Alpha and Omega Semiconductor Limited (AOSL) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Alpha and Omega Semiconductor Reports Financial Results for the Fiscal Fourth Quarter of 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Gary Dvorchak, Investor Relations representative. Thank you. Please go ahead, sir.

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor’s conference call to discuss fiscal 2020 fourth quarter and year-end financial results. I’m Gary Dvorchak, Investor Relations representative for the company. With me today are Dr. Mike Chang, our CEO; Yifan Liang, our CFO; and Stephen Chang, our Executive Vice President. 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. Mike will begin with a review of business overview for the quarter. Then, Stephen will provide a detailed segment report. After that, Yifan will continue with a review of financial results for the quarter and fiscal year and provide guidance for the next quarter. Then, we will have the question-and-answer session. The earnings release was distributed by business wire today, August 11, 2020, after the close of market. The release is also posted on the company's website. Our earnings release and this presentation include certain non-GAAP financial measures. We use the 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 remind you that during the course of this conference call, we will make certain forward-looking statements, including discussions of the 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 call over to our CEO, Mike, to provide an overview of our business. Mike?

Thank you, Gary. Welcome everyone. Before we discuss our fourth quarter results, I want to briefly address the COVID-19 situation, which continues to impact families, businesses and markets across the globe. I want to thank our employees for staying resilient and being flexible as we navigate this new working environment. Our primary focus is to ensure the safety and well-being of all our employees and their families. Meanwhile, we continue to work closely with customers to support them in every way we can during this challenging time. Now, some key highlights of the June quarter. Solid execution enabled us to deliver results ahead of expectations. Fueled by our product strength and growing customer penetration, revenue of $122 million was up 9% year-over-year and above the high end of our guidance range. Coupled with tightly controlled operating expenses, this resulted in non-GAAP earnings per share that exceeded the consensus. Our core business generated solid operating cash flow of $20 million and the free cash flow of $11 million. Yifan will provide details of our June quarter results later on the call. The favorable financial results were driven by high demand in certain segments and solid operating execution. Shipments rebounded for our products in Computing and Gaming applications, driven by the recent shift to a “work, learn, and entertain from home” environment. We also focused on our cost structure and prudently managed our expenses. We reduced non-essential spending and benefitted from travel bans, while still pursuing strategic and critical R&D projects to expand our market reach. The strong fourth quarter capped a solid fiscal year. This is very encouraging, given the backdrop of COVID-19 pandemic, heightened trade tension between U.S. and China, and global economic uncertainty. Our results demonstrate the strength of our business strategy, diversified product portfolio, and expanded customer base. Next, I will discuss our strategic plan to further strengthen the foundation to achieve our longer-term objectives. First, our joint venture fab in Chongqing. As part of our strategic plan, we built this fab to fulfill growing customer demand. Indeed, during this quarter, the JV fab made a major contribution to capture surging demand. Even though the COVID-19 pandemic has slowed ramp-up production, we were able to make persistent progress. Importantly, these efforts allowed the JV to achieve positive EBITDA for the June quarter. We expect to approach our target run rate by this time next year. Second, our focused R&D is driving broader and better product innovation. As a solution provider, we are able to deepen our relationships with customers, becoming their trusted strategic partner. As such, our new products are driving growth primarily by expanding our BOM content in core applications. The design of our products, especially our Power IC solutions, into an upcoming gaming system and a new PC graphics card demonstrates the opportunities created when we secure trust and confidence from our customers. In looking back in the fiscal year, we are pleased with our accomplishments. The power semiconductor industry is a large market and we are making significant progress to capture opportunities and increase market share. We also recognize that conditions are still fragile. Economic conditions could change at any moment due to factors beyond our control, including the COVID-19 pandemic’s resurgence. Because of this, we continue to operate cautiously and take prudent actions, even as we identify and seize new opportunities. I would like to thank our customers, business partners, and shareholders for their continued support and confidence in AOS. I especially want to acknowledge our employees, as our success could not have been possible without their hard work, dedication and sacrifice in the past year. Now, I will turn the call over to Stephen for a detailed segment report. Stephen?

