Good afternoon, and thank you for attending today's Alpha and Omega Semiconductor Fiscal First Quarter 2023 Earnings Call. My name is Amber, and I will be your moderator for today's call. [Operator Instructions]. It is now my pleasure to hand the conference over to our host, Yujia Zhai with Alpha and Omega. Yujia, please proceed.

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2023 first quarter financial results. I am Yujia Zhai, Investor Relations representative for AOS. With me today are Dr. Mike Chang, our CEO; Stephen Chang, our President; and Yifan Liang, our CFO. 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. Our call will proceed as follows today: Mike will begin with strategic highlights; then, Stephen will provide business updates and a detailed segment report. After that, Yifan will review the financial results and provide guidance for the December quarter. Finally, we will have the Q&A session. The earnings release was distributed over the wire today, November 3, 2022, after the market closed. The release is also posted on the company's website. Our earnings release and this presentation will include non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information for 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 the comparable GAAP measures is included in the earnings release. We remind you that during 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 will turn the call over to our CEO, Dr. Mike Chang, to provide strategic highlights. Mike?

Thank you, Yujia. I would like to welcome everyone to today's call. It is good to be speaking with all of you again. Our fiscal Q1 results were in line with our expectations. Revenue grew 11.5% year-over-year to a record high of $208.5 million. Non-GAAP gross margin was 35.4% and non-GAAP EPS was $1.20. We are pleased with these results. Looking forward, we expect to be impacted by industry inventory correction, particularly in PCs and smartphones. As a result, we anticipate our calendar Q4 2022 results to be somewhat weaker than the historical seasonality that we typically experienced during this period. Our data suggests that this process will occur over the next couple quarters before orders begin to normalize and be more in balance with the end consumer demand. While our near-term results will be impacted somewhat, I think it is important to highlight that our total PC revenue for calendar 2022, including our December quarter outlook, will actually grow slightly year-over-year against a 20% decline in PC units according to DIGITIMES. Our calendar 2022 smartphone revenue is also expected to be up 15% year-over-year, despite that the global smartphone shipments is forecasted to decline 6.5% in 2022. This is due to our success in gaining share, increasing BOM content, and deliberately improving our product mix towards more premium tier products. This also demonstrates the strength of our business' underlying fundamentals and the traction we have gained in these 2 important markets. Even though PC and smartphone demand is slowing in the near-term, these 2 markets will continue to be major components of consumer spending for a very long time. Another example of our solid fundamentals is that, our partnerships with Tier 1 customers and our share with them are the highest it's ever been in our history. We believe…

Thank you, Mike, and good afternoon, everyone. Before I give a detailed overview of our segments, I want to expand on what Mike discussed around our new growth areas. As Mike already mentioned, gaming has been a major success story for us and we continue to expect very strong demand over the next year as our #1 gaming console manufacturer ramps up production. Looking under the hood a bit, over the last year, we built a strong partnership with this customer through our great service and support on shipments during challenging times. Further, our products are significantly more differentiated at the higher-end performance bands, and since gaming consoles are essentially high-end performance PCs, our solutions provide significant competitive advantages against alternative products. Because of these factors, we have won multiple sockets across multiple products, including high-performance MOSFETs, as well as advanced power ICs, such as DrMOS and smart load switch products. Another growth area that I want to highlight has been the success of our MOSFETs for quick chargers. AOS has a long history of providing high-performance medium-voltage MOSFETs to address secondary side rectification in this fast-charging application, particularly as charging power has increased over time. As a result of our focus on product performance and customer support, we have become a leading supplier in the #1 U.S. smartphone OEM. Recently, we expanded our BOM footprint at this key customer to now also supplying the high-voltage MOSFET for primary side rectification, thereby effectively tripling our BOM content with this customer application. All of this have been made possible by our investment in R&D and new product programs that focus on the ability to offer our customers a total solutions portfolio that enables cross-selling and leverage the relationship and success of our existing customers. I will now cover our segment results…

