Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) Q4 2023 Earnings Call Transcript

Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) Q4 2023 Earnings Call Transcript August 9, 2023

Alpha and Omega Semiconductor Limited beats earnings expectations. Reported EPS is $0.19, expectations were $0.02.

Yujia Zhai: Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor’s Conference Call to discuss Fiscal 2023 Fourth Quarter and Fiscal Year-End Financial Results. I am Yujia Zhai, 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 Web site. Our call will proceed as follows today. Stephen will begin business updates, followed by a detailed segment report. After that, Yifan will review the financial results and provide guidance for the September quarter. Finally, we will have the Q&A session.

The earnings release was distributed over the wire today, August 9, 2023, after the market close. The release is also posted on the company’s Web site. 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 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 will turn the call over to our CEO, Stephen Chang. Stephen?

Stephen Chang: Thank you, Yujia, and good afternoon, everyone. I will begin today with a high-level overview of our results and then jump into segment details. Our team executed well and delivered an excellent quarter. Our fiscal Q4 revenue was above the mid-point of our guidance, and gross margin was above the high-end of our guidance, which resulted in a solid bottom line. Revenue was $161.5 million, down 16.7% year-over-year, and up 21.9% sequentially. Non-GAAP gross margin was 28.5%, and non-GAAP EPS was $0.19. These results were driven by solid recovery across notebook and desktop computing applications and strength of our diversified customer base and product portfolio in Power Supply and Industrial end markets. Recall from our prior quarter call, we said our calendar Q1 results reflected our efforts to bring customer inventory levels back into balance as quickly as possible.

We were confident then that due to our resilient fundamentals, we would see a swift recovery in Q2 and continued recovery in Q3 as we go into our peak season. I’m happy to report that it is playing out in line with our expectations. As for the broader market, end consumer demand continues to be soft; however, we are optimistic that the worst phase of this cycle is behind us. We anticipate further recovery in our September quarter, which seasonally has been our strongest quarter, driven by fall smartphone launches and back-to-school. While we remain cautious, we expect to navigate the current environment better than the broader market that we serve, thanks to our robust Tier 1 customer partnerships, leading market share, as well as a much more diversified total solutions product portfolio serving a broader set of end markets across consumer, commercial and industrial applications.

In terms of our operations, our near-term focus is on maintaining close collaboration with our customers while gearing up for our peak season to provide the best customer service possible. As we see repeatedly, by ensuring our products remain highly competitive, prioritizing long-term customer relationships, and consistently upholding our commitment to excellence and reputation as a reliable supplier, we become a favored partner of our customers. As a result, they entrust us with more share. This approach has served as a cornerstone of our growth. It has helped us expand our Tier 1 customers across all our end markets, which in turn, creates a positive flywheel and marketing effect that propels us towards achieving our long-term goals. With that, let me now cover our segment results and provide some guidance by segment for the next quarter.

Starting with Computing, June quarter revenue was down 41.8% year-over-year but up 36.8% sequentially and represented 32.2% of total revenue. These results were driven by a solid recovery in shipments across notebook and desktop computing applications following the sharp correction in the March quarter, which drew down inventories at our key customers. Looking forward into September, which is our seasonally strongest quarter, we continue to see encouraging recovery and expect further sequential growth in the high teens. Turning to the Consumer segment, June quarter revenue was up 18.8% year-over-year and down 1.9% sequentially and represented 27.1% of total revenue. Our year-over-year growth in this segment was driven by strong shipments into Gaming, E-Scooter and wearable applications.

These results reflect our diversified product portfolio. Over the last couple of years, we strategically focused on these consumer applications, targeting leading customers with our highly competitive low-to-medium voltage products. These initiatives broadened our revenue streams in this segment and enhanced our performance and helped us diversify our more traditional consumer areas such as TVs. For the September quarter, we do anticipate a 30% pull-back in this segment as Gaming begins an inventory correction after an extremely strong 12 months of shipments into the number one console manufacturer. Next, let’s discuss the Communications segment, revenue in the June quarter declined 42.4% year-over-year and declined 10.7% sequentially, and represented 10.7% of total revenue.

