Alpha and Omega Semiconductor Ltd (AOSL) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Alpha and Omega Semiconductor Fiscal Q4 2017 Earnings Call. (Operator Instructions) And as a reminder, this conference call is being recorded.

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

Thank you. Good afternoon, everyone, and welcome to the Alpha and Omega Semiconductor's Conference Call for Fiscal Fourth quarter and Year-end Financial Results. Our fiscal year ended June 30, 2017. 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 7 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, August 9, 2017, 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 the 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 Yifan, our CFO, to provide an overview of the fourth fiscal quarter and the fiscal year 2017 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 and for the fiscal year ended June 30, 2017. Then I'll turn the call over to Mike, our CEO, who will review the company's business highlights. After that, I will follow up with our guidance for the next quarter. Finally, we will reserve time for questions and answers.

Revenue for the June quarter was $98 million, an increase of 5.1% from the prior quarter and an increase of 7.2% from the same quarter last year. Our diversified new products continue to show growing momentum.

In terms of product mix, MOSFET revenue was $76.8 million, up 8.4% sequentially, and up 10.8% year-over-year. Power IC revenue was $18.2 million, down 5.6% from the prior quarter and down 5% from a year ago. Service revenue was approximately $3 million as compared to $3.2 million for the prior quarter and $2.9 million for the same quarter last year.

Regarding the segment mix, the June quarter's Computing segment represented 40.9% of the total revenue; Consumer, 24.6%, Power Supply and Industrial, 17.9%; Communications, 13.3%, Service, 3.1%; and others, 0.2%. For fiscal year 2017, revenue was $383.3 million, up 14.2% from last fiscal year. Gross margin for the June quarter was 25.6% as compared to 24.3% in the prior quarter and 21.3% for the same quarter last year. The increase in gross margin quarter-over-quarter was mainly driven by the improved product mix.

For the fiscal year 2017, gross margin was 24% as compared to last fiscal year's gross margin of 19.6%, representing an increase of 440 basis points. The increase in gross margin year-over-year was primarily due to the better product mix and higher utilization. Operating expenses for the quarter were $21.5 million compared to $19.7 million for the prior quarter and $16.9 million for the same quarter last year. The increase in operating expenses quarter-over-quarter was mainly due to the growing expenses associated with our Chongqing joint venture, higher professional fees and legal fees related to fiscal year-end audit and other business activities, increased R&D engineering expenses to support our growth, and higher share-based compensation charge.

Operating expenses for the fiscal year 2017 were $78.7 million compared to $64.3 million for the fiscal year 2016. During the fiscal year 2017, we strengthened our R&D, sales and marketing teams to support new product introduction and customer penetration. The variable compensation also increased along with improved business and financial results. We think that our current R&D and sales and marketing structure can support the further growth in our core business. On the other hand, we will continue to invest in our Chongqing joint venture to bring up the production.

Income tax expense was $0.8 million for the quarter as compared to $0.5 million for the prior quarter. Income tax expense for the fiscal year was $3.7 million compared to $4 million for the last fiscal year.

Net income attributable to AOS for the quarter was approximately $4.1 million or $0.17 earnings per share as compared to $0.14 earnings per share for the prior quarter and $0.08 earnings per share for the same quarter last year. Net income in the June quarter included $2 million share-based compensation charge as compared to $1.7 million in the prior year -- prior quarter. Net income attributable to AOS for the fiscal year was $13.8 million or $0.56 earnings per share as compared to $2.9 million of loss or $0.13 loss per share for the prior fiscal year.

Non-GAAP EPS attributable to AOS for the June quarter was $0.25 earnings per share as compared to $0.21 earnings per share for the prior quarter and $0.13 earnings per share for the same quarter last year. Non-GAAP EPS attributable to AOS for the fiscal year was $0.83 earnings per share as compared to $0.08 earnings per share for the prior year.

We continue to generate positive cash flow. Cash flow from operations was $13.5 million for the June quarter compared to $11 million for the prior quarter and $13.8 million for the same quarter last year. Cash flow from operations for the year was $42.6 million compared to $40.2 million for the prior fiscal year.

