Alpha and Omega Semiconductor Ltd (AOSL) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Alpha and Omega Semiconductor Fiscal Third Quarter 2011 Earnings conference call. (Operator Instructions). As a reminder, this conference call may be recorded.

I would now like to hand the conference over to Mr. Ephraim Kwok, Chief Financial Officer. Sir, you may begin.

Thank you. Good afternoon and welcome to the Alpha and Omega Semiconductor Earnings conference call to discuss our results for fiscal Q3 2011, ended March 31, 2011.

This call is being recorded and broadcast live over the Web and can also be accessed for seven days following the call in the Investor Relations section of our website at www.aosmd.com.

I'm Ephraim Kwok, the Chief Financial Officer of AOS and with me this afternoon is 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 Q3, ended March 31, 2011. The press release is accessible online at the Company 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 fourth 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.

We assume no obligations to update the information provided in today's call.

Also during this call, we will make references to financial measures on a non-IFRS or non-GAAP basis. We use this 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 Q3, 2011, with business highlights, followed by a discussion of our strategic plan and our expectations for fiscal Q4, 2011. We will then open up our call to your questions.

Yifan Liang, our Chief Accounting Officer, will first report the results of fiscal Q3, 2011. Yifan?

Thank you, Ephraim. We posted a solid performance for the fiscal Q3, 2011, with record high quarterly revenue, gross margin and net income. Revenue for the quarter was $91.1 million, up 8.4% sequentially as compared to $84 million in the prior quarter and up 17.3% from a year ago, as compared to $77.7 million in the same quarter last fiscal year.

PowerIC revenue was $16.6 million for the quarter, up 3.8% sequentially and up 40% from a year ago. Our PowerIC revenue accounted for approximately 19.1% of the total product revenue in this quarter.

Our service revenue was $6.1 million for the quarter, as compared to $1.8 million for the prior quarter. The increase in service revenue reflects the fact that the December 2010 quarter included only one month of financial results of APM that we acquired on December 3, 2010.

Gross margin was 30.8% for the quarter, improved 220 basis points over the prior quarter.

R&D expenses were $7.6 million for the quarter, including $0.5 million from APM, as compared to $6.6 million in the prior quarter. As we discussed in our last earnings call, we are investing to expand and further strengthen our product lines for future growth.

SG&A expenses for the quarter were $9.6 million as compared to $9.1 million in the prior quarter. The increase in SG&A expenses was mostly due to the additional professional service fees we incurred related to the conversion of our financial statements from IFRS to the US GAAP and our continued efforts, as we discussed in our last earnings call, to enhance our sales and marketing resources, especially in important emerging markets such as China.

Net profit for the quarter was $10 million or $0.39 per diluted share, as compared to $9.9 million or $0.41 per diluted share in the prior quarter and $9.6 million or $0.47 per diluted share in the same quarter last fiscal year.

When comparing to the $0.41 per diluted share in the prior quarter, you may recall that the prior quarter's EPS included $0.04 per diluted share of non-cash, non-operating, fair value gain resulting from our APM acquisition.

On a non-GAAP basis, excluding share-based compensation and certain one-time items, net profit for the quarter was $11.5 million or $0.44 per diluted share as compared to $10.2 million or $0.42 per diluted share in the prior quarter and $10.3 million or $0.50 per diluted share in the same quarter last fiscal year.

The diluted shares outstanding during the quarter were 25.9 million shares, as compared to 24.4 million shares for the prior quarter and 20.6 million shares for the same quarter last fiscal year. Please note that share count for this quarter included the full quarter's effect of 1.77 million shares that we issued for the APM acquisition, as well as the shares issued at the IPO, while the share count for the prior quarter only included one month's effect of 1.77 million APM acquisition-related shares. Comparing to last fiscal year, fiscal Q3, 2010, included neither the IPO shares nor the APM acquisition-related shares.

Total share-based compensation was $1.4 million for the quarter, as compared to $1.3 million and $0.7 million for the prior quarter and the same quarter last fiscal year, respectively.

Depreciation and amortization expenses were $4.9 million for the quarter as compared to $3.6 million and $2.3 million for the prior quarter and the same quarter last fiscal year, respectively.

Moving on to our balance sheet, cash and cash equivalents were $112.3 million at March 31, 2011. Net trade receivables were $39.6 million. Days sales outstanding for the quarter were approximately 40 days, which were flat as compared to the prior quarter.

