Alpha and Omega Semiconductor Ltd (AOSL) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Alpha and Omega Semiconductor Reports Financial Results for the Fiscal Fourth Quarter of 2020 Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Gary Dvorchak, Investor Relations representative. Thank you. Please go ahead, sir.

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2020 fourth quarter and year-end financial results. I'm Gary Dvorchak, Investor Relations representative for the company.

With me today are Dr. Mike Chang, our CEO; Yifan Liang, our CFO; and Stephen Chang, our Executive Vice President. 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.

Mike will begin with a review of the business overview for the quarter, then Stephen will provide a detailed segment report. After that, Yifan will continue with a review of financial results for the quarter and fiscal year and provide guidance for the next quarter. Then we'll have the question-and-answer session.

The earnings release was distributed by Business Wire today, August 11, 2020, after the close of market. The release is also posted on the company's website. Our earnings release and this presentation includes certain non-GAAP financial measures. We use the 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 remind you that during the course of 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 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 obligation to update the information provided in today's call.

Now I'll turn the call over to our CEO, Mike, to provide an overview of the business. Mike?

Thanks, Gary. Welcome, everyone. Before we discuss our fourth quarter results, I want to briefly address the COVID-19 situation, which continues to impact families, businesses and the markets across globe. I want to thank our employees for staying resilience and being flexible as we navigated this new working environment. Our primary focus is to ensure the safety and well-being of our -- of all our employees and their families. Meanwhile, we continue to work closely with customers to support them in every way we can during this challenging time.

Now some key highlights of the June quarter. Solid execution enabled us to deliver results ahead of expectations. Fueled by our product strength and growing customer penetration, revenue of $122 million was up 9% year-over-year and above the high end of our guidance range, coupled with tightly controlled operating expenses. This resulted in non-GAAP earnings per share that exceeded the consensus.

Our core business generated solid operating cash flow of $20 million and free cash flow of $11 million. Yifan will provide the details of our June quarter results later on the call. The favorable financial results was driven by high demand in certain segments and solid operating execution. Shipments rebounded for our products in computing and gaming applications, driven by the recent shift to work-, learn- and entertain-from-home environment.

We also focused on our cost structure and prudently managed our expenses. We reduced nonessential spending and benefit from travel bans, while still pursuing strategic and critical R&D projects to expand our customer reach. The strong fourth quarter capped a solid fiscal year. This is very encouraging given the backdrop of COVID-19 pandemic, heightened trade tension between U.S. and China and global economic uncertainty. Our results demonstrates the strength of our business strategy, diversified product portfolio and expanded customer base.

Next, I will discuss our strategic plan and further strengthening -- to further strengthen the foundation to achieve our longer-term objectives. First, our joint venture fab in Chongqing. As part of our strategic plan, we build this fab to fulfill growing customer demand. Indeed, during this quarter, the JV fab made a major contribution to capture surge in demand. Even though the COVID-19 pandemic has slowed ramp-up production, we were able to make persistent progress. Importantly, these efforts allowed the JV to achieve positive EBITDA for the June quarter. We expect to approach our target run rate by this time next year.

Second, our focused R&D is driving broader and better product innovation. As a solution provider, we are able to deepen our relationships with customers, becoming their trusted strategic partner. As such, our new products are driving growth, primarily by expanding our BOM content in core applications. The design of our product, especially our Power IC solutions, into an upcoming gaming system and the new PC graphics card demonstrates the opportunity created when we secure trust and confidence from our customers.

In looking back in the fiscal year, we are pleased with our accomplishments. The power semiconductor industry is a large market and we are making significant progress to capture opportunities and the increased market share. We also recognize that conditions are still fragile. Economic conditions could change at any moment due to factors beyond our control, including the COVID-19 pandemic resurgence. Because of these, we continue to operate cautiously and take prudent actions, even as we identify and see new opportunities.

I would like to thank our customers, business partners and shareholders for their continued support and confidence in AOS. I especially want to acknowledge our employees as our success could not have been possible without their hard work, dedication and sacrifice in the past year.

Now I will turn the call over to Stephen for a detailed segment report. Stephen?

Thank you, Mike, and good afternoon. Let me start with Computing. It represented 40.2% of our total revenue in the June quarter. Revenue was up 4.1% sequentially and flat year-over-year. While sell-in was okay, sell-through was quite dramatic. Many customers that have paused production in the first calendar quarter were catching up in the June quarter, end demand is strong, and we were able to meet it with ramping supply from our JV fab.