The drop in revenue was primarily attributable to the inventory correction in smartphones and 5G telecom infrastructure. Fortunately, based on conversations with our customers and channel partners, we believe the inventory correction in smartphones is starting to abate, particularly in the premium tiers, and we anticipate a solid recovery in the second-half of 2023 driven by our U.S. smartphone customer fall launch and further share gains with them. In the September quarter, which is our seasonally strongest quarter, we are expecting over a 70% recovery in revenue sequentially in this segment. Now, let’s talk about our last segment, Power Supply and Industrial, which accounted for 25.7% of total revenue. June quarter revenue was better than our prior expectations, increasing 16.1% year-over-year and 57% sequentially.

These results were driven by strong demand for high performance medium voltage MOSFETs used in quick chargers by our Tier 1 U.S. smartphone customer and China’s high-end smartphone OEMs. In addition, we saw stronger demand from other applications such as Solar and Power Tools. For the September quarter, we expect this segment to continue to be solid and be up low-single-digits sequentially. In closing, as we stated last quarter, we believe the worst of the inventory correction in PCs and Smartphones has passed and we look forward to a solid second half of 2023. While we remain cautious beyond our near-term visibility, our fundamentals have never been stronger, driven by our leading technology, more diversified product portfolio, Tier 1 customer base in all our business segments, expanding manufacturing capability and supply chain.

As such, we are confident we will emerge as an even stronger company on the other side of this cycle. With that, I will now turn the call over to Yifan for a discussion of our fiscal fourth quarter and fiscal year-end financial results and our outlook for the next quarter.

Yifan Liang: Thank you, Stephen. Good afternoon everyone, and thank you for joining us. Revenue for the quarter was $161.5 million, up 21.9% sequentially but down 16.7% year-over-year. In terms of product mix, DMOS revenue was $95.7 million, up 18.2% sequentially but down 30.8% over last year. Power IC revenue was $58.9 million, up 24.2% from the prior quarter and 9.8% from a year ago. Assembly service revenue was $0.6 million, as compared to $0.6 million last quarter and $2.0 million for the same quarter last year. License and engineering service revenue was $6.3 million for the quarter versus $3.6 million in the prior quarter. Non-GAAP gross margin was 28.5%, compared to 25.1% in the prior quarter and 33.8% a year ago. The quarter-over-quarter increase in non-GAAP gross margin was mainly driven by the mix improvement and higher license and engineering service revenue.

Non-GAAP operating expenses were $39.1 million, compared to $36.2 million for the prior quarter and $36.7 million last year. The quarter-over-quarter increase was primarily due to higher R&D engineering expenses and last quarter’s reversal true-up in variable compensation accruals. Non-GAAP tax expense was $0.8 million versus $2.5 million last quarter and $1.2 million in the prior year. The quarter-over-quarter decrease was mainly resulted from higher actual R&D credit and the withholding tax paid last quarter related to the $18 million license fee we received. Non-GAAP quarterly EPS was $0.19, compared to negative $0.21 last quarter and $0.95 a year ago. Revenue for fiscal year ended June 30, 2023 was $691.3 million with non-GAAP EPS of $1.86, as compared to revenue of $777.6 million and non-GAAP EPS of $4.56 for the prior fiscal year.

The decrease in financial performance was largely due to the industry-wide inventory correction. Moving on to cash flow, operating cash flow was negative $28.2 million, which reflected $3.8 million of repayment of customer deposits, an $11.3 million deposit that we made to secure SiC wafer supply, and fluctuation in working capital. By comparison, operating cash flow in the prior quarter was positive $11.6 million and $25.7 million a year ago. We expect to see a positive operating cash flow for the September quarter. EBITDAS for the quarter was $17.7 million, compared to $6.5 million last quarter and $36.9 million for the same quarter last year. A couple of other items that impacted our cash balance this quarter worth mentioning are that during the quarter, we repurchased 441,000 shares of our stock for $10.8 million under our previously announced share repurchase program.

In addition, we also repaid back $16.3 million of debt under bank loans that matured during the quarter. Now, let me turn to our balance sheet. We completed the June quarter with a cash balance of $195.2 million, compared to $265.9 million at the end of last quarter. Net trade receivables were $22.4 million compared to $19.4 million at the end of the prior quarter. Day sales outstanding were 19 days for the quarter versus 30 days for the prior quarter. Net inventory was $183.2 million at quarter-end compared to $179.8 million at the end of the prior quarter and $158.0 million last year. Average days in inventory were 140 days, compared to 152 days in the prior quarter. We expect average days in inventory continue to improve along with our revenue recovery.