Thank you, Mike, and good afternoon. Let me start with Computing. It represented 40.2% of our total revenue in the June quarter. Revenue was up 4.1% sequentially and flat year-over-year. While sell-in was okay, sell-through was quite dramatic. Many customers that had paused production in the first calendar quarter were catching up in the June quarter. End demand is strong, and we were able to meet it with ramping supply from our JV fab. With so many people around the world working, creating and learning from home, PCs have become even more indispensable. Because we did not shut down fully in the March quarter, we were able to meet this resurgence in demand. Going forward, we continue to optimize our production mix to satisfy the anticipated high demand for PC-related products. We are especially excited about the ramp of our high performance DrMOS and digital power solutions in some key customers’ upcoming graphic card platforms. We expect Computing revenue to be strong in the September quarter, with mid-teens sequential growth. Now turning to the Consumer segment, it represented 22.5% of total revenue in the June quarter. Revenue increased 37.5% sequentially and was up 31.7% year-over-year. COVID-driven home-sheltering boosted sales of gaming, TVs, and Home Appliances, enabling those segments to achieve healthy growth. Gaming was up significantly sequentially and is expected to grow rapidly. We have multiple sockets across multiple products, Power IC and MOSFET, in an upcoming gaming system that is expected to launch in the second half of 2020. Looking to the September quarter, we anticipate strong double-digit growth in the Consumer segment, driven by home entertainment, gaming and TVs. I want to note that Power IC is regaining traction. Since 2018, we re-aligned our Power IC product line by focusing on our core competencies of proprietary MOSFET technology, advanced packaging, and intelligent ICs ideally suited for the application. We chose to go after high volume applications within the Computing and Consumer segments given our established MOSFET business. As a result, today, our multi-chip package products deliver the small size and high efficiency required in the latest gaming and graphic card platforms, as you can see in recent Computing and Consumer design wins. Now, let’s discuss the Power Supply and Industrial Segment. It accounted for 19.4% of total revenue, up 24.2% sequentially, and up 3% year-over-year. After a pause in the March quarter, this segment rebounded in the June quarter, driven by higher demand for adapters used for PCs and gaming systems. Our AC-DC power supply business was up significantly versus the March quarter, tracking the surge in PC sales. Demand was good in medium and high voltage products. Once again, we were able to meet high voltage demand with supply from our JV fab. We expect this segment to be down somewhat in the September quarter, due to a bit softer demand for quick chargers and DC Fan. Finally, let’s move to the Communications segment, which was 16.2% of total revenue in the quarter, up 3% sequentially and up 16.1% year-over-year. Telecom drove the growth, although over time we expect unevenness as the 5G rollout advances. Meanwhile, the smartphone market was subdued. One large customer slowed production in the June quarter, so our battery protection line was down slightly sequentially. Looking to the September quarter, this segment appears to be resuming growth across all our core customers. We expect the Communications segment to be up single digits sequentially in the September quarter. With that, I will now turn the call over to Yifan for a discussion of our fiscal fourth quarter financial results and our outlook.