With so many people around the world working, creating and the learning from home, PCs have become even more indispensable. Because we did not shut down fully in the March quarter, we were able to meet this resurgence in demand. Going forward, we continue to optimize our production mix to satisfy the anticipated high demand for PC-related products. We are especially excited about the ramp of our high-performance Driver MOS and digital power solutions in some key customers' upcoming graphics card platforms. We expect computing revenue to be strong in the September quarter with mid-teens sequential growth.

Now turning to the consumer segment. It represented 22.5% of total revenue in the June quarter. Revenue increased 37.5% sequentially and was up 31.7% year-over-year. COVID-driven home-sheltering boosted sales of gaming, TVs and home appliances, enabling those segments to achieve healthy growth. Gaming was up significantly sequentially and is expected to grow rapidly. We have multiple sockets across multiple products, Power IC and MOSFET in an upcoming gaming system that is expected to launch in the second half of 2020.

Looking to the September quarter, we anticipate strong double-digit growth in the consumer segment, driven by home entertainment, gaming and TVs.

I want to note that Power IC is regaining traction. Since 2018, we realigned our Power IC product line by focusing on our core competencies of proprietary MOSFET technology, advanced packaging and intelligent ICs ideally suited for the application. We chose to go after high-volume applications within the computing and consumer segments, given our established MOSFET business. As a result, today, our multichip package products delivered a small size and high-efficiency it required in the latest gaming and graphic card platforms, as you can see in recent computing and consumer design wins.

Now let's discuss the Power Supply and Industrial segment. It accounted for 19.4% of total revenue, up 24.2% sequentially and up 3% year-over-year. After a pause in the March quarter, this segment rebounded in the June quarter, driven by higher demand for adapters used for PCs and gaming systems.

Our AC/DC Power Supply business was up significantly versus the March quarter, tracking the surge in PC sales. Demand was good in medium and high-voltage products. Once again, we were able to meet high-voltage demand with supply from our JV fab. We expect this segment to be down somewhat in the September quarter due to a bit softer demand for quick chargers and DC fan.

Finally, let's move to the Communications segment, which was 16.2% of total revenue in the quarter, up 3% sequentially and up 16.1% year-over-year. Telecom drove the growth, although over time, we expect unevenness as the 5G rollout advances. Meanwhile, the smartphone market was subdued. One large customer slowed production in the June quarter, so our battery protection line was down slightly sequentially. Looking to the September quarter, this segment appears to be resuming growth across all our core customers. We expected the communications segment to be up single digits sequentially in the September quarter.

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

Thank you, Stephen. Good afternoon, everyone, and thank you for joining us. Revenue for the June quarter was $122.4 million, up 14.5% from the prior quarter and up 9.4% from the same quarter last year.

In terms of product mix, MOSFET revenue was $100 million, up 11.2% sequentially and up 3.8% year-over-year.

Power IC revenue was $20.3 million, up 29.2% from the prior quarter and up 47.1% from a year ago. As Stephen discussed earlier, this is a welcome reversal for our Power IC product line, the result of our focus on regaining traction with new and better solutions.

Assembly service revenue was $2.1 million as compared to $1.3 million last quarter and $1.7 million for the same quarter last year.

For the fiscal year 2020, revenue was $464.9 million, up 3.1% from fiscal year 2019.

Non-GAAP gross margin for the June quarter was 27.5%, flat with the prior quarter and up slightly from 27.4% for the same quarter last year. Non-GAAP gross margin excluded $0.3 million of share-based compensation charges for the June quarter as compared to $0.4 million for the prior quarter and for the same quarter last year. Non-GAAP gross margin also excluded $4.4 million of production ramp-up costs related to the JV Company for the June quarter as compared to $6.6 million for the prior quarter and $2.6 million for the same quarter last year.

For the fiscal year 2020, non-GAAP gross margin was 27.9% as compared to 28.4% for the prior year. Non-GAAP operating expenses for the June quarter was $25.3 million as compared to $25.8 million for the prior quarter and $22.6 million for the same quarter last year. Non-GAAP operating expenses for the quarter excluded $2.4 million of share-based compensation charges and $2.6 million of legal expenses related to the Government investigation. This compares to $2.5 million of share-based compensation charges, $2.1 million of legal expenses related to the investigation and $0.6 million impairment charge related to an investment in a privately-held start-up company for the prior quarter as well as $2.1 million of share-based compensation charges and $3.9 million of preproduction expenses related to the JV Company for the same quarter last year. Both GAAP and non-GAAP operating expenses included $3 million of digital power team expenses for the quarter as compared to $3.1 million for the prior quarter and $2.3 million for the same quarter last year. In July, we made the first shipment of our digital power product.

