Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) Q3 2020 Earnings Conference Call May 5, 2020 5:00 PM ET

Company Participants

So-Yeon Jeong - Investor Relations
Mike Chang - Chief Executive Officer
Stephen Chang - Executive Vice President
Yifan Liang - Chief Financial Officer

Conference Call Participants

David Williams - Loop Capital
Tore Svanberg - Stifel
Craig Ellis - B. Riley FBR

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Alpha and Omega Semiconductor Reports Financial Results for the Fiscal Third Quarter of 2020. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [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, So-Yeon Jeong. Thank you. Please go ahead, madam.

So-Yeon Jeong

Good afternoon, everyone and welcome to Alpha and Omega Semiconductor’s conference call to discuss fiscal 2020 third quarter financial results. I’m So-Yeon Jeong, 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 seven 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 business overview for the quarter, and Stephen will provide a detailed segment report. After that, Yifan will continue with a review of financial results for the quarter and guidance for the next quarter. Then we’ll have the question-and-answer session.

The earnings release was distributed by Business Wire today, May 5th, 2020, after the close of the 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 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 conference call, we’ll make certain forward-looking statements, including discussions of 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’ll turn the call over to our CEO, Mike, to provide an overview of our business and the impact of COVID-19 pandemic. Mike?

Mike Chang

Thank you, So-Yeon. Welcome everyone, and thank you for joining us for our March quarter earnings call. I hope that all of you and your families are safe and healthy. As we navigate the unprecedented challenges of this COVID-19 pandemic, we think it is important to update you on our business operations and how we are staying resilient.

Before we begin the usual review of quarterly results, I will take a few minutes to talk about the challenges and the risks we face and our actions to mitigate them. As I said on our last earnings call, our top priority is health and well-being of our employees and their families. In addition to the mandatory measures enacted by federal, state and regional agencies, we proactively implemented precautionary measures and established operating guidelines to safeguard our employees and their families.

As part of our business continuity plan, we instituted a work-from-home policy before it was mandatory. This helped us mitigate the impact of sudden disruptions to our operations and ensured that our employees had full access to the connectivity infrastructure required to work remotely. We are thankful that all 4,000 of our employees are currently safe and well, and our global operations are running.

In addition to safeguarding our employees, we are committed to fully supporting our customers during these trying times. When we discussed our outlook for March quarter back in early February, our guidance factored in an estimate of our lost production in China. As it turned out, production in China was severely disrupted during February.

However, we were fortunate that we maintained partial production throughout the Lunar New Year holiday, during which we ran 24/7. When more people returned to work after the holiday, our employees went above and beyond their typical roles to ensure delivery of our products while complying with various governmental orders and managing logistical challenges.

The Oregon fab also ran non-stop during the quarter. Our diversified manufacturing footprint helped us quickly respond to shifting market demand. Since March, our total production level has recovered significantly faster than we anticipated. Today, I am pleased to report that we are running at the level we expected.

Obviously, COVID-19 negatively impacted our customers. Some of them are recovering more slowly than others. [technical difficulty] factories located in the COVID-19 epicenters, while others are exposed to greater supply chain disruptions, because they source numerous components to complete an entire kit of parts.

Travel restrictions and logistical challenges also restricted our ability to support customers with demo boards, evaluation kits and design-in support. With utmost dedication, we are working closely and creatively to support our customers in every way we can. We are providing excellent service and meeting demand by being flexible and nimble with production schedules, thus demonstrating solidarity with our customers.

As of this stage, we are able to work around temporary disruptions to achieve our operating objectives. While visibility beyond the June quarter is very limited given the uncertainty of the impact of COVID-19, we are managing risks by optimizing product mix, vigilantly seeking new business opportunities and accelerating product time-to-market. Against this backdrop, we reported an in-line March quarter with revenue within our guidance range. Yifan will provide details of our March quarter results later on the call.

Let me now touch on some key business highlights and what we are seeing in the current environment. Even with the overall downturn in the economy, near-term end-demand for Computing and Gaming is very strong. This is due to the shelter-in-place and social distancing mandates, which are driving the need for higher computing power for working-from-home activities, online learning and gaming.

The computing industry has been expanding and transforming to support and connect businesses and individuals worldwide. While we have rapidly diversified into other applications, such as mobile and home appliance, we remain the leader in power management, especially in the computing area.