EBITDAS for the June quarter was $14 million compared to $12.6 million for the prior quarter and $10.3 million for the same quarter last year. EBITDAS for the year was $51.2 million as compared to $33.1 million in fiscal year 2016.

Moving on to the balance sheet. We completed the June quarter with cash and cash equivalents balance of $115.7 million as compared to $116.2 million at the end of last quarter and $87.8 million a year ago.

Net trade receivables were $28.4 million as compared to $22.5 million at the end of last quarter and $26.6 million during the same quarter last year. Day sales outstanding for the quarter was 32 days compared to the 35 days in the prior quarter.

Net inventory was $76.3 million at the quarter-end, up from $73.3 million for last quarter and from $68.8 million for the prior year. Average days in inventory were 92 days, flat as compared to the prior quarter.

Net property, plant, equipment balance was $139.4 million as compared to $117.3 million last quarter and $116.1 million for the prior year. Capital expenditures for the quarter were $14.8 million. Capital expenditures for the fiscal year were $55.6 million, including $30.8 million from AOS and $24.8 million from our Chongqing joint venture.

With that, 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, Yifan. Good afternoon. I am pleased to report further improvement in the June quarter with healthy sequential and year-over-year growth in revenue, gross margin and profitability as our turnaround is gaining strength. Driven by the strong demand for our diversified new products, AOS delivered record quarterly revenue of $98 million and exited fiscal year 2017 with great momentum and confidence, setting record revenue of $383 million. We also achieved the ninth consecutive quarter of gross margin expansion, led by a favorable product mix. The gross margin of 25.6% came in above the high end of the guidance range, marking 130 basis points sequential increase and a 430 basis points year-over-year growth. We post $0.25 earnings per share on a non-GAAP basis for the quarter, which brought a solidly profitable closing to the fiscal year 2017 with a non-GAAP EPS of $0.83.

The tight supply conditions remained in June quarter. We took proactive and solid steps to ease the capacity constraints by adding some key tools and the expediting transfer activities during the June quarter. While these actions are expected to gradually alleviate capacity constraints starting from September quarter, we observed that the rising demand for our products will outpace our capacity for the next few quarters. As the tight supply conditions prolonged, we start to see the cost increase in raw materials and the foundry service. Not all of these increases can be passed on to our customers in the spirit of mutual long-term partnerships with our customer. Nonetheless, we have been and will continue to effectively prioritize our business to manage our own inventories, channel inventories, customer demand and margin.

Now let's move to a detailed review of our business, beginning with Computing segment. It represent a 40.9% of total revenue in the June quarter. We post a 4.6% sequential increase and a 23.9% growth year-over-year. The increase from a year ago was driven by the BOM content gains with Skylake and the Kabylake, the SAM expansion into graphics cards and the Vcore application, and the share gain at the net book -- notebook battery applications. While the demand for our products continues to strengthen, we are trying to manage our mix to support our customers as well as to optimize our business. In fact, a big portion of the steady improvement of our gross margin came from this segment as we have been increasing the shipments of our high-value new products. As a result of ongoing mix management and the supply chain control, we expect the Computing segment to maintain the same level of revenue in the September quarter.

Second, Consumer segment. It was 24.6% of total revenue. It grew 17.5% sequentially and decreased 6.1% compared to the prior year. Our shipments to TV applications remain flat sequentially, due to the wafer shortage at the third-party foundries. However, the emerging shipments of our new products for various applications including gaming, drones and home appliance, all of which were developed and shipped from our own fab, resulted in a healthy sequential growth. We think that the tight capacity at third-party foundries will likely persist. Our own fab capacity that is just starting to open up, cannot expand fast enough to satisfy the demand of our new products. In accordance with our disciplined mix strategy, we expect to maintain a stable Consumer revenue level for the September quarter.

