combination at the time. So this time, $30 million program, I will say we'll reveal as it goes.

Thanks for the color, Yifan. Good luck.

Okay. Thank you.

Thank you.

Thanks, Mike.

Thank you. And I'm showing no further questions at this time. So I'd like to return the call to management for any closing remarks.

So this concludes our earnings call today. Thank you for your interest in AOS, and we look forward to talking with you again next quarter. Thank you.

Thank you.

Ladies and gentlemen, thank you for participating in today's call. This does conclude the program, and you may all disconnect. Everyone, have a great day.