Alpha and Omega Semiconductor Ltd

NASDAQ:AOSL

Earnings Call Analysis

Company's Q1 Earnings Decline YoY; Guidance Provided

The company reported a decrease in non-GAAP quarterly EPS to $0.24 from $0.33 last quarter and $0.67 a year ago. Operating cash flow turned negative at $23.5 million, compared to positive cash flow a year prior. The cash balance also decreased from $193.6 million to $162.3 million quarter-over-quarter. For the upcoming quarter, revenue is expected to be around $150 million, with GAAP and non-GAAP gross margins anticipated to be 23.5% and 25.0%, respectively, both showing a quarter-over-quarter decrease.

Margin Pressures and Cost Management

Investors will note that the company experienced a decline in non-GAAP gross margin, influenced by Average Selling Price (ASP) erosion and higher inventory reserves, which were slightly countered by an improved product mix. The quarter-over-quarter gross margin faced these headwinds, which echoes a challenging environment. Non-GAAP operating expenses saw a reduction to $37.9 million from the prior quarter's $40.8 million due to decreased R&D engineering costs and increased holiday vacations taken by staff. The company reported a non-GAAP EPS of $0.24, down from $0.33 in the previous quarter and $0.67 from the same period last year.

Liquidity and Capital Expenditures

The operating cash flow was negative at $23.5 million, reflecting payments including an $11 million refund of customer deposits and an $11.3 million deposit to secure critical supplies for production. Compared to a positive cash flow in prior periods, this indicates a significant investment in future capabilities but also puts pressure on the available cash. Net inventory went up by $4 million, with the average days in inventory reaching 141 days. This raises concerns about potential excess inventory or slower turnover rates. Capital expenditures were reduced to $9.1 million, and the company expects Capital Expenditures (CapEx) for the following quarter to be between $8 million and $12 million.

Forecasting a Seasonal Uptick

Looking ahead, the firm is basing expectations on normal seasonal trends, strongly anticipating growth in the September quarter, well-known for being a peak period for the PC and smartphone markets. A successful second half is conditional upon overall macroeconomic recovery, suggesting that if macro factors are neutral to favorable, the December quarter could also witness an upturn. The assumption is that the broader market correction might be nearing its end, which could lead to improved customer demand across key sectors.

Gross Margin Guidance and Recovery Prospects

The gross margin guidance for the upcoming March quarter reflects several factors: decreased factory utilization which is typical for the season, ASP reductions, and mix improvements that offer some margin support. An analysis of the impact shows that approximately 200 basis points could be attributed to utilization with another 50 to 100 basis points from net ASP erosion and product improvements. This intricate balance underscores the implications of production efficiency and pricing strategies on profitability. When revenues climb back up, enhanced utilization coupled with a richer product mix is expected to positively influence gross margins.

Earnings Call Transcript 2024-Q2

[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 will be your moderator for today's call. [Operator Instructions]I will now like to pass the call over to your host, Steven Palo. 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 business updates including strategic highlights, and a detailed segment report. After that, Yifan will review the financial results and provide guidance for the March quarter. Finally, we will have the Q&A session.The earnings release was distributed over wire today, February 6, 2024, after the market close. The release is also posted on the company's website. Our earnings release and this presentation include non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in 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 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, executive]