Thank you, Stephen. Good afternoon everyone and thank you for joining us. Revenue for the June quarter was $122.4 million, up 14.5% from the prior quarter and up 9.4% from the same quarter last year. In terms of product mix, MOSFET revenue was $100 million, up 11.2% sequentially and up 3.8% year-over-year. Power IC revenue was $20.3 million, up 29.2% from the prior quarter and up 47.1% from a year ago. As Stephen discussed earlier, this is a welcome reversal for our Power IC product line, the result of our focus on regaining traction with new and better solutions. Assembly service revenue was $2.1 million as compared to [$1.3 million] last quarter and $1.7 million for the same quarter last year. For the fiscal year 2020, revenue was $464.9 million, up 3.1% from fiscal year 2019. Non-GAAP gross margin for the June quarter was 27.5%, flat with the prior quarter and up slightly from 27.4% for the same period last year. Non-GAAP gross margin excluded $0.3 million of share-based compensation charges for the June quarter, as compared to $0.4 million for the prior quarter and for the same quarter last year. Non-GAAP gross margin also excluded $4.4 million of production ramp-up costs related to the JV company for the June quarter, as compared to $6.6 million for the prior quarter and $2.6 million for the same quarter last year. For the fiscal year 2020, non-GAAP gross margin was 27.9%, as compared to 28.4% for the prior year. Non-GAAP operating expenses for the June quarter were $25.3 million, as compared to $25.8 million for the prior quarter and $22.6 million for the same quarter last year. Non-GAAP operating expenses for the quarter excluded $2.4 million of share-based compensation charges and $2.6 million of legal expenses related to the government investigation. This compares to $2.5 million of share-based compensation charges, $2.1 million of legal expenses related to the investigation, and $0.6 million impairment charge related to an investment in a privately held start-up company for the prior quarter, as well as $2.1 million of share-based compensation charge, and $3.9 million of pre-production expenses related to the JV Company for the same quarter last year. Both GAAP and non-GAAP operating expenses included $3 million of digital power team expenses for the quarter, as compared to $3.1 million for the prior quarter and $2.3 million for the same quarter last year. In July, we made the first shipment of our digital power product. Non-GAAP operating expenses for the fiscal year 2020 were $102.5 million, compared to $95.3 million for the prior year. Non-GAAP operating expenses excluded $8.9 million of share-based compensation charge, $4.7 million of legal expenses related to the investigation, and $0.6 million for an impairment charge in the current fiscal year, as compared to $11.2 million of share-based compensation charges and $15.8 million of pre-production expenses related to our JV Company in the prior fiscal year. Income tax expense for the quarter was $0.4 million, compared to a tax benefit of $1 million for the prior quarter and $0.6 million for the same quarter last year. The tax benefit in the prior quarter was primarily driven by relief from the CARES Act. Income tax expense for the fiscal year was $0.3 million, compared to $1.3 million for the previous fiscal year. Non-GAAP EPS attributable to AOS for the quarter was $0.29 per share as compared to $0.11 for the prior quarter and $0.35 for the same quarter last year. Non-GAAP EPS attributable to AOS for the fiscal year was $0.88 as compared to $1.23 for the prior fiscal year. AOS continued to generate positive operating cash flow. AOS on a stand-alone basis generated $20.2 million of operating cash flow in the June quarter, as compared to $29.5 million in prior quarter and $15.2 million in the same quarter last year. Cash flow provided by operations attributable to the JV Company was $20.1 million in the June quarter, primarily due to a refund of accumulated value added tax paid previously. Cash flow used by the JV Company in the prior quarter and the same quarter last year was $15.2 million and $6.9 million respectively. Cash flow from operations attributable to AOS for the fiscal year was $58 million as compared to $65.3 million for the prior year. Cash flow provided by operations attributable to the JV Company was $4.4 million for the year, compared to $33.9 million of cash flow used in the prior year. Consolidated EBITDAS for the June quarter was $14.9 million, compared to $8.8 million for the prior quarter and $14.2 million for the same quarter last year. EBITDAS attributable to AOS for the quarter was $12 million, as compared to $6.5 million for the prior quarter and $15.1 million for the same quarter last year. The JV Company achieved its first positive quarterly EBITDA of $1.1 million in the June quarter, as compared to negative $1.1 million for the prior quarter and negative $5.6 million for the same quarter last year. Consolidated EBITDAS for the fiscal year was $52 million as compared to $55 million in the fiscal year 2019. EBITDAS attributable to AOS for the year was $44.8 million, as compared to $61 million a year ago. Now, let’s look at the balance sheet. We completed June quarter with cash balance of $158.5 million, including $110.3 million at AOS and $48.2 million at the JV Company. This compares to $110.2 million at the end of last quarter, which included $99.5 million at AOS and $10.7 million at the JV Company. Our cash balance a year ago was $121.9 million, including $100.7 million at AOS and $21.2 million at the JV Company. The bank borrowing balance at the end of June was $173.4 million, including $32.7 million at AOS and $140.7 million at the JV Company. During the June quarter, the JV Company borrowed a total of $47.1 million. AOS and the JV Company repaid $2.1 million and $25.4 million of existing loans, respectively. Net trade receivables were $13.3 million at the end of June quarter, as compared to $17.5 million at the end of the prior quarter and $24.3 million for the same quarter last year. Days Sales Outstanding for the quarter were 18 days, compared to 22 days in the prior quarter. Net inventory was $135.5 million at the quarter-end, up from $127.4 million last quarter and up from $111.6 million in the prior year. Average days in inventory was 127 days for the quarter, compared to 131 days in the prior quarter. Net Property, Plant and Equipment was [$412.3 million], flat compared to the prior quarter and $409.7 million last year. Capital expenditures were $13.2 million for the quarter, including $9 million at AOS and $4.2 million at the JV Company. With that, now I would like to discuss the guidance for the next quarter. We expect revenue to be between $134 million and $138 million. GAAP gross margin to be 26%, plus or minus 1%. We anticipate non-GAAP gross margin to be 27.7%, plus or minus 1%. Note that non-GAAP gross margin excludes $0.4 million of estimated share-based compensation and $2 million of estimated production ramp-up costs relating to the JV Company. GAAP operating expenses to be in the range of $32.8 million, plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $27.8 million, plus or minus $1 million. Both GAAP and non-GAAP operating expenses include $3.2 million to $3.5 million of estimated expenses related to the development of our digital power business. Non-GAAP operating expenses exclude $2.5 million of estimated legal expenses related to the government investigation and $2.5 million of estimated share-based compensation charges. Income tax expense to be approximately $0.5 million to $0.7 million. Loss attributable to non-controlling interests to be around $1.2 million. On a non-GAAP basis, excluding estimated production ramp-up costs relating to the JV Company. This item is expected to be approximately $0.2 million. As part of our normal practice, we are not obliged to update this information. With that, we will open the call for questions. Operator, please start the Q&A session.

