Alpha and Omega Semiconductor Ltd (AOSL) 2024 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for joining today's Alpha and Omega Semiconductor fiscal Q2 2024 earnings call. My name is Tia, and I will be your moderator for today's call (Operator Instructions) I would now like to pass the call over to your host, Steve Pelayo. Please proceed.

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2024 second quarter financial results. I'm Steven Pelayo, Investor Relations representative for AOS. With me today are Stephen Chang, our CEO and Yifan Liang, our CFO. This call is being recorded and broadcast live over the web. A replay will be available for seven days following the call via the link in the Investor Relations section of our website.

Our call will proceed as follows. Today, Stephen will begin business updates, including strategic highlights and a detailed segment report. After that, Yifan will review the financial results and provide guidance for the March quarter. Finally, we will have the Q&A session.

The earnings release was distributed over the wire today, February 6, 2024, after the market close. The release is also posted on the company's website. Our earnings release and this presentation include 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.

A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of the 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.

For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligation to update the information provided in today's call. Now I will turn the call over to our CEO, Stephen Chang. Stephen?

Thank you, Steve. Welcome to Alpha and Omega's fiscal Q2 earnings call. I will begin with a high-level overview of our results, and then I'll jump into segment details. We delivered fiscal Q2 results in line with our guidance. Revenue was $165.3 million. Non-GAAP gross margin was 28% and non-GAAP EPS was $0.24. The bottom line finished at the high end of our guidance, primarily driven by overall operational control. These results were driven by continued recovery across notebooks, desktop computing, and smartphones, offset by ongoing inventory correction in gaming and weak demand for quick chargers and solar.

Looking back on the full calendar year 2023, it was undeniably a challenging period for our entire industry. AOS revenue experienced a significant decline of 19% following a record-breaking 2022. This drop was primarily due to the inventory correction in PCs and smartphones that commenced in late 2022 and broader macro headwinds.

In the second half of calendar 2023, our performance was further hampered by inventory corrections and slowdowns in demand across other segments. While revenue declined in calendar 2023. I think it's important to recognize that challenges resulting from the post COVID semiconductor cycle are nearing completion, and we are approaching the recovery phase of the next cycle.

Over our 23 year history, we have navigated many boom and bust cycles in this industry, emerging each time stronger and more resilient on the other side. Looking forward, we expect stabilization across most of our business lines, notwithstanding normal seasonality. While near-term visibility is limited, we remain cautiously optimistic about a broader market rebound in the second half of calendar 2024.

Fundamentally, we are extremely well positioned for future growth as the market recovers. Today, our market position is stronger than ever, supported by our leading technology, more diversified product portfolio and Tier 1 customer base in all of our business segments. More importantly, whether it's a AI accelerators, digitalization, advanced connectivity, electrification or the transition to a low carbon society, power management lies at the core of these trends.

We remain committed to executing our technology roadmap, introducing innovative new products and solutions to our customers and focusing on long-term growth drivers that will allow us to surpass industry growth rates and establish ourselves as a sustained outperformer in the long run.

With that, let me now cover our segment results and provide some guidance by segment for the next quarter. Starting with computing, December quarter revenue was up 12.3% year over year and up 2% sequentially and represented 43.4% of total revenue. These results were ahead of our original expectation for a low single digit decline sequentially and were driven by a continued recovery and stabilization in shipments across notebook and desktop computing applications.

The recovery has been driven by high end driver ICs and MOSFETs for powering CPUs. Looking forward into the March quarter, we expect the segment to be down mid-single digits on normal seasonality and the impact of Chinese New Year. Notably, the inventory correction in graphics cards is coming to an end and tangential markets such as AI accelerators are becoming a meaningful portion of our data center related business.

In summary, we are not immune to seasonality and broader market conditions, but solid rebound expected in graphics cards and continued contributions from a AI related products demonstrate the diversity of our computing segment. Turning to the consumer segment, December quarter revenue was down 50.2% year over year and down 24.4% sequentially and represented 14.2% of total revenue.

As we indicated last quarter, gaming is undergoing an inventory correction after extremely strong shipments into the number one console manufacturer between mid-calendar 2022 and mid-calendar 2023. Similar to what we saw in PCs and smartphones in early calendar 2023. Given the speed of the current correction, we believe demand will revert back to a new normal in a couple of quarters, factoring in that the console is now in its midlife part of the platform cycle.