Net inventory was $53.7 million at the quarter end. Days in inventory were approximately 70 days. The inventory in our distribution channel was slightly over 2 months, which is at the low end of our targeted model of 2 to 3 months in the channel.

Property, plant and equipment increased to $115.9 million at March 31, 2011, from $106 million at December 31, 2010, primarily due to the expenditures on manufacturing equipment.

Next, as we discussed in our last quarter's earnings call, we will be required to file with the SEC as a US filer, beginning after July 1st, 2011. Basically, we will be reporting our financial statements under the US GAAP in our annual report on Form 10-K for the fiscal year ending June 30th, 2011.

Accordingly, we incurred additional $0.4 million during the March quarter and we expect to incur additional G&A expenses in the upcoming two quarters. We estimate the total cost and fees for this conversion are in the range of $1 million to $1.5 million.

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

Thank you, Yifan. First and foremost, we are very thankful that we were able to achieve record financial performance this quarter, especially in light of the fact that our March quarter has been typically a seasonal low quarter.

Our mission and strategic road map are clear -- to become the best full-service power solution provider. Our business model is also simple and straightforward -- one, consistent execution of our strategic road map; two, consistent revenue growth with profitability and cash flow from operations; three, investment in new technology and new product lines to drive further growth.

During the last earnings call, we mentioned that we would increase our R&D spending during the calendar year to fund a new high-voltage MOSFET product line, while maintaining our R&D investment in our current low-voltage MOSFET and PowerIC product lines. We also stated that we do not expect meaningful revenue contribution from this high-voltage line until calendar year 2012.

During this quarter, we introduced a total of 50 new products, including 11 high-voltage products as compared to 44 new products in the prior quarter. Our current product portfolio stands at over 836 products.

We also obtained 23 new granted patents and added 11 pending patent applications during the quarter. The total number of patents granted and pending was 334 as of March 31 this year.

There is no short cut to (inaudible) business. Our philosophy has been and will continue to be building a strong and durable company, one brick at a time. We are focused on our long-term goal of becoming the best full-service power solution company and we will not allow short-term thinking to compromise our stated goal.

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

Thank you, Mike, and thank you, Yifan.

Now let's talk about the outlook for the next quarter and beyond. For the quarter ending March -- I mean June 30th, 2011, we will be reporting our financial results in accordance to US GAAP.

We anticipate revenue to be in the range of $95 million to $100 million. We currently expect the gross margin will be in the range of 29.5% to 31.5%.

As we discussed previously, we plan to accelerate our R&D investment this year for new products and a new technology platform. We expect that R&D expenses will be incrementally up in the June quarter when compared to the March quarter. We expect our operating income and pretax income for the June quarter to be in the range of 10.5% to 11.5% of revenue, including approximately $1.5 million in share-based compensation. The diluted share count is expected to be approximately 26 million shares.

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

Thank you. (Operator Instructions). Our first question comes from Tore Svanberg from Stifel Nicolaus.

Yes, hi. This is Evan Wang calling for Tore Svanberg. Congratulations on a record quarter.

My first question has to do with your outlook going forward. I was wondering if you can comment on your visibility and comment on where you think the growth is going to come from and if there's any impact that's been taken into consideration because of the earthquake in Japan?

Okay. Let me answer that question in the parts that you presented. In terms of visibility at this stage, we are comfortable with our guidance. That would be the first comment.

The second comment, relative to the impact of Japan, Japan is -- accounted for a very small amount of our revenue currently, quite frankly, less than 2.5%. So, we don't see any direct impact from Japan relative to our revenue side of the firm, shipping into Japan.

However, there is anecdotal evidence that what happened in Japan may actually help us in other geographic regions as some of the Japanese suppliers are tight in their supply chain. And, as a result, because most of our supply chain is outside of Japan, we could incrementally benefit from that.

But, as you know, the third part of that situation is that there is a macro side effect that, quite frankly, I don't know the true answer to that macro effect.

Okay, great. Thank you for that. And also, if you could talk a little bit about your inventory, because I see that it's gone up quite substantially. Are you preparing for the -- a new product launch or if you can explain that a little bit?