CapEx for the quarter was $19.2 million. We expect CapEx for the September quarter to range from $15 million to $20 million. We expect to complete our Oregon fab expansion in the September quarter. Now, I would like to discuss September quarter guidance. We expect revenue to be approximately $180 million, plus or minus $10 million; GAAP gross margin to be 27.2%, plus or minus 1%. We anticipate non-GAAP gross margin to be 28.5%, plus or minus 1%; GAAP operating expenses to be in the range of $48.0 million, plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $40.0 million, plus or minus $1 million; interest expense to be approximately $1.2 million and income tax expense to be in the range of $0.8 million to $1.2 million.

With that, we will now open the call for questions. Operator, please start the Q&A session.

Q&A Session

Operator: Thank you. We will now begin the Q&A session. [Operator Instructions] Our first question is from David Williams with Benchmark. Your line is now open.

David Williams: Hey, good afternoon. Thanks for letting me ask the question, and congrats on the execution and really solid results here.

Stephen Chang: Thanks, David.

David Williams: I wanted to congratulate Chang on the logo refresh and Web page [indiscernible] it was really good.

Stephen Chang: We appreciate it, thanks.

David Williams: Yes. So, it looks like you guys did a really good job on depleting the channel inventories over the last couple of quarters. Do you get a sense that now you’re shipping to consumption or is there a chance that we’re seeing some pull-in for replenishment rather than for sell-through?

Yifan Liang: Well, right now they — our channel inventory, you’re right, I mean that right now, after March quarter’s correction and then June quarter’s, and continued efforts. So, now there’s more of our channel inventory dollar amount is more in line with our revenue levels. So, right now there is more we are going with market, and I mean whatever the demand we can see.

David Williams: Okay, great. And maybe if you could just talk about the cadence of orders through the quarter, how those progressed? I know there’s some periods, a point or two strong market or May, with a meaningful decline in June. But wonder if you are seeing the same dynamics or if you’re positioning it maybe just differently, and you’re not seeing those same impacts?

Stephen Chang: I mean we’re relatively — fairly steady in terms of the revenue throughout the quarter. There’s not any kind of hockey stick in any direction. Overall, in general, we do generally see that our business, at least as we predicted, as inventory correction got better it would start to come back. So, this is why we see the June number showing that partial recovery. And as we had into September, we expect to see a little bit more recovery there as well too. So, overall, it’s largely playing out as we’re expecting it to. Certainly, as we want it, we want it to come back stronger faster, but we are encouraged to see the progress and the return to — of some of the business that was on hold back in the March quarter.

David Williams: Okay, appreciate the color there. And then just one last one if I can real quick, you talked about the deposit for [to supply some stick] (ph) wafers. Just can you talk maybe about the traction you’re seeing within the Silicon Carbide market, where you’re seeing the most activity, and how you think about that opportunity over the next few years?

Stephen Chang: Sure. For us, we’re excited about our Silicon Carbide business, our own business. Yes, we’re also excited about the — on the licensing deal, but really that’s kind of — that aren’t the means to help us to really kick-start and to expand our own Silicon Carbide business initiative. Right now we’re still in relatively early stages of the business portion of it. We’ve actually been working on the product and the portfolio release and the promotion on it — of those products for quite a few years. And we’re starting to see some revenue already, but it’s still very small to start with. That the type of business that we’re trying to get into is automotive, this is one of our entry points to really get into the heart of automotive and especially going after the newer EV battery-powered vehicles.

Our first products are targeted towards onboard charging. And as you can imagine, the design cycles for these types of critical applications are longer. Well, they do take a few years to turn from design into revenue. We’re starting to see some revenue now, but it will take us some more time to see more significant impact to our business.

David Williams: Thanks so much.

Operator: Thank you, David. Our next question is from Craig Ellis with B. Riley Securities. Your line is now open.

Craig Ellis: Yes, thanks for taking the question and congratulations on the execution, guys. I want to start off with questions on the fiscal fourth quarter. So, when I look at compute and industrial, we had expected those would be up, but they were both up significantly more than what I would have expected. So, can you just clarify what the driver was for the upside strength in each of those end markets?