Our unwavering commitment in the past years to our computing customers has rewarded us with much-welcomed business during this downturn. In difficult times like these, supporting customers through the uninterrupted supply of our products is more important than ever.

Also noteworthy is that our Chongqing JV is starting to fulfill its purpose, as highlighted in our strategic plan for sustainable growth. Indeed, it has played a critical role in enabling us to meet the surging demand in the computing market. As you would expect, given the environment, we are prudently managing expenses.

We are reducing non-essential spending, while also pursuing strategic and critical R&D projects in order to expand our market reach and TAM. Stephen is diligently working with our R&D team on these special projects, and he will provide more details later on the call. Finally, I want to highlight that our core business is generating consistent and sustained cash flow. Our balance sheet is strong. Yifan will provide you with more color on our cash position.

As I look at our performance in the quarter, I am both humbled by and proud of our amazing group of employees. They delivered extraordinary performance with strong sense of ownership and commitment, while sustaining a safe and healthy working environment. We look forward to a gradual return to normality for our country, our industry and our economy. The power semiconductor market is large and growing, and we are determined and committed to accomplish our mission to rapidly expand and become a top-tier supplier in this market.

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

Stephen Chang

Thank you, Mike, and good afternoon. Let me start with Computing. It represented 44.2% of our total revenue in the March quarter. Revenue was down 2.9% sequentially and down 8.8% year-over-year.

Starting in the second half of March, we saw a rise in demand for our Computing products, especially for notebook PCs. As a result of various stay-at-home orders by governments in response to the COVID-19 pandemic, PCs have become indispensable worldwide as more people are working from home and transitioning to distance learning. We don’t know how this demand picture will play out in the second half of this year, but at the moment, we are optimizing our production mix to satisfy this surge in demand for the next quarter.

Our graphics card business has also been strong with both our high performance DrMOS and MOSFET Vcore solutions. Graphics cards have been selling well as demand in both PC and Gaming is up. We expect Computing to be strong in the June quarter, with mid-single-digit sequential growth.

Now turning to the Consumer segment, it represented 18.7% of total revenue in the March quarter. Revenue decreased 5.3% sequentially and was down 2.9% year-over-year. Our TV business was seasonally down in the March quarter, but we now expect it to grow in the June quarter.

We are very excited to share with you that AOS has achieved a strong design into an upcoming gaming system platform that is expected to launch later this year. Our content in this gaming system has multiple sockets, including DrMOS and MOSFETs to power processors as well as Type C smart load switches and TVS surge protection devices to protect the controller ports.

Gaming systems feature higher resolutions and faster graphics, along with plenty of software features, while still needing to meet energy efficiency, temperature and safety requirements. AOS won this design because our power solutions offer the high performance needed to keep the system operating coolly and efficiently. With the ramp-up underway, we anticipate double-digit growth for the June quarter in the Consumer segment.

Next, let’s discuss the Power Supply and Industrial segment. It accounted for 17.8% of total revenue, down 24.6% sequentially and down 10.3% year-over-year. COVID-19 market disruptions in China impacted our Power Supply/Industrial business during the March quarter. This was caused primarily by a drop in chargers and adapters used for smartphones and PCs. However, as China recovers, we expect to see a rebound in production and demand.

The quick charger application has increasingly been migrating to higher power output, from 18 watts to 24 watts and even up to 65 watts. This performance-driven market opportunity comes with higher value content and fewer competitors, and is well suited for our medium voltage products. We expect a return to growth in the June quarter in this segment as the demand for notebook chargers and smartphone quick chargers recovers.

Finally, let’s move on to the Communications segment, which was 18.1% of revenue in the quarter, down 8.5% sequentially but up 41.4% year-over-year. The smartphone market was severely impacted by the COVID-19 pandemic, and the disruption in production and demand is spreading globally. While we don’t have clear visibility on the smartphone market in the near-term, we are seeing rebound in demand for our telecom business as 5G continues to roll out. We think we can maintain this segment’s revenue in the June quarter.

With that, I will now turn the call over to Yifan for additional comments and guidance.

Yifan Liang

Thank you, Stephen. Good afternoon, everyone and thank you for joining us. Revenue for the March quarter was $106.9 million, down 9.3% from the prior quarter and down 2% from the same quarter last year. In terms of product mix, MOSFET revenue was $89.9 million, down 11.4% sequentially and flat year-over-year.

Power IC revenue was $15.7 million, up 7.1% from the prior quarter and down 11% from a year ago. Assembly service revenue was $1.3 million as compared to $1.7 million last quarter and $1.5 million for the same quarter last year.

