Ladies and gentlemen, thank you for standing by and welcome to the Alpha and Omega Semiconductor Fiscal Second Quarter 2021 Earnings Call. . Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Gary Dvorchak. Thank you. Please go ahead, sir.

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2021 second quarter financial results. I'm Gary Dvorchak, the Investor Relations representative for AOS. With me today are Dr. Mike Chang, our CEO; Yifan Liang, our CFO; and Stephen Chang, our President. This call is being recorded and broadcast live over the web. A replay will be available for 7 days following the call via the link in the Investor Relations section of our website.

Thanks, Gary. I would like to welcome everyone to today's call. I am excited to be speaking with all of you again today and to report an excellent quarter and finish to calendar year 2020. In December quarter, we saw solid shipments across most of our product categories, leading to results ahead of expectations. We grew revenue by 35% year-over-year to $159 million. We achieved higher utilization at our manufacturing facilities. We continued to be disciplined with our spending. All of this led to records in non-GAAP gross margin of 31.4% and non-GAAP EPS of $0.65. Yifan will go into more details on our financial performance later. I am really pleased by our team's execution. The operational controls and efficiencies that we have implemented are positively impacting our bottom line. For investors who may be new to our story, our mission is to become a leading designer, developer and global supplier of a broad portfolio of power semiconductors. This mission drives our strategic focus and the work we do.

Thank you, Mike, and good afternoon, everyone. I will start with an update on our business and then provide detailed segment highlights for the December quarter. Our business momentum has accelerated over the past several quarters due to our advanced product portfolio, marketing strategy and growing production capacity. As we stated previously, our strategy is now to create advanced total solution products in close partnership with our customers. These products leverage our expertise in power and move beyond commodity parts into multi-socket optimized solutions that make our customer products more reliable and efficient. For example, our recent design wins in a gaming system and in a new PC graphic card platform as well as our high growth in home appliance applications and battery protection solutions demonstrate how we have deepened strategic partnerships with tier-one global OEM customers. We expect to accelerate growth by winning new customer engagements with an expanding pipeline of new products and increasing BOM content.

Thank you, Stephen. Good afternoon, everyone, and thank you for joining us. Before I dive into the financials, I want to highlight some key milestones at the JV Company, which Stephen alluded to a few minutes ago. We started the construction of the JV Company 4 years ago as we anticipated additional capacity requirement based on our longer-term growth plan at that time. The 12 inch fab commenced its production in July 2019 and the assembly and test facility started a bit earlier. The JV Company’s production ramp in the past year has played a significant role in our recent business growth. In the December quarter of 2020, the JV Company achieved positive EBITDA for the third consecutive quarter. We are very encouraged by the progress the JV Company has made in its production ramp. Beginning in the December quarter, we no longer report the production ramp up cost as a non-GAAP item. We expect the JV Company to generate another sequential volume growth in the March quarter and approach the Phase 1 target run rate in the September quarter. Beyond Phase 1, the JV Company will provide us with flexible capacity management and geographic diversification of our supply chain. As part of our next phase of the growth plan, we are planning the Phase 2 expansion and will offer more details in the quarters ahead. Now let’s turn to financial results. Revenue for the December quarter was $158.8 million, up 4.8% from the prior quarter and up 34.8% from the same quarter last year. In terms of product mix, DMOS revenue was $118.5 million, up 3.6% from the prior quarter and up 19.3% year-over-year. Power IC revenue was $37.4 million, up 8.5% from the prior quarter and up 122.2% from a year ago. Assembly service revenue was $2.9 million…

. We have our first question from the line of Craig Ellis from B. Rile Securities.

Congratulations on the strong calendar 2020 and start to '21. I wanted to start with a higher-level question, and maybe I'll direct this to you, Stephen.

Thank you.

Yes. Sure, Mike. Yes, business has come a long way, and it's been an incredible journey with the 300-millimeter fab and nice to see that doing so well here with the $6 million EBITDA. My first question is just around the nature of order visibility that the company has at present. We've heard some -- from some companies that their visibility extends well into the second half. For some, it's already extending all the way through calendar '21. Stephen, maybe you can just comment on order visibility you have across the main end markets. Where is it comparatively longer? And where might visibility be a little bit shorter?