Stephen Chang: Sure. Well, let’s talk about them in part. So, the computing portion was largely driven by inventory correction, yes. That’s where, during the peak of the shortest period, several of our customers were very aggressive in accumulating supply. So, those were the customers that had to work through their supply in order to match with the demand that we’re currently seeing. So, when we made that judgment, back in the March quarter, and going into the June quarter, it played out as we thought. Basically the inventory correction is improving, and we see that because we started to see orders and started to fulfill orders for products that were on hold in the March quarter. So, certainly computing, and especially in the notebook side. Even the motherboard desktop side, we saw a recovery in those markets. The other one you mentioned –?

Craig Ellis: And what about industrial, Stephen?

Stephen Chang: On industrial, yes, industrial is a little bit tied to that also, but I think the bigger contribution is actually coming from quick chargers. The smartphone market is still rather slow, but — in terms of the overall worldwide shipments. But the premium-end phones seem to be doing better, and that’s where we have more impact to our business. And for us, especially, the high-end quick chargers, we started seeing more orders for that coming in and fairly strong, especially when compared to the March quarter. So, that’s why we saw that bump up in the power supply and industrial. There were also other two sub-segments within that sector that also grew in addition to quick charger, and that’s the power tools, as well as on the solar power portion. So, those also helped to a small degree, but the bigger portion is coming from the quick charger side.

Craig Ellis: That’s really helpful color, Stephen. The second question I wanted to ask is related to comments that the company feels like the inventory correction is moving along, and we’re behind it. It seems like in many cases we are, but I wanted to ask the question this way. If we look beyond the fiscal first quarter to the fiscal second quarter, what are some of the gives and takes for growth across the businesses, because when I look at some of our first quarter color, with consumer off significantly as gaming console orders correct and inventory corrects, couldn’t we be at risk for that same thing happening in PCs and smartphones as we move beyond their peak seasons? Can you just talk about the gives and takes there, and what it means as you’re looking beyond the fiscal first quarter to the fiscal quarter for growth gives and takes?

Stephen Chang: Sure. Each specific end application has its own situation. And the game console, the difference there was that gaming actually never went into correction. It was actually about four full quarters of very strong performance. Just keep in mind that this console may vary. Remember in the early days, when they first released their platform, they had production issues and — because they couldn’t source all the parts needed to build their consoles. But once the market slowed down and the supply chain eased up a bit, they quickly were able to catch up at production. And that’s what they were doing in the last 12 months. Going forward, they’re about halfway through their whole product cycle or for the lifetime of the console.

And they never had to do any kind of correction before. And now they — this is the first time, first quarter that they will have to do some production adjustments. So, that’s why we see, specifically for gaming, their correction came late. We didn’t see any correction in the past before, until this coming quarter. Whereas the other segments there, whether it’s computing or smartphones, a lot of that, the inventory correction is already behind us, that happened already, starting end of last year — last calendar year, and going into the March quarter of this year. So, now, it’s more about the visibility of the market. And we’re right in the middle of a full launch of our — of the major U.S. phone maker. It’s also in the middle of a back-to-school time and in preparation for the holiday season.

So, our eyes are looking now more at the end markets with less an impact from inventory control, these for the computing and the smartphone markets.

Craig Ellis: And so, with that being said, Stephen, does that mean since you feel like the business is recovering from inventory correction, that the business should actually be up quarter-on-quarter in the December fiscal second quarter or would you expect seasonal dynamics to be more at play, and for the business overall to be down sequentially in fiscal 2Q?

Stephen Chang: Honestly, it’s a little bit too early to tell right now. And our visibility is still looking at the next — the current quarter that we’re in. And we do need to see again how well the phones are received and how strong the holiday seasons are expected to be. So, even in a normal year, and not any downturn year, but normal year the calendar fourth quarter can go either way. It could remain strong, it could go even stronger, or it could start to adjust because, again, March quarter is usually the seasonally low. So, seasonality does play a factor, but for the December quarter, it simply just depends on the strength of those key drivers there with back to school and with the phone markets.

Craig Ellis: Got it. So, we’ll keep our eye on in demand. That’s helpful, Stephen. And then Yifan, I want to just close out with you. So, great to see the significant gross margin upside in the quarter and it’s guided to a high level. But it is flat when revenues were up significantly. So, I would have expected a volume benefit to gross margin sequentially. Can you just talk about the gives and takes in gross margin quarter-on-quarter and fiscal 1Q? Thank you.

Yifan Liang: Sure. For the September quarters, March, and right now, we have seen those incremental revenues pretty much the mix is in line with the June quarter. So, and then in terms of the utilization, it’s kind of largely muted then compared to the June quarter, because in June quarter we were ramping up on our Oregon fab’s expansion. So, overall, our production level is expected to be relatively similar — at a similar level for the September quarter, as compared to the June quarter.

Craig Ellis: Okay. So, does that mean we’d need to see revenues materially above $180 million a quarter before we get that volume and utilization health to gross margin from here, Yifan?

Yifan Liang: Right. And that — for our Oregon fab utilization actually in the June quarter was relatively good, and then — not then — then it was okay. So, the incremental benefit and yet may not be as strong as the revenue recovery that you indicated.

Craig Ellis: Stephen, Yifan, thank you very much.

Stephen Chang: All right, thank you, Craig.

Operator: Thank you, Craig. Our next question is from Kyle Smith with Stifel. Your line is now open.

Kyle Smith: Hey, everyone, Kyle Smith on for Tore Svanberg and Jeremy Kwan here at Stifel. Kind of going off that, I had a question on CapEx. So, you mentioned, last quarter, your expectation is to see your CapEx gradually decline. And it looks like you’re guiding for the September quarter to be roughly similar to the June quarter. So, do you have any update here as you think about the rest of the fiscal year?

Yifan Liang: Right, and I mean, right now, for the September quarter, we can see a relatively — yes, the $15 million to $20 million level, yes, and maybe in a couple of million dollars lower than the June quarter, but it is still in that range, yes. And then — and in our Oregon fab expansion, right now, I guess toward the tail end of the payment process. So, going forward it’s more like on — for the maintenance and de-bottlenecking, and in those — depending on our product requirements. So that right now, I would say, overall, we would target — our target model is try to target CapEx within the 6% to 8% of our revenue range, and then that’s our normal CapEx target.

Kyle Smith: Great, thank you.

Operator: There are currently no further questions registered. [Operator Instructions] Our next question is from David Williams with Benchmark. Your line is now open.

David Williams: Hey, gentlemen, thanks for letting me ask the question — or a follow-up question here. I guess, Yifan, if you think about the mix this quarter, the IC business, Power IC was up quite a bit sequentially. Just wondering how much of the gross margin improvement was from that mix, and how you think that mix will flow into the next quarter despite maybe the segment mix?

Yifan Liang: Sure. Our Power IC product line, it generally carries at a higher margin. And in — yes, in the June quarter, the Power IC revenue recovered relatively, compared to the March quarter, at a bigger pace. Yes, because the — back to last year also, when the supply was constrained and so we optimized our shipment and product mix quite a bit, so the — tentatively — I mean those products accumulated more inventory at a different level, and at a ODM level, and OEM level. So, and then March quarter, kind of correct that quite a bit, so the — in the [technical difficulty] quarter the mix definitely improved along with revenue recovery. So then — I mean those level contributed then to the — over gross margin improvement in the June quarter quite a bit.

David Williams: Okay, understood. And then just one last one, from a geographic perspective, can you talk a little bit about what you’re seeing coming out of Asia? And is China better or worse, maybe neutral? There’s been some mixed messaging, I think, around that market in terms of whether it’s improving or still down? So, any color around what you’re seeing would be very helpful. Thank you.

Stephen Chang: Sure. Everyone that’s been looking at China, as their reopening as a potential kick-start to, not only China, but maybe to the rest of the world, and so far, I think opening it up, it is — there is a lot more activity there and there is — and then if you travel there, it’s kind of like what it was before. And — but not sure whether — I don’t think it’s actually translated over into retail spending being up. And it is up, but I would say that the expectations were for it to be higher. For AOS ourselves, we do see China, just like all the other regions, also through a correction in the March quarter, and that also came back in the June quarter. So, they’re a part of that recovery. We are counting on China, as well as the rest of the Asia region, especially Taiwan, and Korea, Japan also to grow going forward.

David Williams: Thank you.

Operator: There are no additional questions waiting. So, I will pass the conference back to the management team for any closing remarks.

Yifan Liang: This concludes our earnings call today. Thank you for your interest in AOS, and we are looking forward to talking to you again next quarter. Thank you.

Stephen Chang: Thank you.

Operator: That concludes today’s conference call. Thank you for your participation. You may now disconnect your line.