Non-GAAP gross margin for the March quarter was $27.5 million – 27.5%, down from 28.3% for the prior quarter and up from 27% for the same quarter last year. Non-GAAP gross margin excluded $0.4 million of share-based compensation charge for the March quarter as compared to $0.4 million for the prior quarter and $0.5 million for the prior year period.

Non-GAAP gross margin also excluded $6.6 million of production ramp-up costs relating to the Chongqing joint venture for the March quarter as compared to $8.5 million for the prior quarter and $3.4 million for the same quarter last year.

Non-GAAP operating expenses for the March quarter were $25.9 million compared to $25.7 million for the prior quarter and $23.2 million for the same quarter last year. Non-GAAP operating expenses for the quarter excluded $2.5 million of share-based compensation charge, $2.1 million of legal costs related to the government investigation.

And $0.6 million impairment charge related to an investment in a privately held start-up company as compared to $2.1 million of share-based compensation charge for the prior quarter and $2.6 million of share-based compensation charge and $3.6 million of pre-production expenses related to the joint venture company for the same quarter last year.

Both GAAP and non-GAAP operating expenses included $3.1 million of digital power expenses for the quarter as compared to $3 million for the prior quarter and $2.3 million for the same quarter last year. Our digital power development is also progressing well, and we are close to securing a design win at a graphics card maker.

Income tax benefit for the quarter was $1 million compared to tax expense of $0.6 million for both prior quarter and the same quarter last year. The tax benefit was primarily driven by the tax relief from the CARES Act. Non-GAAP EPS attributable to AOS for the quarter was $0.11 per share as compared to $0.23 for the prior quarter and $0.22 for the same quarter last year.

AOS on the stand-alone basis generated $29.5 million of operating cash flow in the March quarter as compared to $12.5 million in the prior quarter and $9.5 million in the same quarter last year. Working capital management contributed $22 million in the quarter. Cash flow used in operations attributable to the JV Company was $15.2 million for the March quarter compared to $3.5 million for the prior quarter and $17.5 million for the same quarter last year.

Consolidated EBITDAS for the March quarter was $8.8 million compared to $13.9 million for the prior quarter and $11.8 million for the same quarter last year. EBITDAS attributable to AOS for the quarter was $6.5 million as compared to $12.5 million for the prior quarter and $13.5 million for the same quarter last year.

Now, let’s look at the balance sheet. We completed the March quarter with cash and cash equivalents of $110.2 million, including $99.5 million at AOS and $10.7 million at the JV Company. This compares to $107.2 million at the end of last quarter, which included $86.1 million at AOS and $21.1 million at the JV Company. Our cash balance a year ago was $139.1 million, including $90.9 million at AOS and $48.2 million at the JV Company.

The bank borrowing balance at the end of March was $153.6 million, including $34.8 million at AOS and $118.8 million at the JV Company. During the March quarter, AOS and the Joint Venture Company repaid $2.1 million and $6.6 million of the existing loans, respectively. The JV Company obtained $15.4 million of working capital loans.

Subsequent to the quarter end, the JV Company also entered into two loan agreements with local banks for a total of $50 million. We believe that this would largely be sufficient to achieve the Phase 1 plan at the JV Company.

Net trade receivables were $17.5 million, as compared to $33.9 million at the end of prior quarter and $28.4 million for the same quarter last year. Day sales outstanding for the quarter were 22 days, compared to 28 days in the prior quarter.

Net inventory was $127.4 million at the quarter end, up from $117.6 million last quarter and up from $107.9 million in the prior year. Average days in inventory was 131 days for the quarter, compared to 114 days in the prior quarter.

Net property, plant and equipment was $412.3 million, as compared to $416.1 million prior quarter and $391.6 million last year. Capital expenditures were $16.8 million for the quarter, including $13.1 million at AOS and $3.7 million at the JV Company. We estimate that the capital expenditure for AOS alone to be in the range of 8% to 9% of the total revenue for the fiscal year 2020.

Before I move on to the guidance for the next quarter, I would like to update you on the progress at the JV Company. During the March quarter, the 12-inch fab and assembly and test facility performed better than we expected, considering the conditions of the COVID-19 outbreak in China.

Given this situation of the global pandemic and resulting economic recession, our visibility into overall market demand beyond the June quarter is very limited. At this point, we are unable to determine when we can ramp up the 12-inch fab to its Phase 1 target run rate.