Sure. And again, I think this year is still continuation of last year in terms of nonseasonal patterns that we're seeing now. But overall, backlog is strong, and Yifan can probably comment on that afterwards. But overall, we're still in a very tight market overall. We do see -- just kind of going through some of the key segments, and Computing still remains to be fairly strong. We are still exiting what is traditionally the peak season -- a normal season, but it's still -- we still expect it to be relatively strong going into this -- the March quarter of this year. Overall, in general, we're in still a fairly tight market, so demand is pretty strong across most of our segments. I wouldn't necessarily say that we have visibility all the way to the end of the year. I think we still think that we're in unusual times, so there could be corrections that will happen to certain segments. But overall, we are on an allocation stage right now, so we are trying to best serve our customers while also, of course, protecting our revenue.

Yes. I echo Stephen's comments. And then -- I mean, backlog has been healthy and stable throughout the quarter. Right now, I mean, I wouldn't say, we can see far enough toward the second half of the year, this calendar year. So there are a lot of dynamics and risks out there. So we just want to be a little bit cautious.

Stephen, can you elaborate further on the allocation statement that was made in the prepared remarks and in your answer to that last question? How broad-based are they? Can -- and can you provide any color on when they started to emerge and just where they stand here as we start February?

Sure. I think allocation -- in terms of overall tightness in the market that probably started towards the second half of last calendar year, as soon as -- yes, I think our third quarter, we had a pretty strong quarter. But it really wasn't just us. It was the industry-wide that we were seeing general shortness here and there, whether it's in some raw materials or lead times being stretched out. And we're pretty good at our operations, but we're not immune to that. So it is something that's high priority for us to make sure we have a secure supply chain for, just like any other company in this space. So we see it also in the marketplace as well, too, in terms of the demand across segments coming in are pretty strong. As Yifan mentioned, we just talked about, the backlog is very high. And I think part of that is in reflection to the overall industry shortness in addition to the demand that we're seeing because of COVID because of other segments that are strong now.

And if demand is strong and if there are allocations, why wouldn't the JV fab Phase 2 start to ramp up earlier to alleviate that demand? Can you just talk about where products are being sourced that are related to some of the tightness? And why there wouldn't be a pull-in on the Phase 2 ramp, if there is tightness?

Yes. I'll speak generally first on that. Yes, for the -- CQ is ramping actually pretty well, especially compared to the beginning of the last calendar year towards the end. We're very, very fortunate and happy to see that CQ is ramping and ready to support us with the growth. So we will be depending on this JV more going forward. Yifan, do you want to provide some more color on the expansion?

Sure. We have been continuously ramping the JV Company. I mean, over there, as you can see, started from last calendar year's June quarter, September quarter, December quarter continued to ramp. And then we do expect in the March quarter, we'll continue to ramp, but it takes time for a brand-new fab to ramp. So at this point, we do expect we can ramp-up Phase 1 target run rate by the September quarter of this year.

That sounds good. And then last question for me before I jump back in the queue. We've heard from a number of companies and it's widely reported that there has been an increase in various types of input costs and that is triggering some more tactical pricing moves from all types of semiconductor suppliers. What's the status of that type of activity at AOSL? And how should we think about whether either, a, you would be doing that or, b, to the extent that you're not, if there's an opportunity to gain either intermediate or long-term share gain from customers that are raising prices?

Sure. And certainly, we are seeing the cost of raw materials increasing in general and whether it's from actual physical raw materials or the services. We see that in lead times, and it's affecting the cost and it's reflection of the overall market supply chain being tight. We will be adjusting, and we actually are already adjusting some of our pricing to reflect the cost increases. I do want to make a note that this is not a time for us to -- our customers. We're -- because we are focusing on long-term relationships, especially several of these -- many of these Tier 1 customers that we're really establishing ourselves to be a close partner with them. So we are being intentional and selective about how we implement the cost increases.