Non-GAAP operating expenses for the fiscal year 2020 were $102.5 million compared to $95.3 million for the prior year. Non-GAAP operating expenses, excluded $8.9 million of share-based compensation charges, $4.7 million of legal expenses related to the investigation and $0.6 million for an impairment charge in the current fiscal year as compared to $11.2 million of share-based compensation charges and $15.8 million of preproduction expenses related to our JV Company in the prior fiscal year.

Income tax expense for the quarter was $0.4 million compared to a tax benefit of $1 million for the prior quarter and $0.6 million for the same quarter last year. The tax benefit in the prior quarter was primarily driven by relief from the CARES Act.

Income tax expense for the fiscal year was $0.3 million compared to $1.3 million for the previous fiscal year.

Non-GAAP EPS attributable to AOS for the quarter was $0.29 per share as compared to $0.11 for the prior quarter and $0.35 for the same quarter last year. Non-GAAP EPS attributable to AOS for the fiscal year was $0.88 as compared to $1.23 for the prior fiscal year.

AOS continued to generate positive operating cash flow. AOS on a stand-alone basis, generated $20.2 million of operating cash flow in the June quarter as compared to $29.5 million in the prior quarter and $15.2 million in the same quarter last year.

Cash flow provided by operations attributable to the JV Company was $20.1 million in the June quarter, primarily due to a refund of accumulated value-added tax paid previously. Cash flow used by the JV Company in the prior quarter and the same quarter last year, was $15.2 million and $6.9 million, respectively. Cash flow from operations attributable to AOS for the fiscal year was $58 million as compared to $65.3 million for the prior year. Cash flow provided by operations attributable to the JV Company was $4.4 million for the year compared to $33.9 million of cash used in the prior year.

Consolidated EBITDAS for the June quarter was $14.9 million compared to $8.8 million for the prior quarter and $14.2 million for the same quarter last year. EBITDAS attributable to AOS for the quarter was $12 million as compared to $6.5 million for the prior quarter and $15.1 million for the same quarter last year. The JV Company achieved its first positive quarterly EBITDAS of $1.1 million in the June quarter as compared to negative $1.1 million for the prior quarter and negative $5.6 million for the same quarter last year.

Consolidated EBITDAS for the fiscal year was $52 million as compared to $55 million in the fiscal year 2019. EBITDAS attributable to AOS for the year was $44.8 million as compared to $61 million a year ago.

Now let's look at the balance sheet. We completed June quarter with a cash balance of $158.5 million, including $110.3 million at AOS and $48.2 million at the JV company. This compares to $110.2 million at the end of last quarter, which included $99.5 million at AOS and $10.7 million at the JV company.

Our cash balance, a year ago, was $121.9 million, including $100.7 million at AOS and $21.2 million at the JV company. The bank borrowing balance at the end of June was $173.4 million, including $32.7 million at AOS and $140.7 million at the JV company.

During the June quarter, the JV Company borrowed a total of $47.1 million. AOS and the JV Company repaid $2.1 million and $25.4 million of existing loans, respectively.

Net trade receivables were $13.3 million at the end of June quarter as compared to $17.5 million at the end of the prior quarter and $24.3 million for the same quarter last year.

Day sales outstanding for the quarter were 18 days compared to 22 days in the prior quarter.

Net inventory was $135.5 million at the quarter end, up from $127.4 million last quarter and up from $111.6 million in the prior year. Average days in inventory was 127 days for the quarter compared to 131 days in the prior quarter.

Net property plant and equipment was $412.3 million, flat compared to the prior quarter and up from $409.7 million last year.

Capital expenditures were $13.2 million for the quarter, including $9 million at AOS and $4.2 million at the JV company.

With that, now I would like to discuss the guidance for the next quarter. We expect revenue to be between $134 million and $138 million. GAAP gross margin to be 26%, plus or minus 1%. We anticipate non-GAAP gross margin to be 27.7%, plus or minus 1%. Note that non-GAAP gross margin excludes $0.4 million of estimated share-based compensation charges and $2 million of estimated production ramp-up costs relating to the JV company.

