Alpha and Omega Semiconductor Ltd (AOSL) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Alpha and Omega Semiconductor fiscal second-quarter 2013 conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Ms. So-Yeon Jeong. You may begin.

Thank you. Good afternoon, everyone, and welcome to the fiscal second quarter of 2013 ended December 31, 2012, conference call for Alpha and Omega Semiconductor. This is So-Yeon Jeong, Investor Relations representative for the Company. I'm joined by Dr. Mike Chang, the Chairman and Chief Executive Officer; and Mary Dotz, the Chief Financial Officer and Corporate Secretary of the Company.

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

Let me begin this call by mentioning that we will be attending the Stiefel conference on February 5 in San Francisco; and the Piper Jaffray conference in New York on March 12.

The earnings release was distributed by the Globe Newswire today, January 30, 2013, after the market closed. The release is also posted on the Company's website. Our earnings release and this presentation includes certain non-GAAP financial measures. 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 provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release.

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 2013. 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 reference our recent and subsequent filings with the SEC. We assume no obligation to update the information provided in today's call.

Now let's hear from Mary, who will provide an overview of the fiscal second-quarter 2013 financial results. Mary?

Thanks, So-Yeon. Good afternoon, and thank you for joining us. I'm sure most of you have had a chance to review our earnings press release, so I'll focus on just the key points for the quarter in my comments. Then I'll turn it over to Mike Chang, our CEO, who will review the Company's business highlights. And I will follow-up with guidance for the next quarter.

As a reminder, the results we're reporting today are in conformance with US GAAP, except where indicated as non-GAAP measures.

Revenue for the December 2013 quarter was $89.4 million, a decrease of approximately 6.6% quarter-over-quarter; and an increase of about 11% from the same quarter last year. MOSFET revenue was $70.8 million, down 6% quarter-over-quarter. Our Power IC revenue was $12.9 million, down 11% quarter-over-quarter. And our service revenue was flat, at $5.7 million. The decrease in product revenue reflected the industry-wide slowdown and seasonality of our business, primarily in the computing and consumer areas. We experienced the largest regional decline in Taiwan, due to the continuing challenges in the PC market.

Computing was 52% of revenues, compared to 56% last year; and power supply was 11%, versus 6% of revenue year-over-year, reflecting our continuing efforts to diversify our end markets.

Our gross margin was 23% for the December quarter as compared to 26.7% for the prior quarter. The decrease in gross margin is primarily due to lower factory utilization as a result of reduced customer demand; and, to a lesser extent, changes in product mix.

Operating expense was relatively flat quarter-over-quarter, but please be reminded that our September quarter operating expense was favorably affected by a reversal of our variable compensation accrual, and the business tax refund received at one of our China subsidiaries. Our December operating expense was slightly down when compared to the same quarter a year ago, on an 11% higher revenue base.

Income tax expense was $1.1 million, reflecting an effective tax rate of 22.6% for the quarter, as compared to 18.6% for the prior quarter. GAAP net income for the quarter was $3.7 million, or $0.14 per diluted share, as compared to $7.9 million or $0.31 per diluted share for the prior quarter; but $1.5 million or $0.06 per diluted share for the same quarter last year.

The diluted shares outstanding during the quarter were 26.1 million shares, compared to 25.9 million shares for the prior quarter, and 25.4 million shares for the same quarter last year. Total share-based compensation expense for the quarter was about $900,000 as compared to $1.4 million for the prior quarter, and $1.5 million for the same quarter last year. Depreciation and amortization expense was $7.5 million for the quarter.

Moving onto our balance sheet -- we completed the quarter with cash and cash equivalents of approximately $91.9 million, as compared to $95.2 million at September 30 of 2012. Our net trade receivables were $43 million, and our days sales outstanding for the quarter were approximately 43 days. This compares to days sales outstanding of 28 days last quarter. The increase in days sales outstanding is primarily driven by the timing of billings and customer payments. Shipments were back-end loaded for the December quarter, driving the increase in receivables. There is no collection issue at this time.