We will continue to monitor and evaluate market conditions closely and provide further guidance when we gain more visibility. For the June quarter, we expect the JV Company to increase production volumes sequentially to support our business growth opportunities as our Oregon fab is running at full capacity.

With that, now I would like to discuss the guidance for the next quarter. We expect revenue to be between $117 million and $121 million; GAAP gross margin to be 22%, plus or minus 1%. We anticipate non-GAAP gross margin to be 26.5%, plus or minus 1%.

Note that non-GAAP gross margin excludes $0.4 million of estimated share-based compensation and $5 million of estimated production ramp-up costs relating to the JV Company. GAAP operating expenses to be in the range of $29 million, plus or minus $1 million.

Non-GAAP operating expenses are expected to be in the range of $25.7 million, plus or minus $1 million. Both GAAP and non-GAAP operating expenses include $3.2 million to $3.5 million of estimated expenses relating to the development of our digital power business.

Non-GAAP operating expenses exclude $1 million to $2 million of estimated professional fees related to the government investigation and $2.3 million of estimated share-based compensation. Income tax expense to be approximately $0.3 million to $0.5 million. Loss attributable to non-controlling interests to be around $2.7 million.

On a non-GAAP basis, excluding estimated production ramp-up costs relating to the JV Company, this item is expected to be approximately $0.1 million. As part of our normal practice, we’re not assuming any obligations to update this information.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from David Williams from Loop Capital. Please go ahead.

David Williams

Hey. Good evening. Thanks for taking my question and congratulations on the guidance. That’s a very strong revenue. And if I kind of look back over the last couple of quarters or couple of years, that looks to be a fairly high level of revenue. Can you kind of talk a little bit about where the greatest level of demand is and maybe what’s your confidence level is in the guidance range?

Yifan Liang

Sure, David. This guidance for the June quarter primarily reflected the demand surge in the Computing and Gaming area that we are seeing right now. As you know some other areas that are not performing to the level that last year we saw. For example, in the smartphone area, some industrial areas, those areas are definitely down.

For us, and you know with our long-term commitment in the Computing area, you know, this time, we saw a pretty strong surge in the month of March I would say started, we saw demand for our products, so that’s why we adjusted our production. And this time, our joint venture, secured joint venture actually provided us with flexibility of production and a much needed capacity to support this sudden surge in Computing demand. So I mean, we are managing this surge, and going after those business opportunities.

But on the other hand, I want to be cautious about the outlook for the second half of the year. I mean, we don’t know whether or not this surge of demand will be short-term or can extend it for a while. So at this point, we’re very happy in the Chongqing Joint Venture and support us for much needed supply. I mean this – Mike, do you have anything you want to add?

Mike Chang

Well, thank you Yifan and thank you, David for the question. Actually, we’re very thankful. You know thank god that in such a difficult time, we have the PC business surging. And maybe let me speak a little bit about the Chongqing JV, as Yifan mentioned about it.

And also this time, we really got a benefit from this joint venture. As you know, our core business model is technology and volume all along. The technology will enable us to create new demand and also of course extend benefit more to newer customers. However, this new business will need capacity to support.

And our Oregon fab, from very beginning, we knew – we know that it’s – the capacity is very limited. And indeed, since last year, it started to be full capacity. And this JV of course is coming in right time. Of course, it takes some time to bring up there and right now, we are very thankful that it’s coming to serve this surge and start to produce a good result to us. And we are very, very thankful.

David Williams

Fantastic and thanks for the comment too. It’s very helpful. If we kind of think about how much flexibility, how much capacity came out of the JV this quarter, can you give us anything that maybe quantifies that or maybe to what level of revenue was provided by the JV?

Yifan Liang

Sure. I mean, at this point, I mean the – because of the uncertainties about the overall market demand, and then you know right now, it’s hard to say about the second half of the year right now. So now we are unable to determine when we can ramp up this Phase 1 to the target rate. Given that, but you know you can tell from our June quarter’s guidance, I mean these incremental revenues are all supported by our Chongqing Joint Venture.

Over there, we still have capacity to support that you know even higher demand if this market that play out well you know in the second half of the year. Right now, there’s so much uncertainty and that you know our visibility beyond the June quarter is very limited. So that’s – we’ll closely monitor the market and then react accordingly. So that we’ll see.

David Williams

Okay, fantastic.