Third, Power Supply and the Industrial segment. It was 17.9% of the total revenue, which was down 4.4% sequentially and down 12.3% from same quarter last year, as we continue to be more selective about allocation. We recently introduced the high-performance aMOS5 High Voltage MOSFET platform. This will enable future high-voltage product offerings to fulfill the higher power density in smaller and more efficient packages. These new products will replace the traditional high-voltage products that tend to carry low margins. The initial revenue contribution from new high-voltage products addressing industrial power applications will start from the September quarter. We anticipate that this segment will demonstrate a healthy sequential growth.

Lastly, the Communications segment. The revenue was 13.3% of the total revenue, representing a growth of 2.6% sequentially and 25.1% year-over-year. Telecom networking products gained a further market share based on the strong demand of our medium-voltage MOSFET products. Our AlphaDFN products for smartphone battery management applications and the surge protection products are well positioned with key customers, and we continue to expect the demand for these products to rise during the second half of 2017. Accordingly, we expect to see a solid growth in this segment next quarter.

In closing, we are pleased with the improvements we have been making so far. In fiscal year 2017, we demonstrated the benefit of our turnaround strategy as we continue to generate strong financial results, strategically invest for future and adhere to our prudent capital management. Against the backdrop of tight supply, we are putting forth best effort to maintain a good balance between customer relations and the business optimization. Looking ahead, we are confident that we can continue to expand our business and improve profitability as we are seeing more sustainable growth opportunities.

Now let our CFO, Yifan, to give you the guidance. Yifan?

As we look forward to the first quarter of fiscal year 2018, we expect our September quarter's revenue to be in the range of $101 million to $105 million. GAAP gross margin is expected to be approximately 25.5%, plus or minus 1%. GAAP operating expenses are expected to be in the range of $22 million, plus or minus $1 million, as we expect the Chongqing joint venture-related expenses continue to increase to support our joint venture's development plan. Tax expenses are expected to be about $1.1 million to $1.3 million. Loss attributable to noncontrolling interest is expected to be around $1.6 million. Our share-based compensation should range from $2 million to $2.3 million.

As part of our normal practice, we're not assuming any obligations to update this information.

With that, we'll open the floor for questioning. Operator?

(Operator Instructions) Our first question comes from the line of Tore Svanberg with Stifel, Nicolaus.

This is Jeremy Kwan, calling for Tore. If I could just -- going back to the capacity challenge. Can you give us an update in terms of how much you anticipate you'll still need to spend in terms of the CapEx to alleviate that constraint? And how many -- can you give us an update as far as much you expect to spend in the next couple of quarters on that?

Okay, sure. Yes, right now, we are expanding our capacity, so we will see some initial ramp starting this September quarter. Gradually, we'd expect it can support more on our revenue. So for the fiscal year '17, we spent about $30 million in CapEx. For the next fiscal year, fiscal year '18, we expect slightly higher, probably $30 million to $35 million range. We still see our -- the demand on our new products still increasing, still outpace our capacity for the next few quarters. So we will increase our capacity for the next fiscal year.

Very good. And of the $30 million, does that include any of the China JV spending?

Say that again. Say it again, Jeremy.

For that $30 million for fiscal '18, the $30 million or $35 million, does that include any spending on China, the China JV?

Oh, no, no -- oh, sorry, yes, yes. I should clarify that. Yes, that $30 million to $35 million is for AOS-only CapEx. Joint venture is increasing. Yes, for sure, because we have capital injections from Chongqing funds and then from AOS. So we are progressing on our schedule for the Chongqing joint venture construction right now.

Great. Can you give us an estimate for the CapEx in the China JV, and when you might expect some initial volumes to start ramping there?

Okay. The initial capitalization for the joint venture is $330 million. That's including cash contributions and some equipment we will contribute and some IPs. So total CapEx, yes, we'll see the initial construction for the facility is around $78 million and $80 million range. And we're going to move some of our assembly and test equipment from our Shanghai facility to the joint venture as our capital investment contribution. And then, we'll also use some cash to purchase some equipment for our 12-inch fab in the joint venture. So timeline-wise, this construction started in the March quarter, the past March quarter. Right now, they're in the middle of the construction right now. We expect 1 year to 1.5 years to complete the facility. So basically, toward mid next year range. Then we'll start ramp initially for assembly and test, and then followed by our 12-inch fab.