Net inventory was $71.5 million at the quarter end, remaining relatively flat compared to the prior quarter. Average days in inventory were about 93 days for this quarter, as compared to 88 days for the last quarter. Our inventory levels year-over-year reflect the growth and wafer inventory from our fab, and the large number of new product we developed and introduced over this past year. We continue to maintain tight inventory controls and anticipate the days in inventory will decrease as our products gain further traction in the market. The channel inventory is stable, at the high end of our target range. Our net property plant and equipment decreased quarter-over-quarter, and we do not anticipate major capital expenditures this year.

Now I would like to turn the call over to our CEO, Dr. Mike Chang, who will provide the business highlights for the quarter. Mike?

Thank you Mary. Our December quarter results came at a lower range of the guidance we had issued in late October. We saw softening business conditions in all markets, but the weakness was most pronounced in the PC segment. Our revenue is up 6.6% sequentially, an increase of 10.8% year-over-year in the December quarter. In looking back at 2012, I am encouraged to see that we have achieved 3% growth year-over-year while the semiconductor industry is projected to fall about 5%. This is a meaningful for us, as we have achieved this growth amid a continuously deteriorating PC market, a segment from which AOS still derives about half of its revenue.

Our multi-year effort of diversification, which is well on its way to forging a path forward for business transformation. In pursuing our business strategy, we were able to take the computing segment down from 52% to -- 50% from 56% of our total revenues, while growing industrial and the power supply business from 7% to 13% in the December quarter year-over-year.

While we are seeing positive signs with improved bookings, the challenging market economy and the PC market conditions cannot be discounted. Therefore, we continued to persist in our diversification efforts and are further streamlining operations to optimize our business. We will continue to navigate through the changing market conditions with agility, and align our resources with the most promising opportunities.

Now let me share some details on our diversification efforts and the key business wins in the December quarter. First, following the successful design-ins and design wins, we've finally made a powerful strike in the smartphones market, with one of the world's largest mobile manufacturers. We have secured multi-million dollar business from this single customer. It is a really exciting breakthrough for us into the high-growth mobile segment. We were actively increasing our [bond] content and extending new opportunities to a wider customer base.

Second, the growth of our industrial leading technology platform has further accelerated our diversification. We have recorded numerous design wins with power supply products in industrial and telecom market of a major account. These products are also broadening our geographic footprint in emerging markets such as Brazil and India.

Third, I am very pleased to announce that we had a very exciting design win at a market-leading brand name Ultrabook program, with our new PairFET and Power IC products. Our PairFET technology offers significant advantages over existing discrete solutions, by shrinking the size and by increasing system power efficiency. The proprietary architecture of our new Power IC provides ultra-fast load transient response and a small solution size. We are greatly encouraged by our initial success in the fast-growing Ultrabook application.

Additionally, we have been successfully penetrating customers in industrial, power supply, portable and the game console market with our new best-in-class technology products; such as XSFET, Molded Chip Scale, AlphaMOS2, AlphaIGBT, and new DrMOS series. The accelerated release of these products was made possible by our Oregon fabs. Although the topline and gross margin contributions from these new products is still small today, I expect to see bigger contributions in the coming quarters.

During the recent quarter, we introduced 28 low-voltage products, 19 million medium-voltage products, 13 high-voltage products, and seven Power IC products. About 60% of these new products are targeting the industrial and power supply and advanced computing segment.

In addition, AOS is leveraging the thinner molded chip scale in a DFN packaging capability to further expand its presence in the portable market. We have expanded our 80-volt and 100-volt AlphaMOS medium-voltage product portfolio. Our device operates at a lower temperature than our competition, which improves overall system efficiency and reliability for our customers. These small footprint solutions give circuit designers flexibility in floor-space-critical telecom and networking applications.

We have launched the first product of a new family of Power Factor Correction devices, with a number of regulatory features and value-added functions for switch mode power supplies, LCD TVs, emerging LED lighting, and AC-DC adapters.

Looking forward to the March quarter, despite our strong design win momentum, the PC market is declining faster than expected. This further aggravates the soft March quarter [technologies]. While we have been taking action to improve our cost structure, including capital spending an operating expense, we've undertaken additional initiatives to streamline our operations to improve the productivity and the cost structure.

With this, I'll turn over to Mary to give the forecast.

