Good day, ladies and gentlemen, and welcome to Alpha and Omega Semiconductor Reports Financial Results for the Fiscal Second Quarter of 2019 ended December 31, 2018. 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 now like to introduce your host for today's conference, So-Yeon Jeong. Ma'am, you may begin.

Thank you. Good afternoon, everyone, and welcome to the Alpha and Omega Semiconductor's conference call for fiscal 2019 second 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. I would like to take this time to welcome Stephen Chang who is joining us on today's call as a speaker. Stephen is the Senior Vice President of Marketing and he has been with the Company since 2004. Yifan will begin the call with a review of the financial results for the quarter. Then Mike will review the business highlights, followed by Stephen, who will provide a detailed segment report. After that, Yifan will follow up with the guidance for the next quarter. Finally, we will reserve time for questions and answers. 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 Business Wire today February 6, 2019 after the market closed. The release is also posted on the Company's website. Our earnings release and this presentation include certain non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. We would like to remind you that during the course of this conference call, we'll make certain 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 second fiscal quarter financial results. Yifan?

Thank you, So-Yeon. Good afternoon and thank you for joining us. Revenue for the December quarter was $114.9 million, essentially flat when compared to the prior quarter and up 10.6% from the same quarter last year. We performed well on the top line and overcame market challenges as a result of growing momentum in our higher-value new products. In terms of product mix, MOSFET revenue was $93.3 million, up 1.1% sequentially and up 9.6% year-over-year. Power IC revenue was $19.4 million, flat from the prior quarter and up 23% from a year ago. Assembly service revenue was $2.2 million as compared to $3.4 million for the prior quarter and $3 million for the same quarter last year. Regarding the segment mix, Computing segment represented 48.5% of the total revenue, Consumer 16.2%, Power Supply and the Industrial 19.4%, Communications 13.8%, Service 2% and others 0.1%. Non-GAAP gross margin for the December quarter was 29.2% as compared to 29.7% in the prior quarter and 27.4% for the same quarter last year. The sequential decrease of 50 basis points in non-GAAP gross margin was primarily impacted by the fluctuation of production and operation expenses. Non-GAAP gross margin excluded $0.5 million of share-based compensation charge for the December quarter as compared to $0.5 million for the prior quarter and $0.4 million for the same quarter last year. Non-GAAP gross margin also excluded $3.5 million of production ramp-up costs related to the Chongqing joint venture for the December quarter as compared to $1.1 million for the prior quarter. Non-GAAP operating expenses were $25.1 million compared to $24.5 million for the prior quarter and $21.3 million for the same quarter last year. Non-GAAP operating expenses excluded $3.9 million of share-based compensation charge as compared to $2.6 million in the prior quarter and $3.6 million for the…

Thanks, Yifan, and good afternoon, everyone. Our solid December quarter results demonstrate the business momentum we continue to build. The year-over-year revenue increase of 10.6% represents the 12th consecutive quarter of growth. Furthermore, we generated healthy operating cash flow, which is funding our key growth initiatives. The soft markets that we had discussed last quarter, namely home appliances and smartphone applications in China, further weakened during the December quarter. The weakness deteriorated in the March quarter as high-end smartphone business conditions have changed recently. Our smartphone customers are reducing their inventories, which has led us to adjust our production plan accordingly. In addition, trade tensions are adding more headwind in the near-term. However, we are navigating these business environment challenges by our growing momentum in higher-value new products. During the December quarter, we won key strategic customers in home appliances and smartphone applications, further expanded our market share in Computing and increased share of BOM in high-end tablets. Even after the adjustment, our demand is still ahead of capacity. The Oregon fab ran at a full capacity and we look forward to ramping the Chongqing joint venture, so we can build -- better fulfill the demand. Investors often ask us why we are winning and why customers like to work with AOS. Let me take a few minutes to highlight and reiterate our core competencies and the customer support philosophy that are transforming AOS into a preferred supplier in key markets. Our core differentiator versus larger competitors is our highly effective R&D capability. Two. We have over 1,800 granted and pending worldwide patents, but our ability extends far beyond that. We now have the critical building blocks of discretes, IC design, advanced packaging and silicon processing technology, enabling us to serve our customers with the best products in a wide…