Mike Chang

Might I add a little bit more? Okay. Yes, indeed, we still have some capacity in the Chongqing JV to – for more business. However, our first phase plan is really is to reach the breakeven in the cash flow. So we do have the capacity, but not overly – not too much, in other words. And so not to support its near-term. Okay that’s the fact. Yeah, thank you.

David Williams

Okay. So you feel comfortable that you can say a solid demand coming in the June quarter through the additional capacity in the JV?

Mike Chang

Yes, yes.

David Williams

Got it. And maybe if you have a sense of the channel inventory health, are you seeing any maybe pull-in orders or anything that would give you any concern in terms of inventory overstocking or just generally the health of the channel?

Yifan Liang

Okay, sure. Channel inventory right now, you know, we are at – in the mid-range of our target, like in two months to three months. And you know, last couple of quarters we’re at the low end of the channel inventory. This quarter, because of the better-than-expected production recovery, we actually benefited from this production recovery you know so that we can serve better on this demand surge. So right now, the channel – the incremental channel inventory was pretty much in the Computing area, so that – which is much-needed inventory for – provided to our customers for this June quarter.

David Williams

Okay, fantastic. And just one more, if I can here and I’ll jump back in the queue. But you talked a little bit about the controller and the progress there. How helpful – sorry, I know you said in the past about the year end. Do you think there’s an opportunity to accelerate that and maybe drive that controller revenue up before the year end?

Stephen Chang

Hi. David, this is Stephen. Yeah. Let me comment on that. So actually, our digital power has been addressing two markets. One has been advanced computing, and the second one is telecom. And we’re actually pretty close to getting a design win actually on the advanced computing side at a graphics card maker.

And that’s – it’s kind of going into more of a consumer side of that, but we’re pretty excited about this one. We’re hoping and expecting this to generate revenue closer to the end of the year once the project ramps up. So we expect that to come as near-term revenue.

The other portions, I think we’re still in the development phase in terms of development, working with the customers. So we’re anticipating – it will still take some time to develop the revenue for the other portion of the business. So we expect – in a nutshell, we do expect some business in the short-term, but it will be kind of small, just to start out with, and with some more mild growth going into 2021.

David Williams

Okay, great. Well, thanks again and best of luck on the quarter. Stay healthy, please.

Stephen Chang

Thank you.

Yifan Liang

Thank you.

Operator

Your next question comes from Tore Svanberg from Stifel.

Tore Svanberg

Yes, thank you. A question on gross margin. So I do recognize the Oregon fab is full, but I was expecting a little bit more fall through from the $10 million to $15 million higher revenue in the June quarter. So is the lower gross margin just a pure function of the revenue mix?

Yifan Liang

Hi, Tore. This – you know, the higher revenue guidance for the June quarter, the margin, you know, we did not increase much over there. A couple of things. So one is, you know that we baked in some ASP erosion, and you know, we would expect at the economic recession time, you know there’s you know some other areas that you know we would expect some price erosion.

Another thing is, you know this incremental revenue is pretty much supported by our joint venture. So joint venture by providing pro forma, the production ramp-up cost, and actually, you know, you can tell that the margin benefit will be reflected in the production ramp-up cost reduction. So then you know in the March quarter, with pro forma of the out $6.5 million or so. For the June quarter, we’re expecting you know there about a $5 million production ramp-up cost from the joint venture. So that will be the agenda of it.

Tore Svanberg

That’s very helpful. And you mentioned a $50 million loan. Could you elaborate a little bit on the terms of that loan? And as far as the usage of that money, is that going to go down to pay down some of the JV debt or is that going to be spent more on CapEx as you continue to ramp up Phase 1 and eventually Phase 2?

Yifan Liang

This $50 million of loans are for CapEx and for working capital. So the terms are pretty much similar to our – to their previous loans, is in the five years in a range and similar interest rate and a little bit down, actually, better rate than before. This will be used for remaining payment for the CapEx and for the Phase 1 and for some working capital for the company.

Tore Svanberg

Great and do you have a CapEx number for the JV for this year?

Yifan Liang

CapEx, you mean for this fiscal year, that will be the June quarter, I would think then a little bit higher than this March quarter’s $3 million or $4 million CapEx payment. That just depends on the timing of the payment. So there are some remaining payment then they need to make after the equipment got installed and then the dry run and then for a period of time and then everything checked out and then you know they wouldn’t make the last payment for those equipment.

