Alpha and Omega Semiconductor Ltd (AOSL) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Alpha and Omega Semiconductor Fiscal Q3 2017 Earnings Call. (Operator Instructions) As a reminder this call is being recorded.

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

Thank you. Good afternoon, everyone, and welcome to the Alpha and Omega Semiconductor's conference call for fiscal 2017 third quarter financial results. This is So-Yeon Jeong, investor relations representative for the company. With me today are Dr. Mike Chang, our CEO; and Yifan Liang, our CFO. This call is being recorded and broadcasted 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.

The earnings release was distributed by GlobeNewswire today, May 3, 2017, after the market close. The release is also posted on the company's website. Our earnings release and this presentation include 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'll make forward-looking statements, including discussions of 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'll turn the discussion over to our CFO to provide an overview of the third fiscal quarter financial results. Yifan?

Thank you, So-Yeon. Good afternoon and thank you for joining us. To begin, I will discuss financial results for the quarter. Then I'll turn it over to Mike, our CEO, who will review the company's business highlights, and I will follow up with our guidance for the next quarter. Finally, we'll reserve time for questions-and-answers.

Revenue for the March quarter was $93.3 million, down 1.5% sequentially and up 12.4% year-over-year. Demand for our new products continued to show strong momentum during our typically lowest season.

In terms of product mix, MOSFET revenue was $70.8 million, an increase of 1.4% from the prior quarter and up 11.5% from the same quarter last year. Power IC revenue was $19.3 million, down 11.7% from the prior quarter and up 18.8% from the same quarter last year. Service revenue was $3.2 million, as compared to $3 million for the prior quarter and $3.3 million from the same quarter last year.

In terms of segment mix, this quarter's Computing segment represented 41.1% of the total revenue; Consumer, 22%; Power Supply and Industrial, 19.7%; Communications, 13.6%; Service, 3.4%; and others, 0.2%. Gross margin was 24.3% for the March quarter, as compared to 23.3% in the prior quarter and 19.7% for the same quarter last year. The increase in gross margin quarter-over-quarter was mainly driven by the new product contribution and improved product mix.

Operating expenses for the quarter were $19.7 million, compared to $19.3 million for the prior quarter and $16.4 million for the same quarter last year. The higher operating expenses quarter-over-quarter were primarily due to the headcount increase in R&D and sales and marketing functions to support our expected business growth.

Income tax expense was $0.5 million for the quarter, compared to $1.1 million for the prior quarter and $1.2 million for the same quarter last year. The decrease in income tax expense quarter-over-quarter was primarily due to the release of previous reserve after the expiration of applicable statute of limitation.

Net income attributable to AOS for the quarter was approximately $3.6 million or $0.14 earnings per share, as compared to $0.11 earnings per share for the prior quarter and $0.06 a loss per share for the same quarter last year.

Non-GAAP EPS attributable to AOS for the quarter was $0.21 earnings per share, as compared to $0.18 earnings per share for the prior quarter and breakeven for the same quarter last year. Non-GAAP EPS excluded the effect of share-based compensation expenses of $1.7 million for the March quarter as compared to $1.6 million in the proper quarter and $1.2 million in the same quarter last year.

We continue to generate a positive cash flow cash flow. Cash flow from operations was $11 million for the March quarter, compared to $8.8 million for the prior quarter and $1.7 million dollars for the same quarter last year. EBITDAS for the March quarter was $12.6 million compared to $12.2 million for the prior quarter and $8.1 million for the same quarter last year.

Moving on to the balance sheet, we completed the March quarter with cash and cash equivalents balance of $116.2 million, including $7.2 million balance at our Chongqing Joint Venture, as compared to $122.8 million at the end of last quarter and $78.9 million a year ago.

Net receivables were $22.5 million, as compared to $24.5 million at the end of last quarter and $32 million for the same quarter last year. Day sales outstanding was 35 days for the quarter, same as compared to the prior quarter.

Net inventory was $73.3 million at a quarter end compared to $70.2 million for last quarter and $67.9 million for the prior year. Average days in inventory were 92 days for the quarter compared to 87 days in the prior quarter.

Net property, plant and equipment balance was $126.1 million, as compared to $122.7 million for last quarter and $112.5 million for the prior year. Capital expenditures were $17 million for the quarter, including $12.2 million related to our Chongqing Joint Venture, mainly driven by the down payment for the construction work that started during the March quarter. The remaining balance of $4.8 million was spent on our own capacity expansion to open up some critical bottleneck.