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 finished at the high end of our guidance, primarily driven by overall operational control. These results were driven by continued recovery across notebooks, desktop computing and smartphones, offset by ongoing inventory correction in gaming and weak demand for quick chargers and solar.Looking back on the full calendar year 2023, it was undeniably a challenging period for our entire industry. AOS revenue experienced a significant decline of 19% following a record-breaking 2022. This drop was primarily due to the inventory correction in PCs and smartphones that commenced in late 2022 and broader macro headwinds. In the second half of calendar 2023, our performance was further hampered by inventory corrections and slowdowns in demand across other segments.While revenue declined in calendar 2023, I think it's important to recognize 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 this segment be down mid-single-digits on normal seasonality and the impact of Chinese New Year. Notably, the inventory correction in graphic cards is coming to an end, and tangential markets such as AI accelerators are becoming a meaningful portion of our datacenter-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 #1 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 quarters, factoring in that the console is now in its mid-life part of the platform cycle. Further, we see opportunities to increase BOM content within the current console platform as part of its refresh this year. Longer-term, we believe our relationship with this customer is very strong and are already engaged in discussions for their next model design. For the March quarter, we anticipate stabilization in the segment and are forecasting a low-single-digit sequential decline.Next, let’s discuss the Communication segment, revenue in the December quarter was down 18.0% 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 pull-back in shipments to the Tier 1 U.S. smartphone customer. Note, that customer had strong shipments in the September quarter in 2023 ahead of their fall device launch. Looking ahead, due to strong shipments from Chinese OEMs, we anticipate this segment to remain flat sequentially, out-performing seasonality.Now, let’s talk about our last segment, Power Supply and Industrial, which accounted for 21.1% of total revenue. December quarter revenue was down 15.4% year-over-year and down 16.6% sequentially. These results were driven by reduced quick 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 stand out 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 this cycle, supported by our leading technology, more diversified product portfolio, Tier 1 customer base in all 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, executive]

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 1 year ago. Assembly service revenue was $0.7 million, as compared to $0.7 million last quarter and $1.2 million for the same quarter last year. License and engineering service revenue was $5.5 million for the quarter versus $5.6 million in the prior quarter.Non-GAAP gross margin was 28%, compared to 28.8% in the prior quarter and 29.5% 1 year ago. The quarter-over-quarter decrease in non-GAAP gross margin was mainly impacted by ASP erosion and increased inventory reserve, partially offset by the improved product mix.Non-GAAP operating expenses were $37.9 million, compared to $40.8 million for the prior quarter and $32.8 million last year. The quarter-over-quarter decrease was primarily due to lower R&D engineering expenses and more vacation taken during the holidays. Non-GAAP quarterly EPS was $0.24, compared to $0.33 last quarter and $0.67 1 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 wafer supply. By comparison, operating cash flow was $13.8 million in the prior quarter and $0.3 million 1 year ago. EBITDAS for the quarter was $20.7 million, compared to $23.3 million last quarter and $31.8 million for the same quarter last year.Now let me turn to our balance sheet. We completed the December quarter with a cash balance of $162.3 million, compared to $193.6 million at the end of last quarter. Net trade receivables decreased by $2.5 million sequentially. Days Sales Outstanding remained at 18 days for the quarter.Net inventory increased by $4 million quarter-over-quarter. Average days in inventory were 141 days, compared to 129 days in the prior quarter. CapEx for the quarter was $9.1 million, compared to $12.5 million for the prior quarter. We expect CapEx for the March quarter to range from $8 million to $12 million.Now I would like to discuss March quarter guidance. We expect, revenue to be approximately $150 million, plus or minus $10 million. GAAP gross margin to be 23.5%, plus or minus 1%. We anticipate non-GAAP gross margin to be 25.0%, plus or minus 1%. The quarter-over-quarter decrease in gross margin mainly reflects the lower factory 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 will open the call for questions. Operator, please start the Q&A session.

[Operator]

[Operator Instructions] The first question comes from the line of Craig Ellis with B. Riley Securities.

[Craig Ellis, analyst]

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 and 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, executive]

Sure. Thank you, Craig. Certainly, we are looking forward to the normal seasonality that will come in the September quarter, which is the peak season, both for PCs as well as for smartphones. And in both of those markets, we continue to be well positioned at our customers. So comparing first half to second half, I think generally, we do expect the second half to be stronger compared against the first half. And the question more of is whether the macroeconomic conditions overall is recovering. Right now, we are still relatively still in the world where 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 looking -- our visibility isn't as clear that far down. We are preparing mainly for the September seasonal peak first.