We have our next question from the line of David Williams from Loop Capital.

First off, Stephen, congratulations. It's great to see you moving through there, and then also congrats on the fantastic results. And you guys are really -- you're really building on your success, and it's nice to watch and to see the growth. So congratulations there.

Thank you, David. Appreciate it.

I wanted to see maybe if we could kind of talk a little bit about the incremental capacity that you may have at the JV. Obviously, you're still ramping. You're not quite there yet. But do you think that there's an opportunity -- and you kind of maybe alluded to this in the past that able to squeeze a little more capacity out of that facility. What do you think the actual run rate is? And then maybe if you could just remind us what your full ramp is, and if that's changed at all in terms of the revenue ramp?

Okay. Sure, David. We have been ramping up in JV fab over there. I mean, this -- we'll continue to ramp. Right now, there's -- we still have some room to go. That's a good thing for us actually. So we'll continue to fill up the fab. In terms of the March quarter, right now, we guided $157 million, plus or minus $3 million. And then -- I mean, this is reflecting some production -- lower production than during the quarter because of a couple of factors. One is Lunar New Year, and I mean, we would expect some lower output at our factories. Another thing is, we will have 1-week shutdown at our Oregon fab for scheduled annual maintenance, so facility maintenance once a year. So that would also lower some production output there. So overall, I mean, we're still seeing the continued ramp for the JV Company.

Okay. Great. And then maybe a little bit on your customer, kind of how they're posturing themselves. Are you seeing your orders coming in with maybe longer lead times? Are you seeing customers maybe place orders today that are for the third and the fourth quarter? And then this was asked a little bit earlier, but in terms of the visibility, do you think that's improving overall in terms of -- you've got a lot of volatility still in the market, but demand has been very strong. I guess, I'm trying to get a sense on how comfortable you are that this demand level can remain at these elevated levels. And then what happens as we get into the second half? Do you predict or can you foresee a time that maybe the COVID tailwind subside and we start seeing a little bit of pullback there? And just how do you think about that in posture for that scenario?

Okay. Let me take it first. I mean the backlog right now, yes, it is strong. Then we are monitoring it very closely. So the March quarter and some June quarter's already filled up. I will not ruling out some double ordering in those situations. So we are monitoring order patterns and then triangulating with our design wins at customers so that we don't need to ship kind of whole lot to certain customers that cause other customers lying down. So that's what we are doing on a daily basis right now. So overall, I mean, things could change. I mean, I will not comment on the second half of the year.

Yes. In general -- yes, just to provide some more color, right now because of the strong backlog and the demand from our customers, we're doing quite a bit of scrubbing to sort out what is the critical business to support, whether it's strategic business, whether it's our key customers that we're trying to grow or key products that we're trying to grow. So it's a good chance for us to choose and be selective about what we want to support. But at the same time, we know that this is -- we don't have long, long-term visibility. So we have to -- so we're carefully watching to see if tides are turning for certain markets or -- yes, one way or the other for this upside that's coming that we want to take advantage of.

Okay. Great. And then one more, if you don't mind. On the gross margin side, that was up nicely in the quarter, north of 30%, and so it's good to see. How do you think that trends as we go forward? Can we keep these types -- same types of incremental, I guess, margin rates? Or do you see this moving down significantly? And then maybe if you could just touch on what the impact was? I know there is utilization and some mix. Was the mix more product specific or was it more maybe the IC versus some of your discretes that maybe helped with the margin?

Okay. Sure. We are very encouraged by the historical high of non-GAAP gross margin 31.4% in the December quarter. It demonstrated we can achieve our 30% gross margin target for calendar year 2021. I mean that December quarter's performance gave us more confidence we can achieve our near-term target. I mean, I would expect -- yes, we're on track to achieve that 30% gross margin goal for the calendar year 2021. And I mean, the March quarter, we guided 29.5%, plus or minus 1%. And that primarily reflected some lower production output for the reasons I just talked about, Lunar New Year and 1-week shutdown at our Oregon fab for annual maintenance. And -- I mean, of course, I mean, this is why I give guidance. I would like to finish at the high end of our guidance. So we -- I'm pretty confident at this point we can achieve our near-term margin target.