Okay. The inventory has a couple of -- well, first of all, there is a couple of profile changes with respect to our Company after we acquired APM. Right now, almost 95% of the back-end capacity is internal right now.

So you could imagine that we have to stock up for -- we have to stock up raw material vis-a-vis bonding wire, lead frame, et cetera, in addition to the normal WIP inventory that we get from wafer. So that's point number one.

And point number two is that we are incrementally going into a higher-revenue season. So as a result, we have to prepare at the end of the March quarter, looking forward to the June quarter and the September quarter, relative to our raw material supply.

That makes sense. In that case, do you have a new range that you'd be comfortable, a new target range, in terms of days of inventory?

Yes, I think we are -- I think, off the cuff, the target range is somewhere between 75 to 85 days, which is more or less in line with companies that fit our profile, not a complete fabless company, but companies that kind of have certain manufacturing in house, like we do.

Great. Thank you very much.

Thank you. Our next question comes from Ross Seymore from Deutsche Bank.

Yes, this is Bob Gujavarty for Ross Seymore. One thing about -- I had kind of expected the APM side to come in at around $4 million for the quarter. It seemed to do a little bit better. For going forward, is $6 million a quarter a decent way to model APM or -- the services business?

Well, yes, I think the APM -- well, let's not -- I don't want to be talking APM, per se. Let's just call it service revenue. I think that's really the right way to look at it.

At the end of the day, our focus is really product. However, we made some commitments as we bought APM that we're not going to abandon their customers. So our service revenue would be ebb and flow, related to seasonality, but I would say the midpoint of about $5 million a quarter is kind of the right way to think about it, subject to normal seasonality.

Okay. Yes, fair enough. I was just curious, you mentioned a little bit about stocking up on some raw materials and those kind of things. Have you seen any cost pressure in terms of raw materials, inputs into your gross margin? Is that encompassing some inflation on the raw materials side?

Absolutely. I think that it is not unknown to the market that gold price, copper price and they're all going up and our lead frame that uses a metal compound has also gone up. All of the commodity goes up, including molding compound, which is basically plastic.

So that should be expected and also, we don't try to guess at what the commodity prices, we just buy based on our need and, actually, fortunately, we bought some extra bonding wires in anticipating the high season. So that's also why our inventory went up a little bit.

Great. And this final question, I was just curious how much, given the revenue growth is accelerating again, I was curious how much you spent in CapEx in the quarter and if your full-year budget has changed at all for CapEx?

Well, we spent approximately $15 million in capital and, to be honest, a lot of these are skewed toward the front end of the calendar year, because, as you know, you're trying to put in CapEx in anticipation of the higher season run rate.

And right now, we have no additional report to give you, given our overall thinking with CapEx. I think it is still about the $40 million to $50 million range.

Great, thank you.

For the calendar year.

$40 million to $50 million for the calendar year?

Yes.

Okay. And how much was it in the most recent quarter?

$15 million, roughly.

$15 million. Okay, great. Thank you.

Thank you. Our next question comes from Craig Ellis from Caris & Company.

Great. Thanks, guys. This is [Bret Perra] for Craig. Just to follow up on -- you mentioned that Japan might actually help you guys. Have you seen any changes in your customers' ordering since the earthquake or any hard evidence of this?

Did you say our customer ordering pattern?

Yes, or just how they're thinking about carrying inventory or anything along the lines of that?

We see a lot more urgency for pull-in and stuff, but currently our -- as Yifan reported earlier, our channel inventory is still quite lean at the low end of our 2 to 3 month model. So there is some anecdotal evidence of behavioral change.

Okay. And then along the same lines, what are you seeing in MOSFET pricing? Is that still staying stable?

Well, up until the date of the earthquake MOSFET pricing was going down, as the industry normally goes down on an annual basis. But it has to -- it seems to have stabilized after the earthquake.

Okay. Thanks, guys.

Thank you.

But if -- okay, go ahead.

Thank you. Our next question comes from Neil Gagnon from Gagnon Securities.

Good afternoon, Mike, Ephraim and Yifan.

Good afternoon, Neil.

The numbers that you came out with are somewhat better than most of your analysts were looking for and I'm wondering, on the gross margin side, what contributed to that and what does that suggest, going forward?

