Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) Q4 2024 Earnings Conference Call August 7, 2024 5:00 PM ET

Company Participants

Steven Pelayo - The Blueshirt Group
Stephen Chang - Chief Executive Officer
Yifan Liang - Chief Financial Officer

Conference Call Participants

David Williams - Benchmark
Jeremy Kwan - Stifel Nicolaus & Co.

Operator

Good afternoon, ladies and gentlemen. Thank you for joining today's Alpha and Omega Semiconductor Fiscal Q4 and Fiscal Year 2024 Earnings Call. My name is Tia and I will be your moderator for today's call. [Operator Instructions]

I would now like to pass the call over to your host, Steven Pelayo, with The Blueshirt Group. Please proceed.

Steven Pelayo

Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor’s conference call to discuss fiscal 2024 fourth quarter and annual financial results. I am Steven 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 September quarter. Finally, we will have the Q&A session.

The earnings release was distributed over the wire today, August 7, 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’ll turn the call over to our CEO, Stephen Chang. Stephen?

Stephen Chang

Thank you, Steve. Welcome to Alpha and Omega’s fiscal Q4 earnings call. I will begin with a high-level overview of our results and then jump into segment details. We delivered fiscal Q4 results in line with our guidance for revenue and gross margin. Revenue was $161.3 million, non-GAAP gross margin was 26.4%. Non-GAAP EPS was $0.09.

As we mentioned last quarter, inventory corrections across the majority of our end markets are now largely behind us, and seasonality is returning to more normalized trends. While visibility on the slope of the recovery is limited, the increasing breadth of demand is encouraging. For the June quarter, we saw sequential growth in each of our major segments with relative strength coming from tablets, A.I, graphics cards in our Computing segment; gaming and home appliances within Consumer; e-mobility, DC motors and quick chargers in the Industrial segment; and a regional shift towards a Tier 1 U.S smartphone customer within Communications. The PC segment, however, is taking longer to recover than originally expected.

Looking into the September quarter, we expect PCs and servers to grow sequentially while tablets sustain the strong current run rate within Computing. The Consumer segment will likely see continued strength in gaming and a strong seasonal pick up from wearables, offset by slower home appliances. Smartphones will drive sequential growth in Communication, while AC-DC power supplies and quick chargers are relatively stronger in Industrial.

Looking beyond 2024, AOS is transitioning from a component supplier to a total solutions provider in many areas where we can leverage our core strengths in high performance silicon, advanced packaging and intelligent ICs to penetrate new opportunities and drive higher BOM content. We are building on customer relationships to capture market share with a broader product portfolio. For example, we are leveraging our strength in graphics cards and introducing new Vcore products for opportunities in advanced computing and A.I. datacenters.

Within smartphones, we expect to benefit from trends towards foldable, flexible and multiple screens; increasing A.I. integration; as well as dual-cell batteries and higher charging currents for faster charging times. Beyond Computing and Communication segments, we remain optimistic on the underlying power trends in adjacent markets such as solar, motors and e-mobility, gaming, home appliances and power tools. These examples all represent continued growth opportunities primarily driven by the global shift towards more efficient and sustainable energy solutions.

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 up 37.6% year-over-year and 4.4% sequentially and represented 44.4% of total revenue. These results were slightly below our original expectation for mid-to-upper single digit growth. As mentioned before, we saw relative strength from tablets, A.I, and graphics cards in the quarter, offset by a slower PC market recovery. Notably, tablet revenue was a record high, and the contribution from A.I. and datacenter related applications continued to grow.

We are excited about opportunities in A.I.. Demand for accelerator cards remains steady as the industry prepares for a platform transition ramping next year. We are working on multiple opportunities leveraging our existing relationship with a key graphics card maker, as well as our product portfolio including new multiphase Vcore controllers and power stage solutions for advanced computing.

We are also seeing some ramp in September from a leading power supply maker that is a key supplier to the same A.I./graphics customer. We are selling our high performance medium voltage MOSFETs that go into intermediate bus converters for DC to DC power conversion. Looking forward into the September quarter, we expect the Computing segment to grow mid single digits sequentially as PCs see a seasonal pickup, while tablets, A.I. accelerators and graphics cards remain strong.

Turning to the Consumer segment, June quarter revenue was down 35.5% year-over-year, but up 19.7% sequentially and represented 17.5% of total revenue. The results were in line with our forecast for double-digit sequential growth and were primarily driven by gaming and home appliances. It is now clear that the inventory correction in gaming is behind us and a seasonal build is underway.

The strength in home appliances was better-than-expected as government incentives in China drove demand. For the September quarter, we forecast low double-digit sequential growth in the Consumer segment driven by strong seasonal pickup from wearables and continued strength in gaming, offset by slower home appliances.

Next, let’s discuss the Communications segment. Revenue in the June quarter was up 59% year-over-year and 2.1% sequentially, and represented 17% of total revenue. These results were above our flattish sequential expectations as we began to see the seasonal pickup from a Tier 1 U.S. smartphone customer, offset by sequential declines from Korea and China OEMs.