Next is Jeremy Kwan from Stifel, Nicolaus.

Let me add my congratulations on the very strong results and also even on your expanded leadership role.

Appreciate it. Thank you.

In terms of the -- can you give us a little bit more color? I just want to press in a little more on the allocation situation. Is this both -- are you also putting customers on allocation? And are suppliers placing you on allocation, maybe for things like substrates or raw materials? And can you just give us a little bit more insight into where the shortages are?

Sure. It is happening on both ends. And again, it's not just us, it is industry wide. Just right now, I think our capacity as well as -- in terms of foundries as well as back end as well as all the raw materials, I would say, it's generally across the board that we're seeing shortages in the overall market. That also means downstream to our customers. We're -- and at the same time, the demand also has shot up quite a bit as well, too. I believe, I mentioned the backlog is quite high right now and much higher than our capacity. So as a result, they are on allocation because of us too. So there is restriction on both ends.

Good thing is, Jeremy, that we have the majority of the manufacturing operations in-house. So that's better part than a fabless company.

Yes. And this situation is certainly a competitive advantage for you guys. Can you give us a little bit more insight also into the pricing trends that you're seeing from your suppliers? I know you touched on some of the pricing that -- for your customers. You're still -- you're not really necessarily passing that along. But can you give us some of the magnitude of this effect? And if that impacts things further down the line?

So pricing increase on the supply side kind of varies quite a bit and some did not increase, some increased some, some a little bit higher than -- I mean, this is all over the map. So for us, we focus on long-term relationship with our customers. So our adjustment is try to off that or mitigate the cost increase at this point.

Got it. And maybe if I can switch gears a little bit to the $10 million customer deposit that you got. Is this included in the $35.7 million operating cash flow on the AOS side?

Yes. Yes. This is part of that $35 million operating cash flow because we recorded in the other liability -- long-term liability account.

Got it. Okay. And then turning to the Comm side of the business. You mentioned China smartphones, that's responsible for a big part of that. Nice growth that you've seen. Can you give us a sense of how big that is? How -- what proportion of revenues of the Comms business is from these Chinese smartphone wins?

I would say it's -- I mean it's not as big as the big global customers that we normally serve. But the story behind this is that these are actually not new customers that we've -- the China customers are not new customers. And they've been customers before, but because of allocation, you can say, we chose to prioritize the global business before that. But because now that our capacity has expanded some, especially because of CQ -- the JV fab, we've been able to go back to these customers and actually grow our business with them. So -- now size-wise, I would say they're not together. They're not as big as the global customer, but they're significant enough for us to mention. And we believe that is part of our growth going forward to really be a leader globally in this space.

Great. And then, I guess, speaking of the JV, it's nice to see that hit operating cash flow breakeven. We noticed that the CapEx also increased a little bit meaningfully. Is this the last of the Phase 1 spending? Or is this kind of maybe a little bit preparation for what you plan to do in the Phase 2? And until you announce the plans for Phase 2, what can we expect in terms of the CapEx going forward for the JV?

Sure. I mean, CapEx spending kind of fluctuates from time to time, depending on payment term and when we purchase some, we need to put down payment and some tailwind after qualification and dry run, we need to pay the last portion of the payment. So right now, we are in the process of planning Phase 2 expansion. We'll have some flexibilities there. And as I mentioned before, the current Phase 1 clean room, we still have some space there. So we can squeeze in some equipment to solve some bottleneck areas, so that we can lift up the total output. So right now -- we will provide more details in the quarters ahead.

Maybe just a little bit more clarification. Can you give us a sense of how much the JV Phase 1 is being utilized? Because I know your target in the past was that JV would help you to reach that $600 million run rate. And this quarter and next quarter, you're ahead of that. So where is this excess coming from? Is it -- are you able to squeeze more out of the Oregon fab? And how much room is left for the -- on the JV side?

