Alpha and Omega Semiconductor Ltd (AOSL) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Alpha and Omega Semiconductor, Limited, earnings conference call for the fiscal second quarter of 2011. My name is Sayid, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference call. As a reminder, this conference is being recorded for replay purposes.

At this time, I would now like to turn the presentation over to your host for today's conference, Mr. Ephraim Kwok, CFO. Please proceed, sir.

Thank you. Good afternoon, and welcome to the Alpha and Omega Semiconductor earnings conference call to discuss our results for fiscal Q2 2011, ended December 31, 2010. This call is being recorded and broadcast live over the Web and can be accessed for seven days following the call in the Investor Relations section of our website at www.aosmd.com.

I'm Ephraim Kwok, Chief Financial Officer of AOS. And with me this afternoon are Dr. Mike Chang, Chairman and Chief Executive Officer, and Yifan Liang, Chief Accounting Officer.

Earlier today we issued a press release announcing the financial results for our fiscal Q2 2011 ended December 31, 2010. The press release is accessible online at the Company's website.

We would like to remind you that during the course of this conference call, we will make forward-looking statements, including discussions of business outlook and financial projections for the third quarter of fiscal 2011. 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, including our annual report on Form 20-F. We assume no obligations to update the information provided in today's call.

Also, during this call, we will be making references to financial measures on a non-IFRS or non-GAAP basis. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we also provide. You can find a reconciliation of non-GAAP to comparable GAAP measures in our press release.

We would like to start this call by reviewing the results of fiscal Q2 2011, with business highlights, followed by discussion of our strategic plan for calendar year 2011 and our expectations for fiscal Q3 2011. We will then open up our call to your questions. Yifan Liang, our Chief Accounting Officer, will first report the results of fiscal Q2 2011, as well as explain the financial impact of our recent APM acquisition on this quarter's results. Yifan?

Thank you, Ephraim. As we previously announced on December 3, 2010, we acquired all of the remaining outstanding shares of Agape Package Manufacturing, Limited, or APM for short, that were not already owned by us. Therefore, our fiscal Q2 results included APM's financial results for the month of December 2010, with the months of October and November 2010 still being accounted for under the equity method of accounting.

With that, let me start with our P&L results. Revenue from fiscal Q2 2011 was $84 million as compared to $89.4 million in the prior quarter and $64 million in the same quarter last year. This quarter's revenue included $1.8 million of APM's revenue to third-party customers.

Power IC revenue was $15.6 million, or approximately 19% of total product revenue in fiscal Q2 2011 as compared to approximately 19% and 12% in the prior quarter and the same quarter last year, respectively. Our largest end market is computing, which accounted for approximately 60% of the total product revenue in this quarter.

Gross margin was 28.6% for the quarter, improved about 150 basis points over the prior quarter, primarily due to the one-month consolidation of APM, lower depreciation expenses, and a higher utilization of factory capacity, offset by full quarter's negative impact from wafer cost increases by our primary foundry.

After the APM acquisition, we completed an analysis of the useful life assumptions of certain factory machinery and facility equipment of APM and our own packaging house. Based on the analysis, we've adjusted certain useful life assumptions upward from 5 years to 8 years, effective in the month of December 2010. This resulted in a favorable impact to our income statement of approximately $0.5 million for the month of December 2010.

R&D expenses were $6.6 million for the quarter, including $0.2 million from APM as compared to $6.3 million in the prior quarter. As we discussed in the past, R&D expenses fluctuate dependent upon product and technology platform development.

During the quarter, we introduced a total of 44 new products as compared to 49 new products in the prior quarter. Our current product portfolio stands at over 776 products. We also obtained 14 newly granted patents and added 13 pending patent applications during the quarter. The total number of patents granted and pending was 323 as of December 31, 2010.

SG&A expenses for the quarter were $9.1 million as compared to $9.3 million in the prior quarter. The decrease in SG&A was primarily due to less professional service fees and less variable expenses related to sales. Gain on our equity interest in APM was approximately $1 million, representing the gain from the acquisition on a book value of the 43% equity interest we held prior to the acquisition.

Share of profit on our APM equity investment for the quarter was $1.2 million as compared to $0.8 million for the prior quarter. Net profit for the quarter was $9.9 million, or $0.41 per diluted share as compared to $8.9 million, or $0.38 per diluted share in the prior quarter, and $9.7 million, or $0.48 per diluted share in the same quarter last fiscal year.