Further, we see opportunities to increase BOM content within the current console platform as part of its refresh this year. Longer-term, we believe our relationship with this customer is very strong and are already engaged in discussions for the next module design. For the March quarter. We anticipate stabilization in this segment and are forecasting a low single-digit sequential decline.

Next, let's discuss the communications segment. Revenue in the December quarter was down 18% year over year and down 6.6% sequentially and represented 17.5% of total revenue. Shipments to the Korea and China-based smartphone OEMs were strong. However, this was more than offset by a pullback in shipments to the Tier 1 US smartphone customers.

Note, that customer had strong shipments in the September quarter in 2023 ahead of their fall device launch. Looking ahead, due to strong shipments from Chinese OEMs, we anticipate this segment to remain flat sequentially, out-performing seasonality.

Now let's talk about our last segment, power supply and industrial, which accounted for 21.1% of total revenue. December quarter revenue was down 15.4% year over year and down 16.6% sequentially. These results were driven by reduced quick charges following our peak season shipments to our Tier 1 US smartphone customer in the September quarter and continued weakness in solar.

Power tools were a notable standout in the December quarter, further solidifying their strong growth and contribution throughout calendar 2023. For the March quarter, we expect this segment to further decline in the mid-10s sequentially, mainly due to reduced quick chargers following the peak season and lower solar demand.

While power tools will also see a seasonal decline, we expect strong sequential growth in our e-mobility segment, driven by deepening customer relationships for e-bikes and e-scooters. In closing, we delivered fiscal Q2 in line with our expectations. While we are not immune to the macroeconomic headwinds. There are indications that the cycle has bottomed and we are looking forward to the recovery phase.

Therefore, it is important to emphasize that our core fundamentals remain strong, a testament to the strategic investments we have made over the past years. These investments have positioned us well for growth, and we continue to focus on driving the company towards growth beyond our $1 billion revenue target on the other side of the cycle, supported by our leading technology, more diversified product portfolio, Tier 1 customer base in all of our business segments and expanding manufacturing capability and supply chain.

With that, I will now turn the call over to Yifan for a discussion of our fiscal second quarter financial results and our outlook for the next quarter. Yifan?

Thank you, Stephen, and good afternoon, everyone, and thank you for joining us. Revenue for the quarter was $165.3 million, down 8.5% sequentially and down 12.4% year over year. In terms of product mix, DMOs revenue was $108.8 million, down 10.5% sequentially and down 20.9% over last year. Power IC revenue $50.3 million, down 4.6% from the prior quarter and up 0.6% from a year ago. Assembly service revenue was $0.7 million as compared to $0.7 million last quarter and $1.2 million for the same quarter last year.

License and engineering service revenue was $5.5 million for the quarter versus $5.6 million in the prior quarter. Non-GAAP gross margin was 28% compared to 28.8% in the prior quarter and 29.5% a year ago. A quarter-over-quarter decrease in non-GAAP gross margin was mainly impacted by ASP erosion and increased inventory reserve, partially offset by the improved product mix.

Non-GAAP operating expenses were $37.9 million compared to $40.8 million for the prior quarter and $32.8 million last year. The quarter-over-quarter decrease was primarily due to lower R&D engineering expenses and more vacation taken during the holidays. Non-GAAP quarterly EPS was $0.24 compared with $0.33 last quarter and $0.67 a year ago.

Moving on to cash flow. Operating cash flow was negative $23.5 million, including $11 million of repayment of customer deposits, an $11.3 million deposit that we made to secure silicon carbide wafer supply. By comparison, operating cash flow was $13.8 million in the prior quarter and $0.3 million a year ago. EBITDA for the quarter was $20.7 million compared to $23.3 million last quarter and $31.8 million for the same quarter last year.

Now let me turn to our balance sheet. We completed the December quarter with a cash balance of $162.3 million compared to $193.6 million at the end of last quarter. Net trade receivables decreased by $2.5 million sequentially. Days sales outstanding remained at 18 days for the quarter. Net inventory increased by $4 million quarter over quarter.