GAAP operating expenses to be in the range of $32.8 million, plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $27.8 million, plus or minus $1 million. Both GAAP and non-GAAP operating expenses include $3.2 million to $3.5 million of estimated expenses related to the development of our digital power business.

Non-GAAP operating expenses exclude $2.5 million of estimated legal expenses related to the Government investigation and $2.5 million of estimated share-based compensation charges.

Income tax expense to be approximately $0.5 million to $0.7 million.

Loss attributable to non-controlling interest to be around $1.2 million. On a non-GAAP basis, excluding estimated production ramp-up costs relating to the JV company, this item is expected to be approximately $0.2 million.

As part of our normal practice, we're not obligated to update this information. With that, we will open the call for questions. Operator, please start the Q&A session.

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

Congratulations on the nice execution in the quarter, guys. Yifan, the first one is really just a clarification. Did you mention what the JV Phase 1 revenues were in the quarter? And what are they expected to be inside of the fiscal first quarter outlook?

Yes. This -- during the June quarter, majority of our revenue increase was supported by our joint venture. So you saw the joint venture achieved first EBITDA-positive quarter. We're happy with that.

Right now, because of the uncertainty of this pandemic situation, we expect that we'll continue to ramp this joint venture fab. Right now, our September guidance also factored in this support from the joint venture. So we -- as Mike mentioned that we were going to progressively continue to ramp this JV fab during the course of fiscal year '21.

Okay. And as long as we're just talking about the fab ramp and what happens in the fiscal year before coming back to some other near-term items, how should we expect that to play out through what's typically a seasonally softer part of the business? In fiscal 2Q and Q3, would we expect fab production and fab sales to mirror historic seasonality? Or is there something about the design win profile you've been able to achieve with products from Phase 1 that would allow that fab to continue to grow output and revenue sequentially through next year when you expect to get to that original $37.5 million target?

I would expect, there are some seasonalities along the way in this fiscal year '21. On the other hand, yes, we have some design wins and company-specific and we're going to continue to ramp the joint ventures and fab. Overall, I would think the some -- still some uncertainties down the road in terms of the December quarter, March quarter. We just go quarter-by-quarter. So right now, our September quarter's guidance reflected our expected ramp -- continued ramp.

Okay. The next one is a question for Stephen. And Stephen, I think 3 months ago, we thought that the new gaming platform might deliver $6 million in sales. And it looked like consumer was up, significantly enough that, that $6 million might have been $7 million, $7.5 million. One, can you confirm what the revenue contribution was from the new gaming platform? What would you expect in the fiscal first quarter?

And somewhat similar follow-on is I had for Yifan. Given the highly seasonal nature to gaming platforms, would we expect revenues from the set of design wins to moderate in fiscal 2Q and 3Q before reaccelerating mid next year?

Yes. So we are very excited about the gaming business, and that's ramping up now. We saw that ramp up already happening in the June quarter. This platform -- this gaming console is not only going to release until a later part of this year, more towards the end of Q3, beginning of Q4. However, obviously, the production has already started for that. We -- I'm not quoting any specific numbers for these quarters, but it's very healthy, and we expect another big jump going into the September quarter.

Beyond that, we have to see how the acceptance of this console to the market, and see whether there's any also any production hiccups or anything on our customers. And -- well so far, we don't see anything. Right now, we are pretty happy with this business. And as Yifan mentioned, this is one of the key design wins for new business that we are counting on for the December quarter.

Okay. Great. And then interesting teaser about server power shipping in the June quarter. So can you give us some further color on what happened there? And what's happening in the back half of the year?

Sure. So digital power, and we're very excited to be in the -- one of the upcoming graphics card platforms. This is going into one of the high-end models that gets released at the start of the platform release. So we have our [SPS] product going to be shipping already in this September quarter as well as ramping going into the December quarter.

So naturally, as we talked about before, our digital power is focused on 2 key markets: going after advanced computing as well as Telecom. So it's not too surprising that we see the first business win coming more from a kind of client-side portion of the computing portion of the business. So we're pretty excited about this. This will ramp up some more next year as well. At the same time, we have other opportunities that are being cooked up at the moment for the other applications.

Okay. That sounds good. And then lastly, just a long-term question to Yifan and maybe even for Mike. So guys, thanks for clarifying the Phase 1 fab ramp target. Got it. Fiscal 1Q '22, it sounds like. How should we think about what was the calendar '23 $1 billion revenue target? Is calendar '23 still the right period for that revenue target? Or would that shift out due to the COVID crisis?

Well, I'll take the first question. The original target of $1 billion revenue for calendar year 2023, I wouldn't expect, yes, probably more so pushed out by one year and because of this 2020 years pandemic situation. So that's our current view. And I mean, it may change down the road, depending on the market situation. So I'll leave it that way.

This is Mike Chang. Yes. Let me follow-up Yifan's little bit, give a little bit in depth. When we look into the future business, okay, especially like kind of far away to '23 and $1 billion, which of course always our challenging goal, actually, only thing that made is your technology and new product development and acceptance, and which is -- does take time and a patience. And we are quite encouraged during this difficult time, this pandemic time there. Our products have to get except, which is a tremendous encouragement to our people to us.

So I agree with Yifan, okay, we cannot fight with natural, right? So this what affect us, but the momentum is there. We believe it should not allow more than delay one year.

That's helpful, Mike. And then if I could just follow-up on that, useful color. Since you mentioned long-term technology road map, where does wide band-gap fit silicon carbide GaN on your long-term technology road map? And where are you in development of those technologies?

This is another slow cooker, okay? So we've been in this area -- R&D in this area for quite many years. Recently, we just want to release one pretty good silicon carbide 1200-volt product. But however, I don't want to create too much excitement there because such kind of things will take time for customers to accept, okay? So you got product there and a pretty good product there. But you just happen to take time for customers to really to accept, to buy and to expand. So I can only tell you that we have the capability. We have R&D there, but I will put it longer term.

Your next question comes from the line of David Williams from Loop Capital Markets.

Congrats on the solid quarter and the guide.

Thank you.

So the gross margin came in a little better than we had expected and, of course, ahead of the guide. Can you maybe talk through any puts and takes there of the margin? Was that more mix related or just productivity out of the JV? Or what really led to the better margin profile this quarter?

Oh, sure. I mean the gross margin came in at the high end of our guidance. So I mean, we are pleased to see that. Since the majority of the increase of our revenue was from our joint venture. So we -- our non-GAAP gross margin, we performed out production ramp-up costs. So actually make the normalized non-GAAP gross margin already. So the June quarter's non-GAAP gross margin was flat compared to the March quarter, so are relatively stable compared to the March quarter in terms of product mix and factory utilization and so on.

Basically, the $2.2 million reduction in the production ramp-up cost from March quarters, $6.6 to $4.4 million in the June quarter that $2.2 million, basically, that will be the margin increase, if we did not perform out the production ramp-up cost. So that will be the margin gain there. But since we already normalized the non GAAP margin. So the June quarter's margin was basically stable compared to the March quarter.

Okay. Great. And then maybe if you can just maybe rank order the growth of the underlying trends. That's going to continue to support the growth. If you kind of exclude some of the shorter-term trends that you're seeing, what are the, I guess, the largest maybe secular growth drivers that you see that will support you to that $1 billion run rate that you talked about?

David, I can take that question. We're definitely heading more towards a diversification. In order to get to the $1 billion revenue, we're expecting contribution from all the core markets. Of course, we'll continue to be strong in the computing. And even in computing, we are finding ways to expand BOM content. We expect that with the future platforms coming from Intel and AMD that our BOM content is actually going to increase. And also -- not only for the Vcore and system power, but also finding new sockets like getting into Type C as well as some other areas that we are investing in.

So computing will definitely be strong. We even have the server market as part of the midterm growth for computing. Communications has also been strong for us in the past and will continue to be strong, with strength in the battery protection going into phones. We have a very good position going into that that we talked about during the earnings release. And we expect that to continue going forward as we also look to supplement that also with the business from our Telecom side. We also expect to see our power supply grow as well. Right now in the short term, it's been growing mainly with the PC boom because with the work-from-home situation.

A big part of that is because we've been able to service the high-voltage market, which we have ignored in the past and due to allocation. Now because we have CQ and we have the ability to support that, this is going to be a new area of growth for us and to support not only power supplies for PCs but also for gaming systems, for industrial power and for solar and other applications. And of course, gaming, we've been -- and consumer, we've been talking about, that's a brand-new area for us. Gaming will be a big part of consumer going forward, but so will our other existing business. We're pretty pleased with our home appliance business there based on IGBTs in our module solutions. And this is one area that will continue to grow. We're still on track to grow by more than a 40% year-over-year for the calendar year. So -- and as well as our TV business will continue to be strong. So in the end, we have to grow by diversification. We can't count only on just a few areas of the market. We've gotten big enough and established enough in our current applications, and we are expanding into new applications to help us to get to that $1 billion.

Great. That's very helpful. And then, Stephen, maybe -- or Mike, on the digital controller front, you're obviously making some very nice progress, shipping in the queue. How do you think that layers in as you move forward? What does that ramp look like? Is it slow and steady? Or could we expect to see maybe a nice more hockey-stick approach as you get into the middle part of next year?

We expect it to be more slow and steady. And we do expect, again, the client portion of the business, to grow a little sooner and faster, just because of the nature of the shorter design cycles for going into client computing. The longer ones are going into the server platforms and going to the telecom platforms, which we are engaged in, but this simply just take more time to both design in as well as to ramp up.

So I think steady is probably the right word for that. This kind of business is -- it takes longer to design in, but it's much stickier and will stay for much longer because these platforms endure for a much longer time.

Okay. Any thoughts on the BOM content addition that you can pick up?

Oh, the content can be pretty large, but it really depends on the end application. There's different scales of base stations and servers. It depends how many rails and they are looking to use digital power for. So -- but it can be on the 10s and 20s of dollars per system. But it's a pretty wide range of -- depending on the application.

Okay. Fantastic. And one more, if I can. Just kind of thinking about the health of the inventory. Can you maybe talk about the different puts and takes there? How do you feel in terms of the inventory that's maybe in the channel? And are you shipping to consumption? Or are you seeing any type of builds that's really -- that could be helping your 1Q guide?

Sure. Our channel inventory right now is what I consider pretty healthy. It's within the targeted range of 2 to 3 months. And right now, there's close to the midpoint of that targeted range. So we don't have much concerns about the channel inventory at this point.

Best of luck on the quarter.

All right. Thank you.

(Operator Instructions) Your next question comes from the line of Jeremy Kwan from Stifel.

And let me add my congratulations to the excellent results and outlook and especially the cash flow generation.

Thank you.

Thank you.

I guess first question maybe regarding the -- a follow-up on some of the seasonality questions. It seems like some of the growth near-term has been driven a lot by the consumer gaming and graphic cards, some of the cell phone builds. Could you see potentially some maybe a stronger seasonal trend coming up in the next couple of quarters because of that? Like is there -- are there certain design wins that are -- that can maybe make up for some of that potentially increase seasonality?

Sure. First, I want to comment that because of COVID, there's not much of a normal seasonality this year. But there's been a lot more disruption because of how COVID has affected our customers both their demand as well as on their production.

Computing, typically, is a Q3 or September quarter, a major peak season. This year, we basically saw that peak season pulled in from September into June. That's partly because also March was a pretty disaster quarter for our computing customers because their factories were located in China and a lot of them in the epicenter of where COVID was starting out from.

So we -- but because of the work from home and the strong demand, the September -- the June quarter was very strong, and the September quarter remains very healthy also. We -- so far, we don't know how this will play out over the longer time frame.

Q4 so far looks still okay, but we really need to wait and see to see how demand changes. But right now that still looks strong.

Going into smartphone, smartphone, I would say, it's probably a little more -- it depends on how each of the major players, customers in this space are doing. Some of them -- one of our customers, they launched a new phone back in the March quarter, and they actually didn't pull back production until the June quarter. And so -- but then coming into the September quarter, they're actually starting up production pretty heavily again in anticipation of possibly another factory shutdown that may have to happen in the coming cold season. So we're seeing a lot of disruption like that happening. Overall, right now, smartphone typically is strong in Q3. And actually, we do see that from all 3 vendors. Demand is very healthy and strong going into them, the second half of this year.

Now some of the newer areas for us are, at least for AOS, is gaming as well as graphics cards. And both of these areas are relatively new for AOS. So it's not really seasonal. It's tied to their platform releases that are launching at the end of this -- in the second half of this year.