On a non-GAAP basis, excluding share-based compensation and a one-time gain from the APM acquisition, net profit for the quarter was $10.2 million, or $0.42 per diluted share as compared to $10.5 million, or $0.45 per diluted share in the prior quarter, and $10.3 million, or $0.51 per diluted share in the same quarter last year.

The diluted shares outstanding during the quarter were 24.4 million shares as compared to 23.7 million shares for the prior quarter and 20.1 million for the same quarter last year. I want to remind everyone that the share count for this quarter included the one-month effect of 1.77 million shares that we issued for the APM acquisition, as well as the shares issued at the IPO. Comparing to last year, fiscal Q2 2010 did not include either the IPO shares or the APM acquisition-related shares.

Total share-based compensation was $1.3 million for the quarter as compared to $1.6 million and $0.6 million for the prior quarter and the same quarter last fiscal year, respectively. Depreciation and amortization expenses were $3.6 million for the quarter as compared to $2.9 million and $2.2 million for the prior quarter and the same quarter last fiscal year, respectively.

Moving on to the balance sheet, cash and cash equivalents were $114.4 million at December 31, 2010, reflecting the cash payment of $17 million for the APM acquisition as compared to $126 million at September 30, 2010. Net receivable was $42 million at the quarter end, including $5.7 million from APM as compared to $31.8 million at September 30, 2010.

Net inventory was $44.5 million at the quarter end, including $7.8 million of the inventory from APM, as compared to $30.4 million at September 30, 2010. The inventory in our distribution channel was slightly over 2 months, which is in line with our target model of 2 to 3 months in the channel.

Property, plant and equipment increased to $106 million at December 31, 2010, from $49.2 million at September 30, 2010, primarily due to the acquisition of APM.

Next I would like to discuss our foreign private issuer status. As we stated in our press release earlier, pursuant to the SEC requirements, we performed an assessment of our ownership structure as of December 31, 2010, and determined that we no longer qualify as a foreign private issuer under the applicable SEC rules. As a result, we will be required to comply with additional SEC reporting obligations as a US issuer beginning on July 1, 2011. Basically, we will be required to present our financial statement under US GAAP in our annual report on Form 10-K for the fiscal year ending June 30, 2011.

Accordingly, we expect to incur additional G&A expenses in the upcoming quarters, including costs for converting our existing IFRS financial statements to the US GAAP financial statements. We estimated such costs and fees are in the range of $1 million to $1.5 million.

Lastly, our Board of Directors approved a $25 million stock repurchase program in the prior quarter. As of today, we have not repurchased any shares under this program.

Next, our CEO, Dr. Mike Chang, will make some comments on our strategic plan for calendar year 2011. Mike?

Thank you, Yifan. I want to take some time this afternoon to talk about some of our major initiatives for this calendar year. First of all, I want to reiterate our strategic roadmap that will lead us to become the best full-service power solution provider.

Our Company was initially built on low-voltage MOSFET business, and a few years ago, we made a strategic investment to expand into power IC. During the early years of this development, we derived little to no revenue from power IC production. But now, our IC revenue accounts for nearly 20% of our total revenue and is expected to grow faster than our low-voltage MOSFET business. Furthermore, we expect our IC sales to contribute positively to our gross margin in the longer term.

During the past year or so, we have launched into the high-voltage MOSFET business in a modest way. Because of our excellent reputation and our track record in the low-voltage area, the reception to our high-voltage products was surprisingly positive. The move into high-voltage MOSFET was clearly planned as the first stage of our strategic roadmap to become the best full-service power solution provider. Accordingly, we intend to step up our R&D investment in high voltage during this calendar year.

As with our power IC investment a few years ago, the R&D spending will precede any meaningful revenue contribution. Therefore, we expect that R&D spending to approach 10% of revenue for the next few quarters before returning to our long-term model of 7% to 8% of revenue. We expect the high-voltage business will contribute about 10% of our overall revenue by calendar year 2012.

In addition, we will continue to invest in our low-voltage and power IC product lines by developing new technology platforms and improved manufacturability.

There are a couple of points I want to emphasize here. One, this is a part of our strategic roadmap to become the best full-service power solution provider. Secondly, we demonstrated success in the execution of our strategic roadmap, as was evident by our foray into power IC several years ago. We firmly believe that our intended investment in the high-voltage area will be successful and will further enhance our enterprise value.

Last but not least, on the marketing and sales front, we plan to launch two major initiatives in this calendar year. The power architecture is increasingly application-specific. To better serve our customers and to continue to gain market share, we will increase our staff in our application group. Secondly, we will invest more in our marketing efforts in China to take advantage of the growing strength of the domestic Chinese market.