Okay, Neil, thank you very much. First of all, as we reported last quarter, there was some shift in our depreciation profile toward more industry norm of about, approximately 8 years on manufacturing equipment. That probably contributed about 100 basis points, but the rest of it has to do with product mix, as well as better cost profile now that 100% -- I mean, 95% of our back end is internal.

And I think, going forward, it would have to be -- it will shift gradually as the product mix shifts. However, the only caution now, Neil, as you know, that commodity prices going, shall we say, a little crazy and that has a little bit of a negative impact on the overall formula.

For example, we -- some of our products use gold wire and some of our products use copper wire. Both of them, both of those commodities have gone up significantly, as you know.

Okay.

So I think the bottom line is as our product mix starts to shift, our margin will slowly improve and that's why we basically guided flat margins in the June quarter compared to the March quarter for the reason of all of those things taken together.

Okay. Second question, you introduced 11 high voltage new products this quarter. How is the sampling going of those early products and what kind of feedback are you getting from your customers?

As we mentioned last quarter, high voltage requires a longer incubation period relative to design wins, because it's a very critical product. For example if -- God forbid, if you have a failure in high voltage stuff, it would cause catastrophic failures in certain systems.

So, so far we're getting good reception, but it is a slow, deliberate process on the part of our customers, as well as we are trying to gradually make sure those products (inaudible) internally as well as slowly ramp up in terms of the production supply side.

So, we said very, very clearly we want to set the proper expectation on the Street that high voltage will not start to contribute until calendar 2012 in a meaningful sense.

Right.

Ephraim, you want to add some comment on that?

Sure. Okay, the high-voltage area, people are much more cautious because if anything, failure can either cause fire or something else. So it's pretty slow and, of course, our new products introduced just in a few, so acceptance is right, but revenue-wise, have to wait.

Okay. Good. Thank you very much.

Thank you.

Thank you.

Thank you. (Operator Instructions). I'm showing no further -- actually, we do have a question from Kenneth Miller from Nokomis Capital.

Afternoon, gentlemen. Congrats on a good quarter.

I wanted to ask about your longer-term operating margin targets, I guess your intermediate-term operating margin targets. I believe you mentioned on the last call taking your operating margin down near 10% on a GAAP basis kind of later on in fiscal -- early in fiscal 2012, later on in calendar 2011, as you invest in the high-voltage products. However, your near-term margin appears to be higher than that.

Is it still your plan to take the margin closer to 10% in the kind of seasonally soft quarters in late 2011, early 2012?

Well, I think -- the result for March quarter is already out. I think you know what that is, it's about 12%, 11.9%. And then for the June quarter, we guided midpoint at 11%.

The reason why we said it very clearly in the previous conference call that in this calendar year our R&D spending is going to be ahead of the revenue contribution of a brand-new product line and I think we all know what that is about.

The second thing we made it very clear is that there is some -- what I would term, at least, one-time costs for March, June and September quarters related to this US GAAP conversion that you have to do it for the next couple of quarters, including the March quarter past. So that's why we kind of looked at it -- when I said 10% last quarter, I said at least 10%, so we are on the way of bettering that number.

But the idea is very simple. We want to generate growth, which we are doing right now, as we speak, as well as bring the profitability, at the same time, and reinvest some of that money into a new technology platform and a product line for future growth.

So, we are expecting, obviously, that as the high-voltage product line brings revenue and margin contribution, that midpoint of 10% to 11% would improve accordingly.

Okay. It also seems like your PowerIC revenue, up until about the September quarter, was growing noticeably faster than your discretes revenue. It seems like the last couple of quarters, your PowerIC revenues tracked more closely with your discrete revenue. Do you anticipate the PowerIC revenue re-accelerating in the near term, based on design wins or other kind of activity of your customers?

The answer to your question is a short yes. However, PowerIC, as you know, is a design-win business, so it's not a gradual, linear situation and I think I have discussed this in the past. It's sort of an annual design win and the people put you on that platform for the model year, so to speak, and then you go to the next one and the next one, that kind of a thing.

So, we are -- we have introduced a bunch of new products and also those things are being worked on and being designed in, so you will see some new stuff coming on board towards the end of this calendar year.

Okay, thank you very much.

Thank you.

Thank you. (Operator Instructions). I'm showing no further questions at this time.

Okay. Well, thank you, ladies and gentlemen, for your participation in our quarter conference call and we're looking forward to seeing you roughly about one quarter from now with the June quarter results.

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.