Thank you, Stephen. Good afternoon, everyone, and thank you for joining us. Revenue for the quarter was $208.5 million, up 7.5% sequentially and up 11.5% year-over-year. In terms of product mix, both product lines continued to grow. DMOS revenue was $145.1 million, up 4.5% sequentially and up 11.1% over last year. Power IC revenue was $61.8 million, up 16.3% from the prior quarter and up 18% from a year ago. Assembly service revenue was $1.6 million, as compared to $2 million last quarter and $4 million for the same quarter last year. As Mike mentioned, non-GAAP gross margin was 35.4%, compared to 33.8% in the prior quarter and 35.3% a year ago. The quarter-over-quarter increase in non-GAAP gross margin was mainly driven by better production absorption at our assembly and test facility in Shanghai. In the June quarter, our Shanghai factory was partially shut down due to the citywide COVID lockdown. Since July, our Shanghai facility has been operating at normal capacity. Non-GAAP operating expenses were $36.6 million, compared to $36.7 million for the prior quarter and $35.1 million last year. Holding our non-GAAP operating expenses flat reflects our measures to control discretionary expenses and costs. As such, non-GAAP quarterly EPS was $1.20 per share, compared to $0.95 last quarter and $1.06 a year ago. Moving on to cash flow, we continue to generate healthy cash flow. GAAP operating cash flow was $36.7 million, which included $3.3 million net refund of customer deposits. By comparison, operating cash flow in the prior quarter was $25.7 million, which included $3.4 million net customer deposits. Operating cash flow on a stand-alone basis for AOS a year ago was $84.4 million, which included $40.2 million customer deposits. Consolidated EBITDAS was $45.5 million, compared to $36.9 million last quarter and $45.3 million last year. Let…

[Operator Instructions]. Our first question comes from David Williams with Benchmark.

Congrats on the resiliency for the quarter. I guess, the first one for me, Yifan, is kind of just thinking about the margin profile here. Obviously, you've got some utilization charges that will come in next quarter. But if I look back into your fourth quarter, fiscal fourth quarter, similar revenue level, and I realize that mix has a lot to do with this as well. But it looks like there's about a $5.5 million differential just in that margin. And I'm just kind of curious what your utilization charges should be as you kind of think about that? And then also what we should expect maybe in -- if we're seeing lower levels of demand into the March quarter, where that margin profile could potentially go to?

Sure. David, I mean, the December quarter's margin guidance mainly reflects the effect of current inventory correction. I mean, particularly in PC and smartphone areas. This inventory correction, we expect to result in less favorable product mix for us, which kind of basically, we are expecting to ship less higher-margin products in the December quarter and relatively speaking, shipping more lower-margin products. So basically, the product mix resulted from this inventory correction. So the cost quite a bit product mix changes -- changing unfavorably. So that's the major impact for the December quarter's guidance.

Okay. So most of this is just product mix and less on the utilization charges. You have kind of maybe a baseline of what those charges are expected to be.

Well, yes, I mean, the mix impact is kind of -- is a larger effect than to the less effect extended is the utilization, I mean, factory absorptions.

Okay. Very good. And then maybe just touching, on the script, you noted that there was about a $3.5 million customer deposit refund. Just kind of curious how you're seeing customer behavior and maybe talk about your order cancellations and backlog, just how that's kind of trending, especially we've kind of gotten into October and November here?

Okay. Sure. Yes, I mean, we incurred about $3.3 million in net refund of customer deposits. As you recall, I mean, we first received some customer deposits and probably back to about a year ago or so -- I mean, those customer deposits normally require -- each year, we refund 1/3 or 1/4 of the deposits after they ordered certain amount from us. So this December -- September quarter expected we started refunding. And at the same time, actually, in the September quarter, we also received some customer deposits. I mean, net-net, the net effect was $3.3 million. In terms of backlog, yes, I mean, recently, customers have been adjusting orders in backlog. I mean, these orders for some products decreased and some increased. I mean, overall, the total backlog has been adjusted downwards. I mean, also the mix dynamics changed quite a bit, so which in turn caused us to shift our production schedule quite a bit. So our December quarter's guidance reflects those mix dynamic changes.