Thank you, Mike, and good afternoon. It's my pleasure to be on the call today to give you an update on our results across the major market segments. Let me start with Computing. It represented 48.5% of total revenue in the December quarter. We posted a 10.8% sequential increase and a 26% growth year-over-year. We continued to grow our Computing business by expanding our BOM content in various computing applications. Our high-value DrMOS Power IC products continued to gain market share into the Vcore application. We achieved major design wins in the latest graphics card platform and further diversified our business into the Add-In-Card market. In addition, we expanded our footprint at our new global brand OEM to the tablet application and we began to ship parts for these high-end tablets during the December quarter. Please note that this particular tablet battery protection business was originally tied to the same customer name in our Communication segment when we gave guidance last quarter. To better align our product categories with our business segments, we separated this new tablet business and moved it from the Communication segment to the Computing segment. The CPU shortage in 2018 did not have a major impact on our business because processors were prioritized to support higher value big core systems. The shortage is expected to affect more PC applications in the March quarter, but it is expected to be resolved in the June quarter. Accordingly, we are adjusting our forecast of Computing business marginally down for the March quarter. Now, let's discuss the Consumer segment, which was 16.2% of total revenue. As expected, this segment declined 12.7% sequentially and 12% year-over-year. The declines were due to seasonality in TV and weakness in Chinese home appliance markets. Despite the appliance weakness, our IGBT line continued to gain…

Thank you, Stephen. As we look forward to the third quarter of fiscal year 2019, we expect revenue to be between $109 million and $113 million. Gross margin to be approximately 25.2% plus or minus 1%. Non-GAAP gross margin is expected to be approximately 28.5% plus or minus 1%. Non-GAAP gross margin excludes $0.5 million of estimated share-based compensation charge and $3.2 million estimated production ramp-up costs relating to the Chongqing joint venture. Operating expenses to be in the range of $32.3 million plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $25.2 million plus or minus $1 million. Both GAAP and non-GAAP operating expenses include $3.1 million to $3.3 million of estimated expenses related to our digital power controller team. Non-GAAP operating expenses exclude an estimated share-based compensation charge of approximately $2.7 million and estimated pre-production expenses relating to the joint venture of $4.4 million. Tax expense to be approximately $0.5 million to $0.7 million. Loss attributable to non-controlling interest to be around $4.8 million. On a non-GAAP basis, excluding estimated pre-production expenses and production ramp-up costs relating to the joint venture, this item is expected to be approximately $0.6 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] Thank you. And your first question comes from Jeremy Kwan with Stifel Nicolaus. Your line is open.

Yes, good afternoon and thanks for taking the question. I guess, Stephen, if you could -- it sounds like you're pretty confident in looking at the March quarter being a bottom for the smartphone business and a nice rebound in June. Can you help us understand how much of it is coming from the new program ramps that you've talked about and how much of it is the end market itself kind of recovering?

Thank you. So, yes, it is a little bit of both. Certainly, the global market took a turn down starting in the end of last December quarter and we expect that to continue to drop a bit going into the March quarter. From what we see at least in our business, the smartphone business is typically usually at a seasonal low in the March quarter. Of course, this time, it's a little bit lower than typical seasons. So we are already seeing that that June quarter should begin to rebound at a variety of our customers, including in the China market as well as the global OEMs. So this reflects both our products and -- already selling into the market today as well as new products being designed in. Right now, we're still more and more in the current cycle of phones, so right now we're going into Q1 and Q2, we're talking about the existing products that are ramping.

Great, that's very helpful. And question maybe for Mike, stepping back a little bit, you talked about demand continuing to outstrip supply. Can you help us quantify this and maybe in terms of your backlog and lead times, maybe where they are now versus six months ago and maybe even how you can characterize it in the context of past cycles that you've seen?

Hi. Jeremy, this is Yifan. Maybe -- let me take this question. I mean, overall, we did see some adjustments in the December quarter in terms of booking and backlog. I mean, I guess, there were several elements in here. One is the double booking clean up, I would say. Last year with the Titan global supply in MOSFET in the power discrete in the areas, we would expect some double bookings there. So actually the clean up actually is good for us. Another element is, as Stephen and Mike mentioned, some of our customers and especially in the China smartphone areas, some customers are adjusting their bookings. So we also need to adjust our production plans accordingly. Another element is seeing fresh bookings from our new designing and wins, so all-in-all if you say to net changes some adjustments. Right now, after all those adjustments and then our backlog is still ahead of our capacity at this moment.

Thank you, Yifan. And I guess, for -- I mean if you can switch gears to the JV, it was nice to see that kind of a $24 million cash infusion from the funds. Is it -- at this point, given your current cash balance, your CapEx plans, the operating cash burn and then the ramp up stage, can you give us -- is that -- is this going to be it in terms of financing you'll need to get the JV up and running and cash flow neutral and also looking at the lease repayment schedule that's coming up?