Thank you. [Operator Instructions] Your first question comes from the line of Craig Ellis from B. Riley FBR. Your line is open.

Yeah. Thanks for taking the question and congratulations on the nice execution in the quarter guys. Yifan, the first one's really just a clarification, did you mention what the JV Phase 1 revenues were in the quarter and what are they expected to be inside of the fiscal first quarter outlook?

Yeah. During the June quarter, majority of our revenue increase was supported by our joint venture. So, now the, you know, you saw, you know, the joint venture achieved the first EBITDA positive quarter, you know, we’re happy with that. Right now, because of the uncertainty of this pandemic situation on, we expect that it will continue to ramp this joint venture fab, right now. Our September guidance also factor in those support from the joint venture. So, we, as Mike mentioned and the world was going to progressively continue to run this JV fab during the course of the fiscal year 2021.

Okay, and as long as we're just talking about the fab ramp and what happens in the fiscal year before coming back some other near-term items, how should we expect that to play out through what's typically a seasonally softer part of the business in fiscal 2Q and Q3, would we expect fab production and fab sales to mirror historic seasonality or is there something about the design win profile you've been able to achieve with products from Phase 1 that would allow that fab to continue to grow up putting revenue sequentially through next year, when you expect to get to that original 37.5 million target?

I would expect, and you know, there are some seasonality’s along the way, you know, in this fiscal year 2021. On the other hand, and yes, we have some design wins and company specific and then we were going to continue to run the joint ventures and fab. We're all – I was thinking, and you know, the some – still some uncertainties and down the road and in terms of the December quarter, March quarter, and you know, we just would go quarter-by-quarter. So, right now, you know, our September quarters guidance reflected in our [expected run – continually run].

Okay, thanks for that. The next one is a question for Steven. Steven, I think three months ago, we thought that the new gaming platform might deliver 6 million in sales and it looked like consumer was up significantly enough that that 6 million might have been 7 million, 7.5 million. One, can you confirm what the revenue contribution was from the new gaming platform? What would you expect in the fiscal first quarter? And somewhat similar follow on, as I had for Yifan, given the highly seasonal nature to gaming platforms, would we expect revenues from this set of design wins to moderate in fiscal 2Q and 3Q before reaccelerating the next year?

Yes. So, we're very excited about the gaming business that's ramping up now. We saw that ramp up already happening in the June quarter on this platform, you know, this gaming console is not going to release until later part of this year, more towards the end of Q3 beginning of Q4. However, obviously the production has already started for that. And we, I'm not quoting any specific numbers for these quarters, but it's very healthy and we expect now another big jump going into the September quarter. Beyond that, we have to see how the [substance] of this console to the market and see whether there's any – also any production hiccups or anything on our customers end, but so far we don't see anything. Right now, we are pretty happy with this business. And as Yifan mentioned, this is one of the key design wins for new business that we are counting on for the December quarter.

Okay, great. And then interesting teaser about server power shipping in the June quarter, so can you give us some further color on what happened there and what’s happening in the back half of the year?

Sure. So, digital power and we're very excited to be in the – one of the upcoming graphics card platforms. This is going into one of the high-end models that get released at the start of the platform release. So, we have our SPS product, going to be shipping already in this September quarter, as well as ramping line going into the December quarter. So, naturally, you know, as we talked about before, our digital powers focus on two key markets going after advanced computing, as well as Telecom. So, it's not, you know, too surprising that we see the first business win coming more from a kind of client side portion of the computing portion of the business. So, we're pretty excited about this. This will ramp up some more next year as well. At the same time, we have other opportunities that are being cooked up at the moment for the other applications.

Okay, that sounds good. And then lastly, just a long-term question to Yifan, and maybe even for Mike. So, guys, thanks for clarifying the Phase 1 fab ramp target. Got it. Fiscal 1Q 2022 it sounds like, how should we think about what was the [calendar 2023] $1 billion revenue target? Is calendar 2023 still the right period for that revenue target or would that shift out due to the COVID crisis?