Looking ahead, we anticipate double-digit sequential growth in the September quarter on seasonal strength ahead of new smartphone launches in the U.S and increasing demand from China smartphone OEMs. We are benefitting from a mix shift to more premium phones and we anticipate rising growth in BOM content as phone makers increase battery charging currents.

Now, let’s talk about our last segment, Power Supply and Industrial, which accounted for 17.1% of total revenue and was down 33.7% year-over-year, but up 11.3% sequentially. The results were slightly ahead of our forecast for mid-to-upper single-digit sequential growth driven by strength in the e-mobility segment for e-bikes and e-scooters and DC fans for applications in areas such as datacenters.

The inventory correction in quick chargers appears complete as we also saw the beginnings of recovery in the June quarter. Lastly, power tools continued at a steady pace in June. For the September quarter, we expect this segment to grow 15% to 20% sequentially primarily driven by a solid uptick from quick chargers, as well as strength from AC-DC power supplies tied to the seasonal build in PCs.

In closing, the June quarter was in line with our expectations and marked a solid conclusion to our fiscal 2024 performance. The rolling inventory corrections we experienced over the past year in nearly every one of our end markets are now largely behind us and some markets like smartphones are starting to return, while new markets like A.I. are emerging. We expect seasonal growth in the September quarter primarily driven by PCs, smartphones, wearables, and gaming.

Looking to the next cycle, we are poised for growth, bolstered by advanced technology, a diversified product portfolio addressing a broadening array of end markets, and a premier customer base across all business lines. Power management underpins key trends such as AI, digitalization, connectivity, and electrification, especially as we move towards a sustainable, low carbon society.

We are steadfast in executing our technology roadmap. Customers increasingly view us as a total solutions provider, allowing us to capture a greater portion of the bill-of-materials, and ultimately supporting growth that outpaces industry over the long run.

With that, I will now turn the call over to Yifan for a discussion of our fiscal fourth quarter and fiscal year 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 $161.3 million, up 7.5% sequentially and flat year-over-year. Seasonal demand was relatively broad-based in the June quarter and confirmed the inventory correction is largely complete. In terms of product mix, DMOS revenue was $102.1 million, up 8.8% sequentially and 6.7% over last year.

Power IC revenue was $52.7 million, up 5.5% from the prior quarter and down 10.5% from a year ago. Assembly service and other revenue was $1.4 million, as compared to $1.2 million last quarter and $0.6 million for the same quarter last year. License and engineering service revenue was $5.1 million for the quarter versus $5.1 million in the prior quarter and $6.3 million for the same quarter a year ago.

Non-GAAP gross margin was 26.4%, compared to 25.2% last quarter and 28.5% a year ago. The quarter-over-quarter increase was mainly driven by the improved factory utilization. Non-GAAP operating expenses were $39.3 million, compared to $38.9 million for the prior quarter and $39.1 million last year. The slight quarter-over-quarter increase was primarily due to higher professional fees. Non-GAAP quarterly EPS was $0.09, compared to $0.04 loss per share last quarter and $0.19 earnings per share a year ago.

Moving on to cash flow. Operating cash flow was $7.1 million, including $4.5 million of repayment of customer deposits. By comparison, operating cash flow was $28.2 million in the prior quarter and negative $28.2 million last year. We expect to refund about $8.4 million customer deposits in the September quarter. EBITDAS for the quarter was $16 million, compared to $11.6 million last quarter and $17.7 million for the same quarter a year ago.

Now let me turn to our balance sheet. We completed the June quarter with a cash balance of $175.1 million, compared to $174.4 million at the end of last quarter. Net trade receivables decreased by $0.7 million sequentially. Days sales outstanding were 12 days for the quarter, compared to 15 days for the prior quarter.

Net inventory decreased by $2.3 million quarter-over-quarter. Average days in inventory were 148 days, compared to 153 days in the last quarter. CapEx for the quarter was $7.2 million, compared to $7.4 million for the prior quarter. We expect CapEx for the September quarter to range from $6 million to $8 million.

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 25%, plus or minus 1%. We anticipate the non-GAAP gross margin to be 26.4%, plus or minus 1%. GAAP operating expenses to be in the range of $47 million, plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $40 million, plus or minus $1 million. Interest expense to be approximately equal to interest income, and income tax expense to be in the range of $0.9 million to $1.1 million.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of David Williams with Benchmark. Please proceed.

David Williams

Hey, good afternoon, and congrats on the successfully navigating this volatile macro environment here. Certainly, you're doing a much better job than I think some of your peers have.

Stephen Chang

Thank you, David.

David Williams

With that, I guess, Stephen, I wanted to ask -- yes, I wanted to ask a little bit just on the graphics card and some of the datacenter accelerator and GPUs. We've talked about this before and starting to see those revenues, but I'm trying to understand what is it the magnitude of maybe that could be over time? And maybe is there a way to size, understanding there's different flavors or varieties of those products, but is there a good way to think about what your content can be and maybe where you're at within that maybe qualification process? Any color around that would be, I think, incredibly helpful. Thank you.