Great. And a question for Mike. You mentioned on the Computing side, you expect flat quarter-to-quarter growth due to supply constraints. Can you give us an idea if you weren't constrained, what the potential could be in that segment of the business?

Well, that segment is quite broad, okay, from the load switch all the way to the Vcore, whatever, okay. So some of the product, our old product, was very low margin. And we want to actively replace with a higher-margin new product there. But then, I think, you hear from Yifan, okay, our own capacity, even though we invested $30 million this year, but you only [progressively], so the capacity will not catch up what we wanted. That's why we say we'll maintain a similar level next quarter.

Got it. Okay. And do you have an idea of how much proportion of revenue is new products versus, maybe, like older products from 3 years ago? Do you have a sense of that you can give us?

I think, offhand, I would say between 30% to 45%.

And our next question comes from the line of Edgar Roesch with Sidoti.

So my first question, you mentioned the benefits of product mix on the gross margin. Power ICs were actually, I believe, down in the mix. So is it fair to say that the real mix benefit was related to product allocations and kind of steering your products to the best potential margin opportunities by end market?

Yes. That's in -- also, in addition to that, and you saw our MOSFET product line increased pretty good. And then, we rolled out quite a bit of new products for that product line. For the new products, and they tend to carry at higher margins, so even though, yes, we are constrained on the Power IC product line, there's quite a bit of them on the -- from third-party foundries. So -- but overall, new product contribution plus mix management, yet, I would characterize as the gross margin improvement.

Let me, also, just comment a little bit because you mentioned the Power ICs, okay. Our power IC business or product line is quite unique. It's toward high-powered application. Therefore, our product mostly are the core packaging. With the controller and also the DMOS. In other word, for each of our product, there's a 3 or 4 parts inside there. And then, you can imagine the difficulty in getting all those 4 parts or 3 parts allocated, whatever, it's where this offering. We do have new products. It's just the way of -- it's just harder to manage them in this condition.

Right. Because of the co-packaging, I got it. And then, can you just help us quantify -- or directionally give us some help. Were more products on allocation in the fiscal fourth quarter versus the March quarter? Or about the same?

Fourth quarter, March quarter. Yes. I mean, right now, it's -- not all of the products are on allocation. Certain products. And then, we manage it. We factor in several considerations. Our own capacity, third-party foundries' capacity and the margin and the customer relationship and partnership, we consider all the factors. Since we can now ship them all, I assume, we will then do -- strategically, we'll allocate them. Our overall goal is to try to meet as much as our customers' demand as possible. And we don't want to see customers' line-down in those situations. So that's why we're managing our own inventory, channel inventory and the demand so -- to the best we can.

Yes, actually, the potential customer line-down is our top priority to support. We will make any effort to make sure that our customer not line-down.

And then, hearing from some other players in the power semi space, they saw some correction in the handset end market or the communications end market during the June quarter. You had a nice year-over-year increase, but sequentially wasn't -- it was a little more modest increase. Did you see any of that effect as well?

Yes. I mean, that's the conditions right now that we saw. In the first quarter or so, I would characterize as some kind of a demand and the kind of soft a little bit. And then, June quarter picked up a little bit. And so that's on the handset front. And for our own case, that -- we -- also, we gained some shares in the telecom and networking space, so -- but not entirely offset in the handset adjustment. But we do expect -- and we saw that picking up in the second quarter. So we do expect in the second half of this calendar year, our smartphone business starts to picking up.

And then, one last one. So thank you for the guidance on the noncontrolling interest portion of income statement. Do you think that it will be really until fiscal '19 before that flips from sharing the operating loss or expenses to sharing an operating profit? Or do you have any sense of -- could that be an FY '18 event? Or is that probably still beyond the scope of next year, or this coming year?