Well, I'll take the first question. The original target of a billion dollars and revenue for calendar year 2023, I would expect probably more so pushed out by one-year and because of this 2020 years pandemic situation. So, that's how we currently own and it may change and you know, down the road depending on the market situation. So, leave it that way.

This is Mike Chang. Let me follow up the Yifan and maybe give a little bit in-depth. When we look into the future business, okay, especially like a kind of far away 2023 and a billion dollar, which was always our challenging goal. Actually, only thing I made is your technology in a new product development and acceptance, and which does take time in patients, and we are quite encouraged during this difficult time, this pandemic time there. Our product start to get accept, which is a tremendous encouragement to our people, to us. So, I agree with Yifan, okay, you know, we cannot fight with nature. So, this would affect us, but moment is there. We put it – this should not no more than delay one year.

That's helpful Mike. And then if I could just follow up on that useful color, since you mentioned long-term Technology Roadmap, where does wide-band GAAP fit silicon carbide [indiscernible] on your long-term Technology Roadmap and where are you in development of those technologies?

These is another slow cooker. Okay. So, we've been in this – R&D in this area for many years. Recently, we just want to release one [indiscernible] silicon carbide [200 volt] product. However, I don't want to create too much excitement there, because such kind of thing will take time for customer to accept. So, you got product there and as you clicked it, you have product there,. But, you know, you just happen to take time for customer to really to, you know, to accept, to go, to buy and to expand. So, I can only tell you that we have the capability. We have R&D there, but I will put it longer-term. Yeah.

Thanks for the help guys.

Thank you.

Your next question comes from the line of David Williams from Loop Capital. Your line is open.

Thank you, and appreciate to let me ask the question guys. Congrats on the solid quarter and the guide.

Thank you.

So, the gross margin came in a little better than we had expected and of course, the head of the guide. Can you maybe talk through any puts and takes there of the margin, was that more mix related or just productivity out of the JV or what really led to the better margin profile this quarter?

Oh sure, I mean, the gross margin came in at the high-end of our guidance. So, I mean, we are pleased to see that. Since the majority of the increase of our revenue was from our joint venture, so, you know, we – our non-GAAP gross margin, you know, we perform out and production ramped up cost sold actually, you know, make the normalized non-GAAP gross margin already. So, you know, the June quarters non-GAAP gross margin was flat compared to the March quarter. So, are relatively stable, compared to March quarter. In terms of product mix and factory utilizations and so on, Basically the $2.2 million reduction in the production ramp up costs, you know from March quarters $6.6 million to $4.4 million in the June quarter that’s $2.2 million basically, that will be the margin increase if we did not [perform out] in the production ramp up cost. So, that will be the margin gain there, but since we already normalized the non-GAAP margin, so, the June quarters margin was basically stable, compared to the March quarter.

Okay, great. And then maybe if you can just, maybe rank order the growth of the underlying trends is going to continue to support the growth, if you kind of exclude some of the shorter-term trends that you're seeing, what are the, I guess, the largest maybe secular growth drivers that you see that will support you to that $1 billion run rate that you talked about?

Yeah. Hi, David. I can take that question. We're definitely heading more and more towards on diversification. In order to get to the $1 billion on revenue, we're expecting contribution from all the core markets. Of course, you know, we'll continue to be strong in the computing, and even in computing, we're finding ways to expand BOM content, you know, we expect that you know, with the future platforms coming from Intel and AMD that our BOM content is actually going to increase and also, you know, not only for the V-core and system power, but also finding new sockets, like getting into Type C, as well as some other areas that we are investing in. So, computing would definitely be strong. You know, we have even have the server market as part of the mid-term growth up for computing. Communications has also been strong for us in the past and will continue to be strong with strength in the battery protection going into phones. We have a very good position going into that that we talked about during the earnings release. We expect that to continue going forward as we also look to supplement that also with a business from our telecom side. We also expect to see our power supply grow as well. Right now in the short-term, it's been growing mainly with the PC boom, because with the work from home situation, a big part of that is because we've been able to service the high voltage market, which we have ignored in the past and due to allocation. Now, because we have CQ and we have the ability to support that, this is going to be a new area of growth for us to – and to support not only power supplies for PCs, but also for gaming systems for industrial power, and for solar and other applications. And of course gaming and consumer we've been talking about, that's a brand new area for us. Gaming is – will be a big part of that consumer going forward, but so will our other existing business. We're pretty pleased with our home appliance business there based on IGBT's in our module solutions, and this is one area that will continue to grow. We're still on track to grow by more than 40% year-over-year for the calendar year. So, and as well as our TV business will continue to be strong. So, in the end, you know, we have to grow by diversification. We can't count only on just a few areas of the market. We've gotten big enough and established enough in our current applications. And we are expanding into new applications to help us to get to that $1 billion.