Average days in inventory were 141 days compared to 129 days in the prior quarter. CapEx for the quarter was $9.1 million compared to $12.5 million for the prior quarter. We expect CapEx for the March quarter to range from $8 million to $12 million.

Now I would like to discuss March quarter guidance. We expect revenue to be approximately $150 million, plus or minus $10 million. GAAP gross margin to be 23.5%, plus or minus 1%. We anticipate a non-GAAP gross margin to be 25% plus or minus 1%. A quarter-over-quarter decrease in gross margin mainly reflects the lower factory utilization due to the seasonality and then Lunar New Year holiday.

GAAP operating expenses to be in the range of $46.7 million, plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $39.5 million, plus or minus $1 million. Interest expense to be approximately $1 million and income tax expense to be approximately $1.1 million. With that we'll open the call for questions. Operator, please start the Q&A session.

Absolutely. We will now begin the Q&A session (Operator Instructions)

Craig Ellis, B. Riley Securities.

Yeah, thanks for taking the question. I have one for Stephen and one for Yifan. So Stephen, starting with you. Like the color on how you're looking at the year and the fact that you see a cyclical recovery coming at a much stronger second half?

Can you just provide some further color on how that could play out on the top line? I'm not looking for specific guidance, but any sense on how the linearity plays out or what can happen as we look out in each quarter, the third and fourth calendar quarter of the year from, if you expect both of those to be up materially versus first half, would help us see a little bit of the things that you're seeing?

Sure, thank you, Craig. Certainly, we are looking forward to the normal seasonality that will come in the September quarter which is the peak season, both for PCs as well as for smartphones and in both of those markets that we are continuing to be well-positioned at our customers. So comparing first half to second half I think it's generally, we do expect the second half to be stronger compared against the first half.

And the question more of is whether the macroeconomic conditions overall is recovering. Right now, we are still relatively it's still in the what we're hoping to be at the tail end of the overall broader revenue correction. And depending on the macroeconomic conditions, if the market conditions are back to neutral or favorable, then we can expect to see also that the December quarter will also fall along with September.

But right now, we're looking our visibility isn't as clear that far down. We are now preparing mainly for the September seasonal peak first.

Got it. Thanks. And I'll direct the next one to Yifan. Yifan, I wanted to follow up on the gross margin for the first quarter. So the Lunar New Year impact is something that impacts the business every year. But I thought the impact was closer to 150 to 200 basis points or 100 to 200 rather than the 300. So can you just detail the factors that are causing gross margin to decrease by 300 basis points sequentially quarter on quarter?

How much is the lower utilization for Lunar New Year and what are the other factors and then beyond that, how would you expect gross margin to recover off of that 25% level, if we have the type of environment that Stephen was talking about, which is much better calendar second half demand? Thank you.

Sure. The March quarter gross margin guidance, we factor in a couple of things and primarily that utilization portion to some March quarter typically is our lowest quarter since seasonality wise. And then we also see some price erosions there to the lesser extent, offset by some better product mix. You are probably right 200, some basis points in that for the utilization portion and then 50 to 100 basis points for net of the ASP erosion and the better part of the mix. So that's a combination of those factors.

Thank you. David Williams, Benchmark.

Hey, good afternoon. Thanks for taking my question, certainly appreciated it. A lot of great color there, but just wondering if maybe you can give us a little color on some of the areas of weakness that you're seeing. I know you expanded some in during the call, but just anything I guess, prime to square the recovery in the second half and is that really velocity of orders or maybe just any color there to help us get more comfortable with the second half recovery does materialize. Thanks.

Sure, David. Yes, for a stronger second half, we're counting on not only on the seasonal factors, but also on the macro picture, and the picture that I was looking at our end markets and many of our end markets have been going through inventory correction the PC. The smartphone started earlier, we're recently on graphics also, gaming went through that as well too.

We believe that now actually we're at the tail end of that. PCs and inventory can control, I think, is tapering down. It's more of a factor of end demand needs to come back. In the story, we need the PC refresh cycles to be healthier and the overall macroeconomic to help raise the consumer spending.

And we also mentioned on the call that the inventory control for graphics also is starting to come to an end as well and we're starting we anticipate a comeback of that together also with the gaming, which is all which have entered into inventory control about two quarters ago. And so those are nearing the end of in inventory control and we're looking now more mainly to the end demand once that can pick up that to at least neutral and now we're back to growth and that can point us to a stronger second half.