With that, now I would like to turn the call over to our CEO, Dr. Mike Chang, who will provide the business highlight for the quarter. Mike?

Thank you, Yifan, and good afternoon. AOS delivered another outstanding quarter with improved profitability against the lowest seasonality during the March quarter. Our quarterly revenue of $93.3 million was close to the high-end of our guidance and up 12.4% from the same quarter a year ago. More importantly, we have achieved a pro-forma earnings per share of $0.21, which is 11% higher than the pro-forma earnings we reported during the last high season in the September 2016 quarter. The enhanced profitability was driven by gross margin expansion mainly through a favorable product mix.

We posted the eighth consecutive quarter of gross margin growth, which we believe validates our business strategy and successful product executions. During the early stage of our recovery, we sharpened our strategic decision to focus on market-driven R&D investments. We implemented these by building upon our core competencies in

engineering and manufacturing to develop versatile technology platforms adaptable to a wide range of applications. I am pleased to see that our new product introduction is progressing well and is contributing to the revenue and gross margin lines.

We continued to develop a healthy pipeline of new products. And our products are gaining traction at a diverse customer base. I'm looking forward to updating you on product activities as new opportunities continue to take shape.

Before I touch upon our segment report, let me take a few moments to comment on our supply situation. While we have limited control over the constraints at third-party foundries, we are taking pro-active and deliberate steps to support our customers and prioritize our business. We are making good headway in easing the supply constraints.

Some key tools are being delivered and installed during the June quarter, which will open up additional capacity in our Oregon fab. We are also expediting some transfer activities from third-party foundries to our own fab. We expect these actions to gradually alleviate capacity constraints starting from the September quarter.

Now, I will review our performance in each business segment. First, Computing segment. It represented 41.1% of the total revenue in the March quarter. We posted a 5.5% sequential increase and 27.0% growth year-over-year. The increase from a year ago was driven by the higher BOM content, market share gains, as well as [SAM] expansion into new applications.

Looking ahead, as Kabylake is just starting to ramp, the demand for Skylake products remains strong. In addition, we are seeing developing strength in our new products for Vcore applications for high-end notebook, gaming notebook, and workstations. By expanding market share and the shipments of new products, we expect to see a healthy growth in our Computing segment in 2017.

Second, Consumer. It was 22% of the total revenue. It decreased 14.6% sequentially and

down 8.6% compared to the prior year. The decline was greater than the seasonal norm as this segment is more exposed to the wafer shortage from third-party foundries that are operating at a full capacity. As the increasing shipments of the new products from our own fab are expected to offset the supply shortage impact, we anticipate the Consumer segment revenue to start to improve from the June quarter.

Third, Power Supply and Industrial segment. It was 19.7% of the total revenue, which was down 7.5% sequentially and up 0.6% from the last year. The flattish revenue year-over-year was due mainly to the product mix management. Under the tight supply environment, we have been more selective about incoming orders and allocation to optimize our portfolio. With the additional internal capacity expected to come online starting from the September quarter, we anticipate to increase the shipments of growing applications to meet customers' demand. We expect this segment to gradually improve through 2017.

Lastly, our Communications segment delivered strong results. The revenue was 13.6% of the total revenue, representing a growth of 12.2% sequentially and 44.7% year-over year. The upsurge in revenue was fueled by the increased shipments of the AlphaDFN products. Our ultra thin AlphaDFN products enabled us to further penetrate the customer base in smartphone battery management applications. These results not only exemplify the advantages of our technology but also represent clear signs of success for our mobile strategy.

As mobile application is entering its high season, we expect the demand for our AlphaDFN product line and the surge protection product line to continue to rise for the second half of 2017. Additionally, we anticipate growing shipments of telecom networking products bolstered by solid demand for the superior performance of our medium voltage, MOSFET.

With the initial success of new product introduction, we have demonstrated the healthy earnings leverage with our business model. We believe that our business model can produce even greater earnings potential as we are entering into emerging new product cycles and to generate higher revenue. The entire team at AOS continues to put forth the best effort to create robust demand by investing in differentiated technologies and introducing market driven new products, which we believe will further propel our growth and profitability.

Now [I'll let] Yifan, our CFO, to give you the guidance for June quarter. Yifan?