Similar to our demonstrated success in R&D investments, we strategically invested in our marketing and sales efforts in Korea about three years ago, and now Korea accounts for approximately 20% of our overall revenues, and with Samsung being one of our 10% customers. We are determined to win in China, and we believe our investment there will pay off in the long run, as did our investment in Korea.

With that, I will turn to our CFO, Ephraim Kwok, for next quarter's guidance. Ephraim?

Thank you, Mike. Now let's discuss the outlook for the next quarter and beyond. For the quarter ending March 31, 2011, we anticipate our revenue to be in the range of $87 million to $92 million. Typically, the March quarter is sequentially down 5% to 10% from the December quarter. There seems to be a shift in seasonality this year. The December quarter came in at the low end of our guidance range; however, the March quarter is now expected to be flat to slightly up from the December quarter instead of the usual 5% to 10% decrease.

This may be due to the shifting importance of Christmas season versus Chinese New Year. In addition, the introduction of Intel's Sandy Bridge platform may also have some effect on this year's seasonality.

We currently expect that gross margin will be in the range of 29% to 31%. This takes into account the effect of our recent APM acquisition on our overall corporate margin. On a consolidated basis, we expect APM will add an additional $0.75 million per quarter to our R&D expenses. In addition, Mike has clearly articulated that we plan to accelerate our R&D investments during calendar year 2011, and we expect that R&D will reach approximately 10% of revenue starting in the June quarter.

We are confident of our corporate vision and our strategic roadmap. The execution of the third stage of our strategic roadmap at full speed in year 2011 is a deliberate action to build a strong and profitable full-service power semiconductor company. We believe that this will serve to facilitate our Company's growth at above industry rates, and equally important, to diversify our served end markets.

For example, we believe that our growth rate would have slowed significantly in the past several years had we not diversified our business beyond the PC computing market. While we might have some short-term pain relative to our P&L, we firmly believe that this is the right thing to do to build a long-term, profitable, full-service power semiconductor company.

As reported earlier by Yifan, as a result of our new status as a US issuer, we will have to convert our financial statements from IFRS to US GAAP and comply with additional SEC reporting requirements beginning July 1, 2011. Therefore, we expect to incur additional accounting and legal fees during the next two quarters in relation to this transition.

Taking all the aforementioned factors into consideration, we expect our operating income and our pre-tax income for the March quarter to be in the range of 10% to 11.5% of revenue, including approximately $1.6 million in share-based compensation. The diluted share count is expected to be approximately 26 million shares.

Let me summarize. The agenda for this year is clear -- grow aggressively, invest strategically, execute our roadmap, and build a strong company that will bring superior returns to all our stakeholders.

With that, we will open up the floor for questioning.

(Operator Instructions.) Tore Svanberg, Stifel Nicolaus.

This is Evan Wang calling in for Tore Svanberg. If I may start with a question about your end markets, so could you discuss a little bit about the visibility right now currently in your computing end market? You had mentioned that you saw some decline and the seasonality shift, and that in the March quarter, you may see some growth. Could you just talk a little bit more about that and about what you're hearing from your customers, their sentiments?

I think the industry, you guys probably know more than us from an overall industry standpoint. I don't think I have anything to add to that. But specific to AOS, the demand from all of our end markets is relatively strong. There is a shift in seasonality, as we reported. We came in, the December quarter within the guidance range, but obviously at the lower quartile, below 50% of the guidance range. What we didn't expect at that time during the last conference call is the shift in seasonality. And it seems to be fairly dramatic, as you can probably see from our guidance into the March quarter.

And also, could you talk a little bit about Sandy Bridge and how Intel's recent announcement in the design area with their chipset might impact you specifically?

I assume you're talking about the flaw that they reported?

Yes.

Okay. We currently believe that the impact on us and on the guidance that we give is minimal. And not that it will not have any impact, but it's minimal, given everything fitting into place where we are comfortable with our guidance at this point.

And also, shifting gears, looking forward into the March quarter, which of your end market segments do you believe will be likely to drive growth for you, considering the fact that they are all showing strong demand?

In the short term, there's not going to be a significant shift in the breakdown of relative end markets -- computing versus consumer versus all of our other markets. I think the breakdown is more or less the same in the short term. But obviously, we do expect it to change gradually throughout the rest of the calendar year.

My last question -- I'll get back in the queue -- is about your inventory. It looks like your inventory was up quite a bit this quarter. Was that due to your APM acquisition?