Well, I can -- this is -- that's partly way beyond next fiscal year. Because the next fiscal year is that, the one -- from the construction time line, almost toward the end of this -- the next fiscal year, we'll probably finish up the facility. So we'll start moving in equipment, install them, then ramp and that will take some time. So yes, I will say probably beyond fiscal year '19.

And our next question comes from the line of Tom Sepenzis with Northland Capital Markets.

I'm just wondering, in terms of the supply issues that you guys are facing or you're seeing in your end markets, do you have any view as to when that might end? Or when that might be alleviated?

This question bothers us every night, every day. And for whatever reason, this time -- this cycle seems a lot much longer than we used to ever see or even in my career. This moment, we see this -- at least, we're going to see no sign of softening. And some people say maybe to next -- middle next year, but of course, right now, everything is in speculation. So only we can see this. Okay. At the end -- towards the end of the year, probably still as a short supply, the condition.

Well, Tom, another factor is we do see a good demand for our new products. And so in the last year or so, we rolled out some new products which are gaining momentum. So the supply constraint, it's also on the other hand, because the demand is strong on our new products. That also is another factor, and yes, in addition to the overall supply situation on the market.

Sure. And then I think you mentioned during the prepared remarks that you're going to absorb some of the costs of the new -- or the rising ASPs for your customers. Did I hear that correctly? And if so, should we expect gross margins to kind of flatten out moving forward? Or will they continue to improve as the mix improves?

Yes. There are several factors in here that impact on the gross margin. I mean, one is our new products are -- is gaining momentum, so they carry out higher margin. Second thing is, yes, we are doing mix management in response to the supply constraints. And also, as Mike mentioned earlier, we are seeing cost increase in raw materials and foundry services. So all in all, if you put all the factors together, we expect our margin in the near term stay at this level, up and down a little bit, but, by and large, on the same level.

Great. And then, lastly, just housekeeping. I got all the rest, but I missed the percentage of revenues that was Power and Service.

The Service revenue is 3.1%.

And Power?

Is it Service? Service revenue, right, you said?

Right, and what was the Power? I missed the Power, too.

Power Supply.

Power Supply.

Power supply is 17.9%.

(Operator Instructions) Our next question comes from the line of Craig Ellis with B. Riley.

Yes. I'll just start off on the top line and touch on the capacity topic, but do it in a different way. So while the company is investing in capacity to increase outputs, can you quantify what the incremental revenue dollar of the capacity expansion is worth, say, over the next quarter or 2? Are we talking about another few million dollars in revenues that can be coaxed from the fabs? More than that, less than that, just give us some sense for what the incremental revenue benefit is from the investments that you're making.

Okay, sure. We've guided $101 million to $105 million for the September quarter. So for our guidance, we -- it's reflected in our capacity situation at this point, and yes, for the capacities that can support to that level. And then for the next few quarters, we'll continue to add in some equipment and we'll see -- and then to support next high season next year. So that's our plan.

Okay, that's helpful, Yifan. And then, a follow-up. Just an intermediate term revenue question. Given how tight capacity has been and given that you have high demand from your customers, would you expect that you could see an above-seasonal fiscal 2Q and 3Q, which are typically seasonally softer quarters, as your capacity and your shipments catch up with some of the demand that's out there for those higher-margin, new products?

I will say, probably, yes. And then, this year, kind of seasonality is kind of truncated by this supply situation and our new product penetration. So yes, we probably even would see less seasonality for this coming low season.

And then, lastly, on revenue before I move on to margins. The company has been on a very nice growth track. Clearly, you're doing what you can do to expand your capacity. Since we're at the beginning of fiscal '18, is it -- how should we think about the puts and takes with the company's longer-term growth, some near-term capacity constraints, but clearly, some strong demands, growing end markets, Does all that add up to in your mind, Yifan, a business that is capable growing mid-single digits or higher single digits. How are you thinking about how it nets out to the company on a longer-term basis as we think about top line growth potential?