[Craig Ellis, analyst]

Got it. And I'll direct the next one to Yifan. Yifan, I wanted to follow up on the gross margin for the first quarter. So the Lunar New Year impact is something that impacts the business every year, but I thought the impact was closer to 150 to 200 basis points or 100 to 200 rather than the 300. So can you just detail the factors that are causing gross margin to decrease by 300 basis points sequentially quarter-on-quarter? How much is the floor utilization for Lunar New Year and what are the other factors? And then beyond that, how would you expect gross margin to recover off of the 25% level if we have the type of environment that Stephen was talking about, which is much better calendar second half demand?

[Yifan Liang, executive]

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

[Operator]

The next question comes from the line of David Williams with Benchmark.

[David Williams, analyst]

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 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, executive]

Sure. And David, yes. For a stronger second half, we're counting not only on the seasonal factors, but also on the macro picture. And the picture, when we're looking at our end markets, and many of our end markets have been going through inventory correction. The PCs and smartphones started earlier. And sorry, but 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 entered into inventory control about 2 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, analyst]

Great. And maybe Yifan, if back to the gross margin, maybe to kind of get a little more color, maybe we'll break 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.

[Yifan Liang, executive]

Okay, sure. I mean, if you recall, on March quarter of 2023, then our gross margin was around 25% range. So now this March 2024 quarter, even though the top line is a little bit higher than the 2023 March quarter, but then the utilization right now is about similar to the March quarter 2023 at our factory. Overall, I would expect when our top line recovers, and then I would expect that our utilization 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.

[Jeremy Kwan, analyst]

Yes. 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 going to be up. Can you help us, 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?

[Yifan Liang, executive]

Sure. I mean, inventory balance at the end of the December quarter increased by like $3 million or $4 million. And then, yes, I mean, relative to the overall inventory size, and then it's like a marginal. For the March quarter, we would expect an inventory level maintains around a similar level. And we already slowed down our own production and also some purchases. So going forward, I would expect that the inventory will adjust based on our expected business growth. So if we needed some additional production to support, yes, we'll ramp up some production depending on the bottleneck areas. So that's an -- we manage on a daily basis.

[Jeremy Kwan, analyst]

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, executive]

Yes, the inventory reserve went up by a couple of million dollars and also in the December quarter, so we took a higher reserve.

[Jeremy Kwan, analyst]

And 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?

[Yifan Liang, executive]

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

[Jeremy Kwan, analyst]

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

[Yifan Liang, executive]

Okay, sure. Regarding our own CapEx, again, I would expect throughout this calendar year, our CapEx right now is at what I call maintenance mode. We do our regular upgrade and solve some production bottleneck areas. And so, we don't have a major plan to expand. Generally, we target 6% to 8% of our revenue as CapEx. So I would expect this year, $10 million-ish per quarter. That's probably in the ballpark.In terms of customer deposits, yes, I would -- last year, last calendar year, 2023, we returned about $30 million or so. So this calendar year 2024, we expect to return another $30 million or so customer deposits. In terms of our own deposit we made, that's a one-time deposit. So I would not expect further -- well, depends on the situation. But at this point, that's a one-time deposit.

[Jeremy Kwan, analyst]

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

[Yifan Liang, executive]

At the end of December last year, we had about a $60-some million deposit on hand. So calendar year 2024, we'll return another $30 million or so.

[Jeremy Kwan, analyst]

Got it. And one last question, if I could. Stephen, I appreciate the guidance that you gave for -- by end market. If I'm doing the math right, it looks like licensing and other, that kind of goes down to less than 1%. If that's not the case, can you help me see where I went wrong?

[Stephen Chang, executive]

There was something like an assembly service that a little bit. So that's probably it.

[Jeremy Kwan, analyst]

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

[Yifan Liang, executive]

No, no. No. Right. Correct. I mean, assembly service, we just do some services for some idle capacity. So not a major business for us.

[Operator]

[Operator Instructions] There are no additional questions left at this time. I will hand it back to the management team for closing remarks.

[Stephen Chang, executive]

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.

[Yifan Liang, executive]

Thank you.

[Operator]

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