Thank you, Mike. As we look forward to the fourth quarter of fiscal year 2017, we expect our June quarters revenue to be in the range of $95 million to $99 million. This reflects the supply constraint impact that Mike discussed earlier: GAAP gross margin to be approximately 24.5% plus or minus 1%, GAAP operating expenses to be in the range of $19.8 million plus or minus $1 billion, tax expenses to be about $1 million to $1.2 million, loss attributable to non-controlling interest to be around the $1.2 million to $1.3 million, our share-based compensation to be in the range of $1.6 million to $1.8 million. As per our regular practice, we are not assuming any applications to update this information.

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

(Operator Instructions) And our first question comes from the line of Craig Ellis from B. Riley.

Thanks for taking the question and congratulations on the very good execution in a tight supply environment, guys. My first question is regarding the supply dynamics and the company's specific actions that are being taken. It seems like there's potential for material incremental capacity to be available to the company in the September quarter. The question is would that be sufficient to allow the business to grow in the range of seasonal norms, which would typically be about 5% to 6% quarter-on-quarter? Or would there not be sufficient capacity to have a more seasonal quarter?

Sure, Craig. Right now, yes, overall supply situation is pretty tight from the third party foundries perspective. We are taking proactive steps and would be investing more in CapEx and then on those machines on coming in right now as we speak. We'll install them, we would expect that, yes, gradually starting from the September quarter we can see a higher production output. I would expect, yes, we can support our normal demand on the seasonal basis, and we can support our customers. Our new products are showing pretty strong momentum at this point.

My second question is also on revenue, but it's a little bit longer term in nature. Mike, it was very useful to get your take on the dynamics in each of your end markets. It sounded like from your commentary the way you framed the PC business is that might be your fastest growing business in calendar '18. But I was wondering if you could help fill in behind that or correct me if I'm not correct in inferring that, that would be your highest growth area boiled down. How would you rank the end markets from a growth potential standpoint for calendar '17?

Actually, our highest growth area is in the mobile section, and the computer segment there as we made in the report a while ago is a combination of BOM increase and the SAM expansion as well as our share expansion, too. So it's a combination.

Okay. And then what about the consumer and the industrial businesses? Would you expect those to grow this year? And can you distinguish the relative growth between the two?

The consumer area, unfortunately, was suffered the most due to the supply constraint, mainly because some of the product nature over there have some disadvantages because there are some few -- there's a core package you saw and you show to anyone, you're going to show the whole thing, okay. So this has a [bigger] flavor, you understand it, okay.

However, as we expand our internal capacity, some of this will be overcome as soon as from June quarter, yes. For industry, what's there, in the time market there, it's skewed the product mix management or control to optimize our portfolio.

That's very helpful. Thank you. The last question before I jump back in the queue is for Yifan. Yifan, the business has done an unusually good job, raising gross margins, fairly evenly over the last four quarters about 100 to 150 basis points per quarter and that's despite in the most recent quarter the tightness that's been encountered in terms of supply.

Can you provide some color on what the biggest drivers for that expansion have been? And as we look forward through 2017, to what extent in your view can those factors contribute to a further rising gross margins as we go through the year? Thank you.

Okay, sure. Yes, we posted the eighth consecutive quarters in gross margin expansion in the March quarter. We have been consistently loading all the new products. The major contributions that are already part of this expansion, was from utilization. Right now, it's more contributed from the product mix and the new product contributions.

Going forward, yes, I would expect we'll continue to develop new products and improve all the manufacturing efficiencies, and those new products will continue to contribute. We [have] given the near-term to mid term gross margin guidance on conference. And so we're targeting mid 20% range for the near-term and mid term. For the long-term, yes, our target is 30% of the range. So we'll continue to execute on that plan.

Is there a revenue level that you believe the business needs to be running at to get to the 30% target?

Yes. And I would expect that the revenue level will be much higher, but we got to 500 million to 600 million range because in our way our new products would contribute proportionally much larger to the gross margin line.

Right now, I mean, we are doing mix management. So, right now, that mix management contributed some to our gross margin improvement also. As we have more capacity on line, we'll again focus both on the business and the revenue growth and the gross margin. Our ultimate goal is to improve our EPS. That's our major goal.

Sounds good. So 125 million to 150 million is the level where we might see 30%. Thanks, guys. Good luck.

(Operator Instructions) And I'm not showing any further questions over the phone line.

Okay. This concludes our earnings call today. Thank you for your interest in AOS, and we look forward to talking to you again next quarter.

Well, thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect.