Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) Q2 2024 Earnings Call Transcript

Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) Q2 2024 Earnings Call Transcript February 6, 2024

Alpha and Omega Semiconductor Limited misses on earnings expectations. Reported EPS is $-0.10462 EPS, expectations were $0.15. Alpha and Omega Semiconductor Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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’ll be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions]. I would now like to pass the call over to your host, Steve Pelayo. Please proceed.

Steve Pelayo: Good afternoon everyone, and welcome to Alpha and Omega Semiconductors conference call to discuss fiscal 2024 second quarter financial results. I’m Steve 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 7 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 with 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’ll have the Q&A session.

The earnings release was distributed over the wire today, February 6th, 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 the comparable GAAP measures is included in the 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 Steven Chang. Steven?

Stephen Chang: 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 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 finish 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 the 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 years 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 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 rebounds expected in graphics cards and continued contributions from 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 bond 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 their next model design. For the March quarter, we anticipate stabilization in this segment in our forecasting a low single-digit sequential decline. Next, let’s discuss the communication 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 U.S. smartphone customer.

Note, that the customer has 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 outperforming 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 chargers following our peak season shipments to our Tier 1 U.S. 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-teens 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?

Yifan Liang : Thank you, Stephen. 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 was $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 the 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.

The quarter of a quarter decreased in non-GAAP gross margin was mainly impacted by ASP erosion and increased in 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 of a 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 to $0.33 in the 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 and $11.3 million deposit that we made to secure silicon carbide weaver supply. By comparison, operating cash flow was $13.8 million in the prior quarter and $0.3 million a year ago.

You did ask for the quarter was $20.7 million compared to $23.3 million the 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. Now the 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 non-GAAP gross margin to be 25% plus or minus 1%. A quarter-over-quarter decrease in gross margin mainly reflects the lower factor utilization due to the seasonality and the 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.

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Q&A Session

Operator: [Operator Instructions]. The first question comes from the line of Craig Ellis would B. Riley Securities. Please proceed.

Craig Ellis : Thanks for taking my question. I had 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 in 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, 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.

Stephen Chang: Sure. And 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 then we are continue to be well-positioned at our customers. So, comparing first half to second half, I think it is a general — 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 recovery. Right now, we are still relatively — still in the world what we’re hoping to be at the tail end of the overall broader 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 just looking our visibility isn’t as clear that far down. We are now preparing mainly for the September or September seasonal peak first.

Craig Ellis: And I’ll direct the next one to Yifan. Yifan, I wanted to follow-up on the gross margin for the first quarter. So Lunar New Year impact is something that impacts the business every year, but I thought the impact was closer to 150 basis points to 200 basis points, or a 100 basis points to 200 basis points rather than 300 basis points. 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 to gross margin to recover off of the 25% level if we have the type of environment that Steven was talking about, which is much better calendar, second-half demand? Thank you.

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

Operator: The next question comes from the line of David Williams with Benchmark. Please proceed.

David Williams : Good afternoon. Thanks for taking my question. I certainly appreciate 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 trying 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 that the second half recovery does materialize.

Stephen Chang : For a stronger or second half, we’re counting on not only on the seasonal factors, but also on the macro picture. We’re looking at our end markets and many of our end markets have been going through the inventory correction, the PCs and smartphones started earlier and — sorry, more recently, graphics also and gaming went through that as well too. We believe that now actually we’re at the tail end of that PCs inventory control, I think is tapering down. It’s more of a factor of end demand that needs to come back. And this is where we need, the PC refresh cycles to be healthier and the overall macroeconomic to help and raise 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 entered into inventory control about two or two quarters ago. And so those are nearing the end of inventory control and we’re looking now more mainly to the end demand. And once that can pick up back to at least neutral and or back to growth, then that can point us to a stronger second half.

David Williams: Great. Thanks. And maybe Yifan, if back to the gross margin, maybe trying to get a little more color, maybe — it back there, but can you, I guess just how much of the impact are you seeing from utilization relative to just the leverage loss on the revenue side and maybe what are the puts and takes there as we think about that gross margin longer term? It’s certainly, we expect that bottom out a little higher than this, so just anything helps there. Thank you.

Yifan Liang : Okay, sure. I mean, if you recall on March quarter 2023, then our gross margin was around 25% range. So nowadays, March 2024 quarter, even though the top line is a little bit higher than the 2023 March quarter, but the utilization right now is about similar to the March quarter, 2023, and then at our factory. And then, overall, I would expect, and when our top-line recovers and then I would expect that our utilization, that would help and also product mix and I would expect to come back and at a better product mix as well.

Operator: The next question comes from the line of Jeremy Kwan with Stifel. Please proceed.

Jeremy Kwan : 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 least days of inventory are gonna be up. Can you help us how we — what 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?

Stephen Chang: No, that, I mean, inventory balance and at the end of the December quarter increased by the like $3 million or $4 million. And then, I mean relative to the overall inventory size and then it’s a like a marginal. For the March quarter, we would expect the inventory level maintains around similar level. And we already slowed down our own production and also some purchases. So, going forward, I would expect the inventory will adjust based on our expected business growth. And then so if we needed some additional production to support, and that will ramp up some production depending on the bottleneck areas. So, we manage on a daily basis.

Jeremy Kwan: Also, I guess maybe can you add some more color on the inventory reserve you took? I wasn’t sure if I caught how much that was and without that inventory reserve, where would the inventories have gone?

Yifan Liang : The inventory reserve went up by, up a couple million dollars and also in the December quarter, so we took a higher reserve.

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

Stephen Chang: Well, depends on the market conditions and the overall environment and it’s hard to say for inventory reserve. Generally, I would expect probably back to the normal and I wouldn’t see the additional inventory reserves out there.