Yes. The total inventory was $44.5 million at the quarter end. That included the absorption of almost $8 million from APM. So if you want to look at us alone, you'd have to subtract out that $8 million, or $7.8 million.

And the rest is -- ?

So our AOS inventory did go up slightly, but it is expected, given the shift in seasonality as well as our expected demand in the March quarter.

Ross Seymore, Deutsche Bank.

This is Bob Gujavarty for Ross Seymore. I was just curious, how much of the Q-on-Q increase will be due to a full three months of APM? You mentioned you got $1.8 million in the December quarter. Approximately how much in the March quarter revenue guidance is from APM?

Yes, that's a fair question. In our guidance of $87 million to $92 million, let me try to break it down for you. The APM outside business is primarily service-oriented. So given the profile of the Chinese New Year, not much happened in the month of February, as you might imagine. So what we are putting into the number is somewhere in the $3.5 million to $4.5 million neighborhood.

And then just to get some idea about what is your capacity and CapEx guidance or range for the next maybe couple of quarters or maybe for the year? And how much CapEx did you spend in the quarter?

I think we look at CapEx on more or less of an annual basis. Sometimes it's bunched up related to the delivery of those CapEx. Right now, our thinking is we'll probably spend somewhere between $30 million to $40 million for the full calendar year.

And just one final quick one. Given the OpEx commentary you had, it sounds like in the short term, there's going to be a little bit of bump in SG&A in the March quarter. And then you get a bit of a tradeoff, with R&D going up in the June quarter, but perhaps coming, the SG&A coming down a little bit and still being able to deliver an operating margin of 10% or so. Is that the best way to think about it?

No, let me clarify a little bit. You were almost right. The SG&A is going to happen during this quarter -- let me just talk March and June. The SG&A is going to go up in the March and the June quarter, with heavier emphasis in the June quarter, because our compliance is basically as of July 1. So that's how we look at SG&A.

From the R&D perspective, let me break it down into three different buckets. The first bucket is obviously the current run rate of the Company. The second bucket is that I said in my script that we expected to add $0.75 million or thereabouts in R&D expense just for the APM entity. That's the run rate of the APM entity, because we do invest in the packing development.

And in addition, what Mike articulated would hit more heavily in the June quarter more so than the March quarter. And so for the June and September and December quarters, we would expect that investment of high voltage would kick in at full speed approaching 10% of revenue. Does that make sense?

Yes, that makes sense. Thanks.

Auguste Richard, Piper Jaffray.

A couple quick questions on the market. How is the availability of epi wafers and effectively pricing in the MOSFET market these days?

The epi market loosened up a little bit, and also, we made some strategic moves -- I shouldn't say strategic, more like tactical moves -- to build up a little extra epi wafer inventory. So for us, I would say that it's comfortable, but not loose.

And then in terms of pricing in the MOSFET market, how has the PC market been for you all?

I think the current environment is still relatively stable, with a little bit of downward pressure, but not as dramatic as we have seen in previous years -- at least for the moment.

And then can you talk a little bit about tablets and what your position is there and maybe your relative content to a notebook?

Well, the tablet content for MOSFET is definitely much lower, and so our products still primarily go into the notebook with a little bit to tablet. And also, we are trying to diversify and break into other aspects of the computing market, such as servers and touch.

And then, last one for me, I'll get back in the queue -- in terms of the TV market and the IC market, you've done well in the TVs. How are you doing broadening out amongst the OEMs in TVs and broadening out that power IC market?

We are very confident and encouraged by the trend of our design activities.

Okay. What does that mean? Are you picking up designs outside of TVs? You're picking more OEMs? You're picking up more SKUs within the OEMs that you're working with?

Okay, I'll let Mike answer that.

Let me answer that question. We are positioned in two fronts here. One is to increase our market share or current position. On the other hand, we also actively work other power portions for TV. So there's some more application here. And what makes the prospect, I cannot say at this moment there. A very exciting prospect.

Okay, so you are broadening the ITs that you use to address the TV market?

That's correct.

If I'm getting that right. Any socket ones at this point you want to at least give some color to?

I think it's too early for us to tell you anything there. The only things for the reason that we are trying to sample it.

Tore Svanberg, Stifel Nicolaus.

This is Evan again. I wanted to quickly ask you about your APM acquisition and whether there's any impact on your back end capacity. In other words, through this acquisition, does that reduce your need to expand your own internal back end that you had planned before?