Great. Thanks. And maybe Yifan, if back to the gross margin. Maybe trying to give a little more color, maybe what Craig had asked, but can you -- I guess just how much of the impact are you seeing from utilization relative to just the leverage lost on the revenue side? And maybe what are the puts and takes there as we think about that gross margin longer term and certainly we expect that bottom out a little higher than this. So just any help there? Thank you.

Okay, sure. I mean, if you will recall that on March quarter 2023, our gross margin was around 25% range. So now it is a March '24 quarter, even though the top line is a little bit higher than that, a 2023 March quarter, your that you have location right now is about similar to the March quarter 2023 at our factory. In overall, I would expect when our top line recovers and then I would expect on our utilization that would help them and also product mix, I would expect to have come back at a better product mix as well.

Thanks so much. I appreciate the color.

Thank you. Tore Svanberg, Stifel.

Yes, good afternoon. Maybe if I could just touch on a different aspect of the gross margin question, it looks like inventories were up this quarter and it looks like it's going to be up again. Well at these days of inventory are going to be up. Can you help us and how we should expect inventories to go over the next couple quarters and how much -- where do you see as a good operating level, in terms of both days and or dollars?

Sure, inventory balance at the end of the December quarter increased by $3 million or $4 million. And then relative to the overall inventory size it's like a marginal. For the March quarter, we would expect an inventory level maintains around a similar level and we already slowed down our own production and also some purchases going forward and I would expect it the inventory that will adjusted based on our expected business growth.

And so we need some additional production to support that. Yes, that will ramp up some production depending on the bottleneck areas. So that's we manage it on the daily basis.

And also, I guess maybe can you add some more color on the inventory reserve you touched . I wasn't sure if I caught how much that was in and without that inventory reserve, where would the inventories have gone?

Yeah, the inventory reserve went up and pile up on a couple of million dollars and also in December quarter. So we took higher reserves.

And is this something that you anticipate needing to do again going forward? Or is it kind of a one-and-done and kind of reset from here?

Well, that's kind of it depends on the market conditions and then overall environment and yet it's hard to say for inventory increase and generally, I would expect that probably back to the normal, I wouldn't see it additional inventory reserves out there..

Got it. And also and I appreciate you provided CapEx guidance for the quarter. Can you give us kind of an outlook for the year and you expect it to remain in that $10 million range or can it be taken down a bit on and also the customer deposits both the ones that you are returning back, how much is left and for the silicon wafer deposit, the fee, is this a one-time thing? Or do you have to secure additional supply down the line? Thank you.

Okay. Sure. Regarding our own CapEx and the again, I [wouldn't] expect throughout this calendar year. Our CapEx right now is at and what I call maintenance mode. We will do our regular upgrade, and that will solve some production bottleneck areas. And so we don't have a major plan to expand.

And generally, we target 6% to 8% of our revenue has a CapEx so than I would have expected this year, $10 million-ish per quarter, and that's probably in the ballpark. In terms of a customer deposits, I would say last year as calendar year 2023, we return about $30 million or so sold.

So this calendar year 2024, we expect to retire another $30 million, also a customer deposits, in terms of our own deposit, we made, that's a one-time positive. So I would not expect further or well depends on the situation, but at this point, and that's a one-time deposits.

Quick follow-up on the deposit that you're returning. How much is left after you do that $30 million this year?

At the end of December last year, we had a $60 million of deposits on hand, some kind of a 2024, we'll retire another $30 million also.

Got it. And one last question, if I could, Stephen, appreciate the guidance that you gave or by end market, if I'm doing the math right? It looks like licensing and other that kind of goes down to less than 1%, if that's the case, can you help me see where I went were on?

There was someone like a assembly services on this -- a little bit. So that's probably, yes.

Does that the expectations are for that to fluctuate and it's not expected to be like a material contributor that the way to look at it ?

No, you're right, correct. I mean somebody service and that will just sit and do some services. Some for some idle capacity, not a major business for us.

Okay. Thank you. I'll jump back in the queue.

Thank you (Operator Instructions) There are no additional questions left at this time. I will hand it back to the management team for 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.

Thank you.

That concludes today's conference call. You may now disconnect your lines.