Tore Svanberg

That’s very helpful. Thank you.

Yifan Liang

Thank you.

Operator

[Operator Instructions] Your next question comes from Craig Ellis from B. Riley FBR.

Craig Ellis

Yeah. Thanks for taking the question, team and congratulations on doing such a good job in the March quarter, navigating a real volatile environment. I wanted to start just with a couple of clarifications. The first one with respect to the prior target for the JV ramp, we had been looking for a revenue ramp to $37.5 million in the September quarter and I understand we’ve got a much different environment.

But what I wanted to dig into is, is the reason that the company is uncomfortable sticking with that guidance, because the design wins aren’t there to get to the $37.5 million or the design wins are there, but maybe the unit volumes on those wins is now different than you thought or is it that those two things are fine and maybe you’re just concerned about parts from other suppliers that would go in kits that are related to the design wins that you have?

Maybe it’s other things, but I’m just trying to understand what the specific factors are and where you are overall relative to the design wins that are needed to get to a $37.5 million run rate for that facility?

Yifan Liang

Okay. Sure, Craig. This is primarily because of the overall market demand. And I mean, at this point, it’s so volatile. I mean this is kind of you know in the March quarter, we saw this market, the shift, I mean, like a roller coaster and then you know with the mobile market demand down so dramatically. And then later on you know of the quarter, you know, we saw a surge in demand for Computing. I mean all those things in the end and also there’s a lot of you know uncertainties related to the pandemic, and we don’t know how long it will last.

And then, I mean, those recessions and the – for sure, we’re in recession right now. But then how long and how severe, we don’t know. And then even after this reopening of you know, cities and economy, I mean, how people are going to behave and react, and then you know that also another things to be seen, whether or not and then there’s a second wave of COVID-19 down the road in winter time or you know when does vaccine will be out. And then, I mean, a lot of unknowns are going to impact on the overall global demand for our products.

So at this point, I mean, I’m just unable to give you that guidance you know when we can ramp up to the target run rate of Phase 1. We’ll closely monitor it, and then we will provide further guidance when we gain more visibility.

Craig Ellis

Okay. Going back to a clarification on gross margin. Tore fleshed out the fiscal fourth quarter. But on the third quarter, it was about 150 basis points better than I expected. So what allowed the company to perform so well? And obviously, we had reduced estimates inter quarter, just given the choppy environment. But were there any incremental positives in the quarter that allowed you to offset some of what was likely incremental COGS costs in a COVID environment?

Yifan Liang

Sure. In the March quarter, yes, our gross margin came in higher than our guidance. It was primarily because of our production recovery was better than we expected. And I mean, we expected more decline you know in the production level. So I got to give credit to our employees. And then I mean, especially in China, you know, they fought through this lockdowns and then the shortage of labor for pretty much most of the time, February and March.

So with the limited workforce over there, and then they produced a much higher output for us through overtime, through commitment and you know really demonstrated an ownership over there. And you know given the situations – not only the shortage of labor, but also you know the disruption of logistics, you know some – a lot of shortage on some materials or even clean room masks. I mean, this you know for a while, they were down to a pretty low level. I mean they fought through it. So that contributed to our overall gross margin and then, I mean, performed better than we expected for the March.

Craig Ellis

Okay, got it. And then moving to the consumer –

Mike Chang

Let me take you back to the – this is Mike Chang, if you don’t mind. Yeah. Let me maybe add a few words about the Chongqing JV of the forecast. Yes, facing this recession and the unknown in the COVID-19 impact, we – I think we should be more conservative. But however, I’d like to point out the progress in the loading – in the Chongqing JV is progressively accordingly and improving. So beyond June, really, we cannot comment anything. We cannot forecast anything. But at this moment, I’m very much pleased by the performance. Thank you.

Craig Ellis

Okay, got it. Thanks for that Mike. Moving on to consumers’ gaming ramps. So it looks like gaming is accounting for about half of the sequential growth, if I’ve got the bottoms-up modeling right in the June quarter. So twofold question. When you – you know once we exit the June quarter, where will we be with respect to that ramp? Is there further growth coming in September? Or will you really realize all the benefits of the gaming design win in the June quarter?

And then maybe going back and connecting in with Tore’s question, since this is half the sequential growth and given the decline in gross margins, would it be fair to assume that this design win, is a high volume design win, it’s coming in below corporate average?