Right, that's very helpful. Thank you. And then Stephen maybe or Mike, on the digital controller front, you’re obviously making some very nice progress, ship it in the Q. How do you think that layers? And as you move forward, what does that ramp look like? Is it slow and steady? Or could we expect to see maybe a nice more hockey stick approach as you get into the middle part of next year?

We expect it to be more slow and steady. And we do expect the – again, the client portion of the business to grow a little sooner and faster, just because of the nature of the shorter design cycles for going into client computing. The longer ones are going into the server platforms and go into the telecom platforms, which we are engaged in, but they simply just take more time to build design in, as well as to ramp up. So, I think, steady is probably the right word for that. These – this kind of business takes longer to design in, but it's much stickier and will stay for much longer, because these platforms endure for a much longer time.

Okay. Any thoughts on the BOM content addition that you can pick up?

Oh, the content can be pretty large, but it really depends on the end application. There's different scales of base stations and servers. It depends how many rails and they are looking down to use digital power for. So – but it can be on the tens and twenties of dollars per system, but there's a pretty wide range depending on the application.

Okay, that’s fair. And one more if I can. Just kind of thinking about the health of the inventory, can you maybe talk about the different puts and takes there? How do you feel in terms of the inventories that's maybe in the channel? And are you shipping to consumption or are you seeing any type of bills that will – that's really – that could be helping your 1Q guide?

Sure. Our channel inventory right now is, what I consider a pretty healthy. It's within the targeted range of two to three months. And right now it is close to the midpoint of that target range. So, we don't have much concerns about the channel inventory at this point.

Okay. Thanks so much, guys. I appreciate it, and best of luck on the quarter.

Alright. Thank you.

Okay. Thank you.

[Operator Instructions] Your next question comes from the line of Jeremy Kwan from Stifel. Your line is open.

Thank you, and let me add my congratulations to the excellent results and outlook and especially the cash flow generation.

Thank you.

Thank you.

I guess, the first question maybe regarding the – a follow-up on some of the seasonality questions. It seems like some of the growth near-term has been driven a lot by the consumer, gaming, graphics cards, some of the cell phone builds. Could you see potentially some maybe a stronger seasonal trend coming up in the next couple of quarters because of that? Like is there – are there certain design wins that are – that can maybe make up for some of that potentially increased seasonality?

Sure. First, I want to comment that because of COVID, there's not much of a normal seasonality this year, but there has been a lot more disruption because of how COVID has affected our customers, both their demand, as well as their production. Computing, typically, as a Q3 September quarter have done major peak season, this year, we basically saw that peak season pulled in from September into June. That's partly because also March was a pretty disaster quarter for our computing customers, because their factories were located in China and a lot of them are in the epicenter of where COVID was starting out from. So, we – and – but because of the work from home and the strong demand, the September quarter – the June quarter was very strong and the September quarter remains on very healthy also. We – so far, we don't know how this will play out over the longer timeframe. And Q4, so far looks still okay. But we really need to wait and see to see how demand changes, but right now, that still looks strong. Going into the smartphones. Smartphone, I would say, it's probably a little more depends on how each of the major – each of the major players, customers in the space are doing. Some of them – one of our customers, they launched a new phone back in the March quarter and they actually didn't pull back production until the June quarter. And so – but then coming into the September quarter, they're actually starting up production pretty heavily, again, in anticipation of possibly another factory shutdown that would may have to happen in the coming cold season. So, we're seeing a lot of disruption like that happening. Overall, right now, again, smartphone typically is strong in Q3. And actually we do see that from all three vendors. Our demand is very healthy and strong going into them with the second-half of this year. Now some of the newer areas for us are at least for AOS is gaming, as well as graphics cards. And both of these areas are relatively new for AOS. So it's not really seasonal, it’s tied to their platform releases that are launching at the end of this – in the second-half of this year. Graphic cards typically – the platforms lasts around two years. So – and this – so this is the beginning of that cycle. For gaming systems, those last much longer. You're talking about typically six to seven years, and this is the beginning of that cycle. And even during that six, seven-year, there's multiple revisions are made to platforms along the way to create different price points for the customer, or maybe cost down. So, there's additional opportunities for us to get more business, get more sockets. And so, I would say that that's not really a seasonal thing. It’s more of out of that product life cycle. We're at the beginning of that lifecycle and so it's additional business that we're laying – layering on top of our current business. Does that help?