Okay. Very helpful. And then 1 just -- last one for me, if you don't mind. I guess, on the visibility into the channel, as you think about just kind of across the board, you got a lot to go to disty. How comfortable are you kind of with the level of inventory out there? And how confident are you in your visibility there?

For ourselves, I mean, our disty inventory is still at kind of a lean position. So actually, our disty inventory is still below our targeted range of 2 to 3 months. So this inventory correction is mainly occurred at an ODM, OEM or even at the retail level. So for our own disty inventory is still relatively at a comfortable level.

Our next question comes from the line of Craig Ellis with B. Riley Securities.

Nice job navigating a tough environment in that fiscal first quarter. I wanted to get into a little bit more detail on that last question regarding inventory and maybe take a look at it on a segment basis. Can you just characterize how you see inventory downstream, whether it's in the channel or maybe at some of your direct ship customers and not asking for customer names with the question, but just trying to get a sense for what the gives and takes are and where inventory might be relatively higher or lower across Compute, Consumer, Communications and Industrial and Power Supply?

Sure. Craig, and good to talk to you. So we see inventory correction, particularly affecting kind of consumer-facing applications, specifically PCs. I mean, this is where the bigger inventory correction we see taking place and at least for the current outlook. So, it's throughout the supply chain, and we are also controlling the disty inventory, but there's also inventory at the ODM and at the OEM that they are working through. So over there, it's probably a little more pronounced. On the smartphone side, there also is some impact there. But in general, we're doing fairly well at the U.S. phone makers, especially in their premium models. So in those areas, we're still supporting and shifting our support to grow with them. So I think PC is probably the bigger area of inventory correction, some smaller degree in the smartphones and especially the low- to mid-tier is more affected. And yes, those have been the main ones.

Got it. And as we look ahead beyond the fiscal second quarter to the fiscal third quarter, one of the dynamics that always impacts things is the timing of Lunar New Year and some of the product builds around that, and it's a pretty early occurrence this year, in the third week of February. So the question is this, to what extent are your customers saying that some of the build demand related to that would be pulled into fiscal 2Q? And to the extent that it is, how does that impact the way you're starting to think about fiscal 3Q? Do you think that fiscal 3Q would behave seasonally? Or where would the timing on some of that component pull give it more of a sub-seasonal bias?

I think at this point, first of all, the seasonality is back, we haven't seen that turn or hurt that term too much in the past in a couple of years. And going -- and we are expecting the third fiscal quarter to start to be a lower season in general, just as it normally is, whether there's a pull in, I think we'll see more towards the end of this current quarter in terms of whether there will be a pull in for there. But normally, that's the third fiscal quarter is a shorter quarter, not only for our customers, but also for us, too. We also planning to do -- have maintenance and February is the shorter month, typically, that is a lower season for us. But in terms of the actual dynamics with whether our customers have pulled in, and we'll see closer to the end of this quarter.

Yes. And you typically will do fab shutdowns or maintenance activity during Lunar New Year. Is that correct, Stephen?

Yes. We usually try to time in around then. It makes sense, too.

Yes. And then lastly, and I don't know if this is one more for you or for Yifan. Can you just characterize the pricing environment that you're seeing out there and that's starting to come into backlog? Is it holding up as firmly as what we saw in mid- to late-2021 and early 2022? Or are we starting to see some of the Tier 2 players out there get more price competitive? And to what extent may or may not that be impacting the pricing that AOSL's realizing in its portfolio?

Well, yes, I mean, September is in the same -- similar situation. But having said that, given the current inventory correction and the slowdown of the overall demand and I mean, some other factors like stronger dollars. And then -- I mean, all those things could expect the environment to turn to more competitive, I would expect.

Got it. That's helpful, Yifan. And then lastly, I appreciate that having invested $100 million in the Oregon fab expansion that the company and customers were going to light things up, but given that we are in a pretty meaningful inventory correction, I am a little bit surprised that the company plans to start production in the fiscal third quarter. So can you just walk through some of the considerations around firing up that capacity, given the demand backdrop that we have and the extent to which the output that you're considering now has changed up or down versus what you might have been thinking about 3 or 6 months ago?