Sure. The joint venture is ramping right now for the assembly and test and is on track in the December quarter continued ramp up and so we'll see similar ramp up in the March quarter. So we expect by the June quarter, we can see their assembly and test and production level up to our target range. In terms of 12-inch fab, yes, in the December quarter, the trial production was on track and then we expect in the March quarter we can start sampling products to our customers. So we'll see how that call back patient going so we expect gradually starting from the June quarter and certainly into the September quarter, we expect to see 12-inch fab ramp. In terms of the cash, yes, and we are pleased with the additional $24 million contribution from our joint venture partners, which definitely showed the confidence in the -- from their side. In terms of the overall cash needs, we are currently still in the negotiation process with the local banks to enter into some loans to support our equipment payment and our working capital. So we will report it as we'd finalized in contracts.

Maybe on that last note, can you give us an idea how much is left in terms of the equipment that you still need to purchase and any remaining kind of CapEx for this Phase 1?

Phase 1, right now and most of the equipments are in. So right now, it get down to the payment stage, so we need to borrow some money in order to pay those equipments. So that's the notion is we -- I don't want to borrow them all in upfront a year ago, I have to have to pay it in a big chunk of interest along the way. So right now, we need cash and we'll borrow money from bank. Those are -- currently those investors' contributions and then also they own land and the buildings and equipments and so on, all those things can be used for the borrowing capacity. So they still have enough borrowing capacities over there.

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

Yes, thanks for taking the question. Nice to be in touch again, Mike and Yifan and Steve welcome to the call. What I wanted to do is just clarify, I think from the prior questioner, I heard that the Company thought that the fiscal third quarter could be a trough for Communications. But was the point that it would be a trough in revenues for the entire business for the calendar year or are there some headwinds that you see forming in the calendar second or third quarter, your fiscal fourth and first quarter?

What we expect, again, that is definitely communications will trough in the March quarter, especially with regards to smartphone and business. And as we mentioned, we expect recovery, not only in the smartphone business, but as well as the other segments as well. Normally in Q1, we also -- it's typically a lower season for us, especially due to the holidays. So our production is a little bit shorter than other quarters. But from the marketing and demand side and we mentioned smartphone market will recover. At the same time, we expect also that the CPU shortage in the PC market will be alleviated in the June quarter. So that is expected also to drive up the June quarter revenue.

That's helpful. And Stephen, what gives you confidence that there will be an alleviation of the shortage issues in June?

Specifically, the main shortage has been with CPUs and what we've been told and by -- not only by the CPU maker, but also by our customers, our ODMs in the field is that they expect the recovery to happen within -- at the latest by the end of June. So we are already expecting our customers to prepare and ready for a recovery in -- within the June quarter.

Okay, that's helpful. And then the 5G base station power management opportunity sounds interesting. A couple of follow-ups there. One, how broad is the Company's participation across the top five makers and what's your dollar content and what do you think your share will be with this round of devices?

So just giving you some background. As we mentioned in the prepared remarks, we didn't participate that much in the 4G business in the past. Right now, we are starting to enter into that pre-5G ramp up and we are participating on the few programs in the couple of the Tier 1 players. So we are really just starting to enter into this market. We are for sure going to be targeting all the major makers and we're already engaged with a few -- a couple of them right now at the moment.

And is that with power management ICs or MOSFETs?

That was mainly right now for the first phase going to be with our MOSFETs. But in the future, we will be offering total solutions too.

Okay. And then moving tangentially and perhaps there's some relationship between the product team on the base station side and the team that's working on server power, but server power expenses in the quarter were about $2.1 million. Yifan, is that the run rate going forward for that team in the initiative or should we expect that quarterly expenses would rise further either to $3.5 million or potentially higher than that?

Yes. At this point, we expect now with the expense level. But as the team further develops new products and starting tape-out and sampling, I would expect some additional engineering expenses would -- added into there.

And initial product tape -out would occur when?

I would say in the summer time or closer to the fall.

Okay. And then last question, but -- from me before I get back in the queue, but the Company has had an objective to grow revenues 10% in fiscal 2019, that was initially established before we encountered a period of macro choppiness and more severe US-China trade issues. Is it still the hope of the Company that you can grow 10% in fiscal 2019? And if so, beyond the fiscal third quarter, what are some of the things that need to happen in the fourth quarter to get there?

Sure, Craig. Right now, that goal is still within our target model. Q1 is low seasonality-wise and also the current business environment and so you saw in our guidance reflected some cautions there. We expect seasonally growth in the June quarter. And then as Stephen mentioned, this CPU for the PC area, we expect it can be alleviated in the June quarter. So we're still targeting that model right now.