Graphics cards, typically, their platforms lasts around 2 years. So -- and this -- so this is the beginning of that cycle. For gaming systems, those last much longer. You're talking about typically 6 to 7 years. And this is the beginning of that cycle. And even during that 6, 7 year, there's multiple revisions that are made to platforms along the way to create different price points for the customer or maybe cost down. So there's additional opportunities for us to get more business, get more sockets. And so I would say that, that's not really a seasonal thing, it's more of out of that product life cycle. We're at the beginning of that life cycle. And so it's additional business that we're laying -- layering on top of our current business. Does that help?

Yes. That's very helpful. And maybe just a quick follow-up on the comments that some customers, especially in the smartphone industry, are building ahead of potential shutdowns later on. Is that something that you see is it pretty widespread within cell phones? And do you see that across other industries?

No, no. I see this particular vendor, I think is only one vendor -- one customer that's mainly -- that's doing that more so than other ones. So I wouldn't say it's necessarily reflective of the whole market or industry. But at least they're doing it much more than others are. And the other major vendors are seeing their normal seasonality that's coming. So from my end right now, I know we see all 3 vendors asking for product.

Got it. Great. And then maybe just, can you give us an idea of linearity in the quarter? And maybe your backlog and visibility for the upcoming September quarter?

Sure, Jeremy. Our backlog has been healthy and steady since the month of March. If you recall back to the March quarter, toward the mid-March, we saw the surge in demand started and then backlog started fitting in. I guess this reflected in the recovery of supply chains and then surging demand and due to the work from home, learning from home, those things. And also our company-specific design wins. So -- of course, I mean under this challenging and volatile pandemic environment, we want to be vigilant and cautious, and then monitor the dynamic changes carefully. So right now, our backlog can support our September's guidance.

Can you give us maybe a comparison on a relative basis, maybe this quarter versus prior quarters? Some of the other analog peers have reported very high backlog coverage. Just wondering if that's the same case for you guys.

It has been steadily increasing, yes, at better than last quarter and position, I would say.

Great. And Yifan, just looking at the balance sheet, I noticed other assets looks down about $26 million. Is this the VAT refund, the value-added tax, getting converted to cash?

Yes, yes, yes. Exactly.

So then is that the full amount? So about $26 million, if we look at -- because the operating cash flow has had a very nice bump from the March quarter to the June quarter. So if you take that out, would that be roughly the operating cash flow for the -- excluding the refund?

Yes. I mean for AOS, when we separate an AOS from the JV, AOS generated about $20 million operating cash flow, $11 million of free cash flow in the quarter. JV, yes, that -- about $25 million in refund they got from local Government related to the value-added tax. Last couple of years, when they imported equipment, then they had to pay value-added tax like 13 some-percent of each machine. So that one has been accumulated for at least a couple of years.

So in the June quarter, they got a refund, pretty much all of them from the Government. So on the other hand, prior to that, they were using those receivables from the VAT tax against that they borrowed from a local bank against those VAT receivables. So at the same time, when they got the refund, they also repaid them about $15 million, $16 million also on loans. So that's a net-net, yes, they did get more working capital.

Got it. And did you say, is all the -- VAT tax has it been fully refunded by now? Or is there still some waiting to be collected?

That's pretty much all that refunded already.

Great. And then just a question as the JV has been ramping, I think Mike said earlier that you guys are expecting to hit the target around this time next year. So presumably, you probably need to invest ahead of that. So can you talk to us about CapEx plans? And also just for the JV, what -- so it looks like the operating cash flow is still not quite breakeven at this point. Do you have targets for when you might expect to hit operating cash flow breakeven? And also on a free cash flow basis?

This -- for AOS, our CapEx spending is pretty much in the range of -- normal range, like I would say, 6% to 8% of our revenue. For the joint venture, yes, right now, we are doing some planning work for the next round. But right now, our main focus is to ramp up the 12-inch fab first. So that will have a longer-term planning for the JV.

So sorry, so were there any CapEx or breakeven targets that you can give us?

Well, this target, we'll see, along with our business and growth and the expectations. So that's kind of you have to wait and see. We will disclose when the time comes.

This is Mike. And I may be putting in a few words about this JV?

Yes, please.

Okay. I think, first, we need to differentiate, okay? This JV was sorely purpose-driven. It's a strategic investment to match with our business growth plan. So it's not a purely financial investment. Therefore, we really look into what our business growth in the AOS growth there. Then we tailor this venture to support that. In meanwhile, for this venture grows, too, so it is a primary and secondary. The primary really is to support AOS growth. So don't want to differentiate a little bit.