Thank you, Mike. Now let's discuss the outlook for the next quarter. As we've all seen the continuing broad-based end-market weakness continue, our business environment remains very challenging across all continents, with the impact most pronounced in the PC segment in Taiwan. Our bookings are improving, but with Chinese New Year relatively late in the quarter this year -- February 10, compared to January 23 last year -- visibility remain somewhat low. Our seasonality -- seasonally slow March quarter is impacted further by the soft PC demand, resulting in a sub-seasonal outlook for the quarter.

Due to these factors, we expect our March quarter revenues to be in the range of $76 million to $80 million; and our gross margins to be in the range of 16%, plus or minus 1%, for the March quarter. We will reduce loading in our factories, which will adversely impact our margins, but will help control inventory. We are right-sizing our cost structure to address the challenging business environment, and realigning resources with our operations, our supply chain, and our foundry partners, which should help benefit future quarters.

We expect our operating expense to be in the range of $15 million to $16 million for the March quarter. And based upon our fixed rate tax structure in some of our various jurisdictions, our tax expense should range from $300,000 to $500,000. Our share-based compensation should range from about $1 million to $1.3 million.

With that, I'd like to open up the floor for questioning. Thank you.

(Operator Instructions). Tore Svanberg, Stifel Nicolaus.

Hi. Thank you. This is Evan Wang calling in for Tore Svanberg. I'd like to start with a question on your gross margin. Could you explain whether your fab is fully up in operations? Or is that bring-up still impacting your gross margin? And what could gross margin trends be like over the next few quarters?

Okay, sure. Thanks, Evan. Our fab, as you know, was going through its initial ramp over the past year of calendar 2012. And we did reach the point in that ramp-up where we did have full capacity. So what we are doing, this recent -- what we have done this recent December quarter, and then what we're going to do in the March quarter, is vary that production volume based on what our customer demand is. Now, keep in mind, the Company has historically used outside foundries, outside service providers. So one of the other facets of this ramp is that we are combining production that used to be completed in outside fab, and moving that also to our internal -- our own fab up in Oregon.

So we had, during the past calendar year, reached fully ramping of the Oregon facility. And then, based on the downturn that we described, we did have to take that production volume down, so we will modulate that volume based on how we see our demand. You know that our goal, as we've stated in various other forums, is to reach that 30% gross margin. But in the near-term, because of this underutilization, it is going to affect us, and we are not going to get there.

I see. And so are you producing all your wafers internally? Or what is the breakdown between internal and outsourced?

No, we are not producing them yet all internally. I would still say at least half of them are produced outside.

We never intended to produce the whole thing to inside.

Okay. And if I could ask a follow-up question on your revenue. You mentioned the visibility is low at this point. What kind of factors are you -- what kind of backlog or coverage -- backlog coverage or turns are you working with when you set this guidance?

So we have seen our improvements over the last few weeks in our bookings, so we are encouraged by that. Obviously, that's tempered by the continuing uncertainty in the PC market. But we do see positive bookings. We do have backlog to cover the lower end of our guidance. So those are the areas that we were looking at when we set guidance for the quarter.

Okay, thank you.

Evan, let me add a little bit, okay? What is encouraging us about the new booking is that, yes, we'll continue to see this PC area kind of in trouble there. However, our other areas, since our diversification after enough time the last few years, okay? A lot of areas are picking up. So that's very encouraging for us.

Okay. Great. Thank you very much.

Ross Seymore, Deutsche Bank.

Hi. This is Bob Gujavarty for Ross. I was curious how much was CapEx in the quarter? And do you have some idea of how it's going to trend over the next 6 to 9 months?

Sure. Our CapEx for the quarter was only a few million, and we actually --probably, I think, a couple of million. And we are anticipating that for the next calendar year, our CapEx should be less than our depreciation expense. Our depreciation was about $7.5 million for the quarter. So we should see a positive impact in terms of our free cash flow from our reductions in CapEx.

Okay. Fair enough. And also, you mentioned a little bit that the December quarter is a bit back-end loaded. Is your perception that maybe some of the orders the normally would've come in calendar 1Q got pulled into calendar 4Q, and that's part of the reason we are seeing this Q-on-Q decline -- it's just the timing of some of these orders?