Yes, that's very helpful. Thank you, Steven. And maybe just a quick follow-up on the comments that some customers, especially in the smartphone industry are building ahead of potential shutdowns later on, is that something that you see, is it pretty wide spread within cell phones and you see that across other industries?

I see – this particular vendor is, I think, is only one vendor – one customer that's mainly doing that more so than other ones. So, I wouldn't say, it's necessarily reflective of the whole market or industry. But at least, they're doing a much more than others are. And the other major vendors are seeing their normal seasonality that's coming. So, right now, we see all three vendors asking for product.

Got it. Great. And then maybe just, can you give us an idea of linearity in the quarter, and maybe your backlog and visibility for the upcoming September quarter?

Sure, Jeremy. Our backlog has been healthy and steady since the month of March. And if you recall back to the March folder toward a mid-March, I saw the surging demand started and then backlog started fitting in. I guess this reflected in the recovery of supply chains and then a surging demand and due to the work from home, learning from home those things. And also – is also our company specific design wins. So, of course, then I mean, then under this challenging and volatile and pandemic environment, we want to be vigilant and cautious and then monitor the dynamic changes carefully. So right now, that – our backlog can support our September's guidance.

Okay. Can you give us a – maybe a comparison on a relative basis, maybe this quarter versus prior quarters? Some of the other analog peers have reported very high backlog coverage. Just wondering if that's the same case for you guys?

It has been steadily increasing, yes, better than last quarter and position, I will say.

Great. And Yifan – just looking at the balance sheet, I noticed other assets was down about $26 million. Is this the VAT refund, the value-added tax getting converted into cash?

Yes, yes. Yes, exactly.

Okay. So then, is that – that's a full amount. So, about $26 million, if we look at, because you're – the operating cash flow was – had a very nice bump from the March quarter to the June quarter. So, if you take that out, would that be roughly the operating cash flow for the – excluding the refund?

Yes. I mean, for AOS, when we separate an AOS from the JV, AOS generated about $20 million operating cash flow, $11 million of free cash flow in the quarter. JV, yes, that – about $25 million in refund they got from local government related to the value-added tax. Last couple of years when they imported the equipment, then they had to pay value-added tax like [13-some-percent] of each machine. So, that one has been cumulated for at least a couple of years. So, in the June quarter, they got a refund pretty much all of them from the government. So, on the other hand and prior to that and they were using those receivables from the VAT tax and against that they borrowed from a local bank against those VAT receivables. So at the same time, when they gather refund, they also repaid in about $15 million, $16 million also loans. So net-net, yes, they did get more working capital.

Got it. And did you say, is all the VAT tax hasn't been fully refunded by now? Or is there still some waiting to be collected?

That's pretty much all refunded already.

Great. And then just a question, as the JV has been ramping, I think, Mike said earlier that you guys are expecting to hit the target around this time next year. So presumably, you probably need to invest ahead of that. So can you talk to us about CapEx plans and also just for the JV, what – so it looks like the operating cash flow is still not quite break-even at this point. Do you have targets for when you might expect to hit operating cash flow break-even and also on a free cash flow basis?

This – for AOS, our CapEx spending is pretty much in the range of – normal range like, I would say, 6% to 8% of our revenue. For the joint venture, yes, right now, we are doing some planning work for the next round. And so – but right now, our main focus is to ramp up the 12-inch fab first. So that will have a longer-term planning for the JV.

So – sorry, so were there any CapEx or breakeven targets that you can give us?

Well, this target we’ve seen along with our business and the growth and the expectations. So, that's kind of a – you have to wait and see.

Got it.

We will disclose when the time comes.

Great. Okay.

This is Mike. Can I, may be putting in a few words about this JV?

Yes, please. Thank you.

Okay. I think, first off, we need to differentiate, okay, this JV was a sort of a purpose-driven, it's a strategic investment to match with our business growth plan. So, it's not a purely financial investment. Therefore, we really look into what our business growth or – grows there, then we tailor this venture to support that meanwhile for the central growth, too. So there is a primary and secondary. The primary deal is to support its growth. Yes. So, don't want to differentiate it a bit.