Yes. Let me just add a little bit more color. By the way, this is Mike Chang. Okay. Yes. Okay. The seasonality and also some of the recovery from the -- our client, okay but what really stand up for us is, okay, our new technology and new product really start to get some benefit there. Basically from our design win, okay, the track there, we see the momentum building up here. Okay. Of course now this -- you'll never be able to predict the environment, okay, consumer environment will not further decline some economy; okay, I think that's where is our confidence.

So the point is you feel good about the products and the design wins that you have, but there may be some uncertainty in this kind of macro environment around a program start time and actual program volumes, is that the takeaway there, Mike?

Yes. I think basically it is the design win, pipeline, the track record, which is what based on there, couple of bid okay then hopefully this trade tension will be relieved, okay, I think otherwise it will affect global economy, not necessarily directly against us, but everybody will suffer.

Thank you. Your next question comes from Ed Roesch with Sidoti. Your line is open.

Hi, good afternoon. Could you repeat what you said about the JV ownership at this point after the equity infusion from your partner?

Right. And this is Yifan. Yes. After this contribution $24 million from our joint venture partners, yes, in equity ownership and for AOS back to 51% joint venture partners and ownership back to 49%.

Okay. Okay. There's no way that your ownership can foreseeably drop below that threshold, right, 51% would be the floor?

Well, that was originally when we negotiated this joint venture deal. So--.

I think this is a -- there's a couple of angle, Ed, this is Mike Chang. Okay. The first, okay, because of our future business expansion based on that. So we need some sudden of assurance or control. This is one angle. The good thing is that the other side, they also see this highly technical and specialized business and they trust that says it. AOS is better way to manage that. Going forward, okay, when the situation change there, we'll see what's benefit to AOS that will be.

Okay, thanks for that color. And then assuming that the demand does recover in the June quarter there, could you just give us an update on quarterly capacity? Is it still about a $115 million of production capacity? And when is the next expected step up in that figure, please?

Yes, Ed. This is Yifan. Currently, yes, our capacity is around $115 million range. This quarter, March quarter's guidance reflected some production loss during the Chinese New Year timeframe. So overall, we're still at that $115 million range. The next wave of the capacity increase will depend on the ramp of the Chongqing joint venture, so that 12-inch fab. So -- and then that's why we want to ramp that fab and gradually in calendar year 2019 to fulfill the demand and fuel our growth.

Okay, got it. And then one last one on the Computing segment, which is contending with the CPU shortage. I mean, is it fair to expect that once the CPUs are back on the market and available that that could be just a outsized quarter for you in that end market because there is latent demand that needs to be caught up with that hasn't been fulfilled in the March quarter?

This is Stephen. Yes, that is the expectation and the shortages have again been persisting, starting at the second half of 2018. So overall, this market has been under serving the demand that -- in the marketplace. So we are expecting that there is some -- there will be some rebound as a result of that in addition to the normal seasonality that happens beginning in Q2. So that is what we -- that's what we're seeing from our customers and also from the market.

Your next question is a follow-up from Jeremy Kwan with Stifel. Your line is open.

Yes, thank you. I wanted to follow up on the, I guess, the capacity question. With the $8 million in AOS spending only, if you're capacity is fully maxed out, is this kind ongoing maintenance costs and things like that or is there more to it?

Yes. Jeremy, this is Yifan. Yes. Right now, our major capacity expansions in our Oregon fab is pretty much done. So right now, we're in the stage to fine-tune, mix, optimize the -- our production line. So in that nature, so it would not significantly increase the total capacity. So the additional total capacity we'd expected will contribute from our joint venture along the year, this year, this calendar year.

So then for AOS only, is -- are you still targeting the 68% range for fiscal 2019?

Yes, yes. That one is pretty much in the range for maintenance, for the fine-tune and operations, optimize our mix.

And last question in terms of the JV. Can you give us an idea like how long you expect the qualification process to be? Is it kind of a one quarter thing or is it -- can you give us an estimate?

Sure. It kind of depends. I mean, some customers may qualify faster. Even right now, we've already received the first order from customers. But in order to ramp up, we still need to -- perhaps sometime to qualify with customers. So I will say that probably in a quarter or two, we should be able to see some ramp up.

And as it -- sorry, just last question. As it does ramp up, do you expect to see gross margin benefit because of the 300 millimeter or is there some this stuff to work out some yield challenges?

Well, yes. During the ramp up time, I would not expect to see a cost benefit, actually to the contrary. Once we ramp up to that first phase capacity, I would expect our 12-inch fab wafer cost neutralize with our 8-inch fab wafers and so.

Now, this is Mike Chang. Whenever you talk production, okay, this one key factor is called economy of scale. So in the running case there, okay, you know the cost would be there until we get into the equivalent, yes. End of Q&A

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back over to Management for closing remarks.

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

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