You know, it's been interesting, because the typical seasonality patterns have been a bit choppy, then we did see the December quarter continue to slow down. But we did see shipments in the last part of the December quarter, so that was pretty encouraging to us. And since the bookings have continued in the first few weeks of January, I think it was just the flow that people were on.

Got it. Maybe final comment -- you suggested that the channel inventory is a little on the high side. Curious -- some other semiconductor companies have talked about channel inventories being relatively low, and that distis are cautious. Would you make that as a commentary on distis? Or is it that the OEMs are holding some of your inventory? Just curious of your take.

I would say, right now, that for us we usually model about a 2- to 3-month channel inventory. So we have been somewhat stable at the high end of that range. And I think it just speaks to the cautious nature of everybody out in the space right now. They want to have it available. They wanted have it at the disti, that they can call on and get delivery should the opportunity arise. But they are not really taking it past that. So though it is encouraging that it's stable, it still remains to be seen, then, how the rest of this is going to play out there.

Okay, thank you.

(Operator Instructions). Tore Svanberg, Stifel Nicolaus.

I wanted to ask you a follow-up question on cash flow. First of all, I don't recall you giving out the cash flow number -- if you could provide us with that. And also, given that your DSO went up, if your DSO has stayed typical, how would that have helped cash flow?

Yes. That's a great question, Evan. Cash flow from operations actually were negative of just about $1 million for the quarter. But then, if you look at the growth in receivables on our balance sheet, we actually grew by about -- I want to say $12 million or so. So a lot of that was tied up in those receivables.

But as we stand here today, towards the end of January -- because our customers are pretty darn good; they usually pay us, say, 30 to 45 days. So I've already got visibility in the payments that I've received thus far. So we've received most of that already. They've caught up. So you can translate that and say that that $12 million excess could've fallen into the earlier quarter.

Great. And then a follow-up question on the March quarter as you guided. It looks like, if I take the parameters you've provided, that you may incur a loss this quarter. Am I correct?

That's correct.

I was wondering if you can clarify whether -- if you see this March quarter could be a bottom, and whether your cash flow could still be positive in this March quarter?

Absolutely. If you look at the depreciation and amortization level that we've been carrying at about $7.5 million, then the stock comp expense of over $1 million, I am anticipating that the March quarter -- even though for a GAAP basis we'll probably show a loss, from a cash flow perspective we are still showing -- or expecting good results.

Because, remember now, we've got our inventory in house, which is pretty stable. We are reducing our capital expenditures quite a bit below what we have done historically in the last several quarters. Because, remember, last year we spent a lot in terms of CapEx on the equipment that we were ramping in the fab. So now we're just really seeing that depreciation expense flowing through. So you're not going to have that big of an impact on your free cash flow.

So although there might be a GAAP loss for the March quarter, which is what we are anticipating, I think that the cash should still stay strong. We also are continuing to pay down, remember, on that $20 million loan that we have received as well. So that will be paid off over the next couple of years.

Great. Thank you for the color. I just have one last question, then. Given that your guiding for revenue to decline in the March quarter, could you just give us a sense of how business might go in the new calendar year, assuming that macro is relatively neutral? Just want to see what sort of Company-specific catalyst there might be.

Mike shared with you quite a variety of great new products that we've been getting design-ins and design wins, and we have been ramping those products. But as you know, these things take time. And typically for us, the December quarter is down, and then the March quarter seasonally is down, even on top of that. But there's quite a bit of new product ramping in the pipeline.

And so I think you've got to take a big step back, too, and look at the whole global perspective in terms of the market. Everybody is expecting that the first half of the year is going to be down, and then the second half is going to be the recovery period. So I think that holds for us as well; albeit, like we said earlier, the March quarter tends to be the seasonally low quarter for us.

Often, in a way, we -- in March quarter, we see like a perfect storm. One, the March quarter is seasonably low; and then, market economy doesn't help; and the PC market is softer than we expect. However, in our diversification and new product design wins there, and ramping up there; so I think this is, to me, really is temporary.

Great. Thank you very much for the color. Thank you.

Thank you.

Thank you. I am not showing any further questions in the queue. I'd like to turn the call back over to management for any further remarks.

Well, I'd like to thank you all for joining us on the call today. And we look forward to reporting to you next quarter on our results. Thank you.

Thank you.

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