That's very helpful. Thank you. And I understand it's strategic for AOS as a standalone and there's – the cash flow implications are into consideration, but it's not the primary one [Multiple Speakers].

Our costs would have been very prudent, right?. So – yes. Thank you.

Right. Great. Thank you. And then just one last question, to help us model the government investigation, is it still going to be $2.5 million for the remainder of the year? Or is there some drop off that we can expect at some point?

Well, this one is really hard to estimate and that's the depending on the activities. Right now, for the June quarter, our expenses were in the $2.5 million, $2.6 million range. So, I wouldn't think and – I just use $2.5 million at this point for the guidance. So that's hard to estimate at this point.

Okay. That's true. And that's all I had, and congrats again on the solid results.

Thank you.

Thank you.

Thanks.

Your next question comes from the line of Craig Ellis from B. Riley FBR. Your line is open.

Yes. A couple of them, and thanks for taking the follow-ups, guys. First, I just wanted to get your views on how you're looking at production optimization and demand planning? And I want to do it in the following context. I think when we started into calendar 2020, the company was optimizing its business for communication-centric growth. A lot’s happened since you relied on your feet, and it looks like in the back-half of the year, we're really going to see mid-year, late year, our growth is driven by gaming platforms and compute. So, good for you for realizing that; and I think the communications business has been fairly flattish from the first quarter. The question is, as we look at calendar 2021, so the second-half of your fiscal 2021, first-half of fiscal 2022, how do we think about the way you're optimizing your production and your demand planning? Is it going to stick with being much more of a compute and console incremental demand business? Or do you see the communications business coming back and contributing more to growth next year than has over the last couple of quarters?

Yes, this is Steve, and I can address that. So as similar to the – what I was saying before on anything giving up with the total picture, as in the long-term, we're heading more towards diversification. So – but in the short-term, you're right. Right now, we're seeing a big strong growth in PCs because of the work from home, as well as consumer because of the newer platforms that we're getting into for gaming. In the longer run, I do expect the other platforms also to continue to grow. Communications, we do expect the cell phones still to be the main, I guess, the foundation of that. And we have a very strong position on each of the three major markets and we'll continue – they'll continue to be strong going forward. On the Power Supply side, we saw the beginning of some growth over there because of our high voltage business. Initially, again, going after the PC market, but that has the potential to expand to be more than that. So near-term, definitely, I think the gaming as well as the graphics cards will be big. And computing itself – graphics card is part of the computing segment. We’ll grow over there, as well as with some BOM content increase in the upcoming platforms for Intel and AMD.

That's really helpful color, Stephen. And then the follow-up, I believe the company is spending about $3 million a quarter in its digital power R&D. So just trying to think through the dynamics that get that business to breakeven on an operating basis, so we started to ship product, it's going into gaming core products. Do you feel like you've got visibility now to $6 million to $8 million in quarterly revenue for digital power? Or when would you expect to get that visibility? So, we'd be at a point where on an operating basis, we were breakeven on a quarterly basis?

I think it's still further out. We expected digital power to take time to establish as a first player going into digital power, but also as – for the markets that we're going into – where we want to get into, both the server and telecom, we're still relatively new to those markets. So, it simply just takes time to develop this business. That said, where we’re getting the early traction on is in the applications that we do know well going into the client side on the graphics and as well as clients and PCs. So, we expect to see earlier traction there. It's not going to get to the breakeven point that quickly. I think a steady – we'll be making a steady progress towards that. So, I think we're still a few years out, at least in getting to the break even. But, you know, this is just the beginning of the revenue, is coming from one customer right now, but we hope to expand that in the coming quarters.

Make sense. Thanks Stephen.

This is Mike Chang, can I add up few words?

Yeah. Go ahead, Mike.

What Steven says is exactly true. However, I would like to also share some of our excitement there. As you know, he has come from [indiscernible]. We are actually strong in clients, okay. So, you know, the telecom, which is kind of new, you know, [indiscernible] in the client’s side there, there's a lot of synergy gain among ourselves, [however] in our existing policy there. So, even though they may not get revenue as they, ‘hey, what is this? This is revenue come from this power’, but they will contribute greatly to the other side there. So, as in the benefits not just what does Stephen say so is there is some, how to say, there is a [interest or benefit] there, which is really beneficial.

Yeah. Got it. So there's more than [meets the eye]. Thanks for that clarification, Mike.

Yeah, thank you.

There are no further questions at this time. I turn the call back to the presenters for closing comments.

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 everybody for joining. That concludes your conference call today. Have a wonderful day. You may now disconnect.