Sure. We are still going full steam ahead with our expansion of our 8-inch fab. And just remember that our 8-inch fab is our internal fab, and we actually develop most of our new technologies do originate in that fab. And so, even as of today, that fab is still fully utilized. And some of our foundries, we aren't running to the full capacity. But our current fab is still running at full capacity. And when we can and we will be using the additional fab capacity once it comes online. So it can directly help and immediately help our output in the short-term. So I think this capacity is very much needed. It is geared towards our more higher performance products in general. The products that are hot now are coming from that fab.

Yes, then, I appreciate the point on doing some foundry and sourcing when you get that capacity.

Our next question comes from Jeremy Kwan with Stifel.

Yes. A question on the -- a follow-up question on the pricing questions from earlier. Can you give us maybe more detail or color on what you're seeing in terms of pricing on the discrete side versus the power ICs. I know power ICs probably tend to be a bit more stable. And not just on the ASPs to new products coming out, but maybe on a like-for-like basis. And along with that, I think last quarter, you mentioned some emerging local competitors. Can you just give us an update there on how much impact you're having on pricing?

Yes. So in terms of pricing, it does depend on the product force. The more differentiated product is the more leverage we have in pricing negotiations. So for the higher performance products, including much of the power ICs, it's a little bit less pressure, but it's not either, too. Power ICs are still used largely also in our PC business and which is seeing the inventory correction. So even there, we still have to be competitive, but it's less competitive pressure in general relative to more standardized products. Discretes also have their own spectrum of performance versus kind of standard products, too. So the higher-end, we can differentiate more, there's less competitors to compete against. But at the lower end, this is where we -- that's where the local players are starting to come in to be more aggressive, and we've seen more pressure at that end. So it depends on the product.

Great. And, I guess, maybe on the gross margin side, it sounds like the mix is having a larger effect than utilization. Is this a function of -- in the past when you've had customers on allocation, you optimizing mix margin. Is this a situation where you're now reallocating for utilization?

Yes. I mean, this -- right now, I mean, yes, in the past, when we had supply constraints in the short, we allocated more towards the higher-margin products. In the December quarter, because of the inventory correction, yes, we are seeing some product mix changes. So the change is unfavorable at this point. So right now, it is more impacted our margin, it is more impacted by the product mix.

Fair enough. And can you, I guess, help us understand maybe with the utilization question here. It sounds like you're still -- you're able to keep that relatively high. With the new capacity adds you're seeing there, is -- I guess, does it change anything in terms of maybe your longer-term gross margin outlook, maybe not your targets per se, but maybe what kind of trends we might expect over the next couple of quarters here as you kind of look out ahead and balance utilization with mix?

Okay. Sure. I mean, as Stephen just mentioned, our Oregon fab's expansion is more for those high-performance products. So those products are still in high demand. So we're confident that we can fill up the additional capacity quite well. In terms of margin impact, at this point, we would expect similar margins in those products would produce. So, overall margin impact probably more towards neutral at this point.

Got it. And one last question, if I could, before I jump back. Can you just give us an update on the Chongqing JV? How much flexibility do you have in maybe reallocating from the JV to Oregon if things -- is that a lever that you can pull in terms of the margin and utilization as you look out on the impact of the inventory correction?

Yes, the CQ JV is still providing similar wafers and assembly and test services to us. So they are in the process of raising additional capital from outside investors. In terms of pull back and anything back to our Oregon fab, right now, our Oregon fab is full. So we don't need -- we don't have room to take on more production. So right now, the JV is still producing at their previous level.

Thank you. There are currently no further questions in queue. [Operator Instructions]. As there are currently no further questions in queue, I will pass the conference back over to the management team for any additional or 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.

Thank you.

This concludes today's Alpha and Omega Semiconductor fiscal first quarter 2023 earnings call. Thank you for your participation. You may now disconnect your lines.