Okay, sure. Last year, we guided -- for this fiscal year '17, we guided high single-digit growth, and we ended up and exceeded our goal. For fiscal year '18, I would expect that, yes, we'll probably can do around high single-digit, because we're off from a higher base right now. For the longer term, I would expect that we can do high single-digit as our target in our model, outperform the industry norm.

Okay, that's helpful. I appreciate that. And then moving on to gross margins. One topic that came up on another company's call earlier this week was just industry pricing. And their view was that, industry pricing has been improving. And I think we've seen that in other parts of the supply chain. So as we think about AOSL's gross margin, is it possible that there's some industry benefit that could accrue to gross margin over the next 2 to 4 quarters beyond the company-specific things that are happening with products? And if so, how material could that be for AOSL?

Well, for the pricing overall, I mean, we see less erosion currently. As Mike mentioned in -- the increase in the cost on raw material and wafer services, not all of them we can pass on to our customers. And we're doing some mix management on our side, but then we also treasure that long term on strategic partnership with our customers. So by and large, we really expect that our new products will continue to contribute to the gross margin improvement. I will think it will be offset against the increased material cost. And so by and large, for the next couple of quarters, we do expect our gross margin maintained at the current level.

Okay. So we're thinking longer term on that gross margin point, Yifan. While the company had -- I think it's around 400 basis points of gross margin expansion last year. This year, we'll start pretty flat, and then there's potential that supply picks up, maybe to do a little bit more depending on what happens with the external capacity. But we, probably, be looking at something that's half or less the gross margin improvement than last year for this year. Is that fair?

Well, there's -- well, again, last year's 400-some basis point improvement is a combination of new product and the mix management, plus utilization contribution. So right now, I said, going forward, utilization contribution is pretty much gone. Right now, our factories are full. So this contribution will only be from the new product contribution and the mix management. So -- and right now, we're facing raw material cost increase and third-party foundry services cost increases. So I will say, for the fiscal year '18, the gross margin improvement is probably much less than last year's 400-some basis points.

Got it. And then, lastly, just looking at operating expense. The fiscal fourth quarter was, I think, about $1.5 million above what I had in my model. Were there onetime items or nonrecurring items that were included in operating expenses in the quarter? And if not, can you just give us a breakdown of the things that caused the increase? For how long will those things be in the model? And are they more intermediate than longer-term impacts to your operating expense?

Okay, sure. As I mentioned in my script that -- I mean, in the June quarter, there's -- some increases came from the -- some professional fees and the legal fees related to some business activities. Also, I mean, R&D expenses fluctuate from time to time. I mean, that's also contributed to some. So by and large, if you look at -- in our fiscal year '17, our operating expenses increased and that's because we'd strengthened our R&D sales and marketing teams to support our new product introduction and the customer penetration. So then, our fiscal year results also indicated the benefit. At this point, we believe our R&D and sales/marketing structure is adequate for our core business growth for -- in next fiscal year. I mean, our goal is to grow our long term -- our business in long term. So then -- I mean, right now, we saw a lot of good business opportunities ahead of us. And so we want to invest now, and then to harvest later in the future. So that's -- I will say from this level, for AOS core business, will probably fluctuate around the current level. And then, of course, on the other hand, yes, we'll continue to invest in our joint venture, because we do need to bring it up to production next year.

And can you just quantify the incremental expenses from your first quarter guidance that will be needed in the joint venture up to production? Are we looking at an incremental $0.5 million, $1 million? What would be -- what would we be looking for in operating expense from here through fiscal '18 as that facility gets closer to producing?

Well, you can see from our guidance on the noncontrolling interest the loss attributable to noncontrolling interest. And so, they own 49% of the Chongqing joint venture's loss. So that, basically, you can see in the numbers. So in September quarter compared to the June quarter, that loss attributable to noncontrolling interest, right now based on our guidance, that would increase by 300k-some range. And so you can tell that, probably, our overall expense will increase around $600,000 range for the joint venture.

And I'm showing no further questions at this time. So that does conclude today's Q&A session. And I would like to return the call back to management for any closing remarks.

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

Yes. Thank you to you, all, and God bless you.

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