Stephen Chang

Yeah. This is Stephen. Let me comment on the Gaming thing. We’re pretty excited to be able to share this, because we are winning on multiple sockets in this Gaming system. And as Gaming systems go, definitely, they’re preparing for a pre-production at this point. The system is not released yet. It’s going to release in the second half of this year. Hopefully, you know there’s no delays or anything, but we don’t see anything as of yet.

We do expect our business with this to continue to grow, but it all definitely depends on the customer’s own ramp-up rate. I think you know whenever these things launch, there’s usually a big push, especially they’re trying to do it for Christmas. And then after that, they see how acceptance is, and then they push further. But you know, we believe that this would be a pretty good growth area for us. So we’re excited about it, but we’re also cautious, especially given this coronavirus time.

Craig Ellis

And do you have any sense for what your share is with that sockets fee?

Stephen Chang

The share, I mean, our share in there or is that what you’re asking?

Craig Ellis

Yeah. Are you self-sourcing to the sockets that you’re in or do you think you have the majority share?

Stephen Chang

I think it depends on what socket it is. Some things we have a better share. Others, we don’t. The good thing is we actually have quite a few number of sockets inside, so it depends which one here you’re talking about. But none of them are sole-sourced, and they always want multiple sources for these systems.

Craig Ellis

Okay, great. And then just connecting to the end markets. So, some fancy footwork to realize the strength in PCs. The question as we look ahead, can PCs get back to some of the highs that we had seen last year, with the strength that you’re seeing near-term team? And then secondly, you know, we went into this year thinking that comms was going to be the sequential or the year-on-year growth driver, and we were allocating capacity toward comms.

Clearly, you’ve got some unit headwinds. But as you look to the back half of the calendar year, in the design win funnel that you have, do you feel like from stable revenues in June, do you have the opportunity to really grow that business in the back half or would we really look to calendar ‘21 before we’re able to see significant growth of current revenue levels?

Stephen Chang

Yeah and let me answer that one too. So regarding PCs, definitely we’re very excited about the growth in PCs. Normally in a regular year, Q1 typically is a down season. So actually to – where we’re at, only dropping you know, just a few percentage points in the first quarter is a pretty big unusual type of thing for us.

So we do expect computing to continue to be strong. We’ve – all along we’ve always stuck to PCs as one of our core areas of business, and we’ll continue to do that. And we continue to also grow there into higher content with power ICs and DrMOS. So we do expect to continue to maintain and grow our foothold in PC. Of course, this is all pending the overall market. We don’t know how long you know this current surge is going to last for, but we believe our position at least in what’s there is good.

Regarding communications, what remains to be seen is how the peak smartphone season is going to be in this coming September quarter and December quarter. And we know that in – at least in the March quarter, overall phone shipments were actually you know, we’re actually down quite sharply.

But actually, you know our battery protection business was also down, but actually it wasn’t as down as compared to the overall market. You know we’re still in some pretty good positions at the global phone makers. But of course, we’re you know dependent upon their own shipments to see how they’ll be doing in this upcoming peak season. So yes, I think there is possibility for growth, but there’s also a lot of dynamics that we have to account for as well. So we hesitate to just put a firm number into the second half. But yes, potentially, we could be growing and going into the second half even further.

Craig Ellis

And just to further clarify that last point, Stephen. Can you see the interface of the design wins that you have? For example, is it visible to you whether you’re designed into a 5G or a 4G phone in the back half of the year, because obviously the unit dynamics are going to be dramatically different? Half-on-half, 5G phones are likely to be up 2 to 2.5x in the first half, but 4G phones will be nowhere near, that is good. So, any visibility on whether you’re in 4G or 5G?

Stephen Chang

We don’t necessarily always know which model were design-ins until the things get finally released, but you know, we feel pretty confident about where we’re at position-wise, at least each of the phone makers that we’ve been in. So design-in-wise, I think we’re in a good position in terms of you know what the actual volumes would be of course, we don’t know what that’s – what’s going to happen there until it happens. But right now we are preparing you know preparing for a ramp we don’t know how strong of a ramp it would be.

Craig Ellis

Okay, great. Thanks for all the help. Good luck, team.

Stephen Chang

Thanks.

Mike Chang

Thank you.

Operator

There are no further questions. At this time, I would turn the call back over to the presenters.

Yifan Liang

This concludes our earnings call for today. Thank you for your interest in AOS and we look forward to talking to you again next quarter. Thank you.

Mike Chang

Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.