I would not necessarily characterize it like that, because even before the full -- bear in mind, we already owned 43% before the full acquisition. And at the time, before the full acquisition and the consolidated results, we already accounted for something like 75% to 80% of APM capacity. So in other words, we already absorbed APM capacity as part of our regular business prior to this 100% acquisition. So I think that, as the Company grows, we will still have to invest in property, plant, and equipment, but we will look at our internal NEC capacity and APM capacity combined.

And then regarding your share repurchase program, is there any expiration date set on that program?

Not currently.

My final question is regarding China. With the Chinese New Year coming up, how is your visibility for the weeks after the New Year?

As I mentioned before, the current expectation is what our current expectation. We feel comfortable about that as of today.

Neil Gagnon, Gagnon Securities.

In the power IC area, your product line was maturing, and I think you were suggesting to us that about mid this year, the new product line would start to make a difference, or the increased growth in the product line. Could you address that, please?

Neil, this is Mike Chang. Let me address the issue, the area. I'm going to say that I'm not sure, because that is continually evolving because of the new requirements there, we still have to make analysis and see the new application status. Our (inaudible) is expanding, because that's one of ten areas we are thinking of putting there. And then yes, we will expand to other areas.

I think, Neil, if I read between the lines, I think you're talking about our previous discussion on a prior conference call about the margin profile of power IC. Is that what you're leading to?

No, Ephraim, I was really thinking about the ability of the power IC business to grow faster than it has recently.

Oh, we fully expect that power IC will grow faster on a couple of fronts. As a matter of fact, Neil, I concur with Mike that power IC is still in its infantile stage, I would characterize it, rather than maturing, from the standpoint that as Gus asked the question, we are --the first generation of products, a major win is in the consumer TV segment. What we're trying to do is several things. Number one, we're trying to increase our bill of materials within that segment by delivering and introducing new products. And secondly, we have a slew of new products that is targeted for new applications outside of the TV business.

Good. That's good.

Does that answer your question?

That's it. That's where I'm going. Okay. That's what's going to give you the ability to hopefully increase power IC at a faster rate than the rest of the business?

Yes, sir, yes, sir. And in addition to that, looking forward even further, we'll invest more of an accelerated basis on high voltage, and we also expect the high voltage would add to our revenue growth driver in 2012, as Mike articulated earlier. And high-voltage products also carry a more attractive margin profile.

The high-voltage area -- can you address how big a market that is, say, versus low voltage?

Huge. Mike, do you want to talk about that?

That area is huge for us. The area we are looking to, which you call accessible markets, we're talking about $1.5 billion.

Okay, all right. So it's a new TAM, going after a $1.5 billion market.

Yes. New sales for us.

Gus Richard, Piper Jaffray.

Yes, the last one for me. Just quickly, your gross margin's clearly having a nice lift here. One key, disaggregate the impact of mix in the current quarter and the acquisition of APM with the rest of it. And then secondly, how should we think about gross margins going forward? Will it be more volatile? Should it be at a higher average going forward? And how much higher should that average be?

Okay, I think that's a fair question, Gus. Let me clock it back a little bit and build it up. As you recall, during our last conference call, our guidance for the December quarter gross margin is actually lower than the September quarter, as you recall. Now, as it turned out, the December quarter, compared to the September quarter, is, shall we say, flattish without all of these new impacts. And what we expect is the depreciation changes will probably contribute about 150 basis points or so, and then the APM contribution, geography moving from a minority interest to the gross margin line would contribute another 150 basis points. So that's why we guided to the midpoint of 30%. So 27% plus 3%. Basically, that's how we come up with the 29% to 31%, being the midpoint at 30%. Does that help?

It does indeed. Now, can you talk a little bit, because your business has changed because you now have more fixed assets that are going to be filled on, so depending on the cycle, can you talk about the variability around volumes and revenues?

I think that the volatility of the gross margin might -- I want to use the word "might" -- might fluctuate a little bit due to seasonality. Of course, in the lower seasonal quarter, as it were, your factory may not be as fully utilized as would be otherwise. That's the extent that I would give guidance on that. But this year, we would actually normally expect the March quarter to be the low seasonal quarter, but it didn't turn out to be that. So that's why we guided the March quarter the way we did.

Okay, and just for reference, what's your capacity utilization at APM in the March quarter?

We do not report specific percentages of factory utilization. But needless to say that all of that is being taken into effect.

I'm showing no further questions at this time. I'd like to hand the conference back over for any closing remarks.

Okay, thank you, everyone, for attending this conference call on our fiscal Q2 2011 results and also outlook for fiscal Q3. And we look forward to talking to you in about a quarter or so when we report the next quarter results. Thank you very much, once again, for attending.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.