Okay. Sure. The overall increase in our production is -- come partially from -- come from the Oregon fab, and we increased our product mix and some newer products and providing higher revenue per wafer and also some Power IC products. And you saw we grew quite a bit year-over-year. Those IC products and portion of it related to the IC drivers, those wafers we purchased from third-party foundries, not from our Oregon fab. So for the JV fab, yes, there are still some rooms to go, I would say. At this point, we ramped up to, I would say, 2/3 of it or 70% of it. So we still have about, I would say, 30% room to go.

. We have Craig Ellis again from B. Riley Securities.

I just wanted to follow-up on a few points that we talked about at different times in the past. In the past, the company has mentioned that there could be potential for design wins with follow-on gaming system products. I'm wondering if there's any update to the potential for such?

Yes. The potential is still there, but still not the timing of when the decision is being made yet. So I don't think that will be until probably the middle of the year -- the calendar year. But yes, that's always something that we are preparing ourselves for. And yes, we hope to build the gains in sockets or at least gain more share in existing sockets. But right now, there's not much in the news. It's not the timing yet for that.

And then on the gaming card side, I think the company has mentioned good participation at the high end of the gaming card line. What's the opportunity for following that up with content in midrange cards, which I think are rolling out through the first quarter?

Sure. I think that's ongoing right now and some of that was already happening at the end of the last quarter. And -- so yes, we do plan to participate and -- as part of the rollout of our customers. And -- yes. So right now, again, graphics cards roll out for over a period of two years before the next platform is released. But between that time, yes, they're coming up with more additional models based upon those chipsets.

And how would you characterize the content differential for AOS between a midrange and a high-end card, Stephen?

There's still good amount of driver MOS being used. It's -- the high end could be quite a bit -- I'm not -- we're not really quoting actual specific dollars, but I would say maybe 2 -- half to 2/3 of the BOM content of a high-end card will be in the mid-end card. And that range pretty kind of wide.

Yes. And then lastly, guys, just given the real strong December and the strong above seasonal March guide, great to see those. Really, the question is, with fab Phase 2, sounding like it's not starting up in fiscal 3 or 4Q. Does that mean that we're looking at a pretty steady, stable revenue profile as we go through the calendar year? Or would we be able to see that Phase 2 ramp up, so that there would be more meaningful sequential growth coming through as we get into the back half?

We may have some incremental expansion, I mean, at the JV company. Right now, as I mentioned, the Phase 1 clean room still has some space there. So we would place some equipment there to saw some bottleneck areas, so that we can get some incremental output. I mean, overall, in terms of bigger the expansion, again, we need to get clean room expand. So that will take some time.

We have a follow-up from Jeremy Kwan from Stifel, Nicolaus.

Just two quick questions here. The first is, can you give us some -- a picture of maybe of your channel inventories. What the situation is there with your distributors? And related to that, what kind of lead times that you're quoting to them and quoting to your customers? And what kind of the magnitude -- how that compares to last quarter? And a quick question on the JV. It looks like you're rolling over some of the debt there. Can you give us any update in terms of like the capital plans, whether new financing is needed or where things stand in terms of the JV?

Okay. Sure. In terms of our channel inventory, right now, channel inventory is below the low end of our target. We target in 2- to 3-month channel inventory. Right now, it's below the low end of the target. Right now, we don't see much channel stuffing at this point. In terms of JV's second phase, yes, we are in the process of doing our planning work. So we have some options on the table, and we could raise money from bank and from the market, and we'll evaluate all the options there. So we will disclose more, I would say, in the quarters ahead.

And what about the lead times both that you're seeing from your suppliers and that you're offering to your customers? How -- what's the change been?

Lead time right now is -- from our supply side, yes, lead time is getting longer and then -- I mean, reflecting tightness of the overall market. Our lead time to our customers, I mean, right now, it's well on allocation. And then I mean, if we cannot supply, we'll tell our customers. So -- I mean, the lead time is generally longer than the normal time, I would say.

. There are no further questions at this time. I will turn the call back over to the presenters 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.

Thank you. And God bless you all.

Thank you.

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day.