That's very helpful. And understood. It's strategic for AOS as a stand-alone, and there's -- the cash flow implications are -- it's a consideration, but it's not the primary one for distribution...

Right. Of course, we have to be very prudent, right? So no, yes.

And just one last question. To help us model the Government investigation, is it still going to be $3.5 million for the remainder of the year? Or is there some drop-off that we can expect at some point?

Well, this one is really hard to estimate that's depending on the activities. Right now, for the June quarter, our expenses were in the $2.5 million, $2.6 million range. So I wouldn't think -- I'd just use $2.5 million at this point for the guidance. That's hard to estimate at this point.

And congrats again on the solid results.

Thank you.

Your next question comes from the line of Craig Ellis from B. Riley FBR.

Yes. A couple of them. First, I just wanted to get your views on how you're looking at production optimization and demand planning. And I want to do it in the following context. I think when we started into calendar '20, the company was optimizing its business for communication centric growth. A lot's happened since, you relied on your feet, and it looks like the back half of the year, we're really going to see midyear, late year, our growth is driven by gaming platforms and compute. So good for you for realizing that. And I think the communications business has been fairly flattish from the first quarter.

The question is, as we look at calendar '21, so the second half of your fiscal '21, first half of fiscal '22, how do we think about the way you're optimizing your production and your demand planning? Is it going to stick with being much more of a compute and console incremental demand business? Or do you see the communications business coming back and contributing more to growth next year than it has over the last couple of quarters?

Yes. This is Stephen. I can address that. So it's similar to what I was saying before and even giving up the total picture. In the long term, we are heading more towards diversification. So -- but in the short term, you're right, right now, we're seeing a big strong growth in PCs because from work from home as well as consumer because of the newer platforms that we're getting into for gaming.

In the longer run, I do expect the other -- the platforms also to continue to grow. Communications, we do expect the cellphones still to be the main -- I guess the foundation of that. We have a very strong position in each of the 3 major markets, and we'll continue to be strong going forward.

On the Power Supply side, we saw the beginning of some growth over there because of our high-voltage business. Initially, again, going after the PC market, but that has the potential to expand to be more than that.

So near term, definitely, I think the gaming as well as a graphics card will be big. And computing itself -- graphics card is part of the computing segment. We'll grow over there as well as with some BOM content increase in the upcoming platforms for Intel and AMD.

That's really helpful color, Stephen. And then the follow-up, I believe the company is spending about $3 million a quarter in its digital power R&D. So just trying to think through the dynamics that get that business to breakeven on an operating basis. So we started to ship product. It's going into gaming card products. Do you feel like you've got visibility now to $6 million to $8 million in quarterly revenue for digital power? Or when would you expect to get that visibility so we would be at a point where on an operating basis, we were breakeven on a quarterly basis?

I think it's still further out. We expected digital power to take time to establish as a first player going into digital power. But also as for the markets that we're going into where we want to get into, both the server and telecom, we're still relatively new to those markets. So it simply just takes time to develop this business. That said, we're getting the early traction on, is in the applications that we do know well. Going into the client side on the graphics as well as client and PCs. So we expect to see earlier traction there. It's not going to get to the breakeven point that quickly. I think a steady -- we'll be making steady progress towards that. So I think we're still a few years out at least, in getting to the breakeven. But this is just the beginning of the revenue. It's coming from one customer right now, but we hope to expand that in the upcoming quarters.

This is Mike Chang. Can I add up a few words?

Yes. Go ahead, Mike.

What Stephen says is exactly true, okay? However, I would like to also share some of our excitement there. As you overhear some from Stephen, right? We are actually strong in clients, okay? The telecom, which is kind of a new telecom data. In the client side here, there's a lot of synergy among ourselves, is power and our existing Power IC there. So even though they may not get a revenue and say, "Hey, what is this revenue comes from, which power?" But they will contribute greatly to the other side there. So as in the benefits, not just what Stephen say, so is this -- how to say, there's a intra-benefit there, which is really beneficial.

Got it. So there's more than meets the eye.

Yes, thank you.

There are no further questions at this time. I'll turn the call back to the presenters for closing comments.

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.

Thank you.

Thank you, everyone, for joining. That concludes your conference call today. Have a wonderful day. You may now disconnect.