Stephen Chang

Sure. Yes. So an entry into artificial intelligence programs, a lot of it actually is built upon where we have already been with our graphics cards. And accelerator cards actually aren't that different from a graphics card in the sense that you are basically powering a high-performance GPU in both cases. And -- but with datacenter, that performance requirements are being driven even higher.

So when we look at the content, actually the power solution isn't that different and that you have multiple power stages, usually driver mosses [ph] that surround that GPU. The same thing happens with accelerator cards, but in a bigger scale. So to quantify some of that, so for example, in graphics card, you can have anywhere from 9 to 16, something in that range of number of driver mosses per GPU. But when you move to an A.I. accelerator card, that number actually jumps up to even up to 50 power stages to power that GPU.

And those are the solutions that we are shipping today in our graphics card/AI customer in their existing platforms. And we are working with them on being -- on transitioning over to the new platform that they will be launching soon. So we believe that for us, the A.I. accelerator card will be the portion that is -- that will grow earlier than other areas, mainly because of our presence already in -- both in graphics cards as well as the A.I. accelerator card business that we enjoyed today.

David Williams

Perfect. Good color there. Thank you. And then maybe just can you talk a little bit about the multiphase controller? I know you've mentioned this last quarter, but it sounds like you're getting some nice adoption there, some good traction. Just how is that helping you, I guess, across the breadth of your markets? What is the dollar opportunity there? And then maybe what are the benefits longer term as you introduce that multiphase controller?

Stephen Chang

Sure. So our multiphase controller, we first released and deployed that for our client PC business. And you remember that we've been talking about with Intel's latest platforms that BOM content is increasing because of what they're doing with bringing back more powerrails. And our solution is actually a total solution. We can -- we offer both the multiphase controller, which is new for us, in addition to the power stage. And that has helped us to expand the BOM content that we can address within a PC application. This is in a notebook or in a desktop type of application.

And because we have that foundation, we are -- we’ve been -- we are working on transitioning that over to the next generation of graphics as well as A.I. accelerator cards. So the business I talked about before, in the past we were only shipping driver mosses and in the future we're expecting to ship and be able to ship both as a total solution. So it's important for us not only to expand the BOM content within our current PC application, but it's also allowing us to step into the more advanced, you can say advanced computing, high-performance GPU area as well.

David Williams

And then maybe one last one for me for Yifan. If you kind of think about the gross margin, you're seeing a bit of an uplift here as we kind of move through the year, which is positive, but how do you think about the margin profile? And I'm sure I've asked you this almost every quarter, but just it seems like as that mix gets better, utilization comes back. And then especially as you become a larger player in some of these, the GPU market or the accelerator market, it seems like there's some nice room for margin appreciation. Is that fair to say? And maybe how do you think about the margin trending through your FY '25? Thank you.

Yifan Liang

Sure. As you know, our September quarter's margin guidance, we guided a flattish than quarter-over-quarter. This is mainly because we expected similar quarter-over-quarter factory in the nation. And we plan to consume some inventories and reduce inventory balance in the September quarter. So other factors impacting the margin, like product mix and ASP erosion that we expect they're similar to the June quarter. So overall, we expect a flattish margin quarter-over-quarter for the September quarter.

So going forward, yes, I mean, I would expect and as we grow our revenue and then our product mix will continue to improve and then factory utilization will be higher. So those factors will be contributing to our margin improvement.

David Williams

Thank you. [Indiscernible], appreciate it.

Operator

Thank you. The next question comes from the line of [indiscernible] B. Riley. Please proceed.

Unidentified Analyst

Hi. Yes, I'm actually calling in for Craig Ellis. And I was really just wanting to think about this A.I. datacenter ramp that's coming up in the second half. So you guys obviously have a lot of work in some very similar environments and can really pursue this, I think, with a really great angle. So with all the different configurations and approaches to building these A.I. datacenters, are you guys seeing different design wins across the spectrum here with all the different ways that someone can approach these systems?

Stephen Chang

Yes, and our customer -- our big customer has a lot of different end products, and they're catering it to folks building systems, they're catering to folks that want the total solution or they just want the accelerator card by itself. So for us, we actually have quite a bit of number of opportunities at play, but we believe that the updated accelerator card will come first for us and because we already have a track record there, we're already shipping in their older platforms.

And going forward, I think both the graphics and the accelerator card is expected to share the same type of architecture. And we believe that for us, in terms of design win, turning to revenue, that portion we will see first ahead of the other business. And at the same time, we are working on the other sockets that we're developing products for. We're working on design wins for at the same time in parallel.

Unidentified Analyst

Okay. Yes, that's great. Just to kind of follow-up on that, do you guys have any, like, quantification as far as kind of how many design wins you're on or how many sockets you've kind of tried to pursue to design wins upon?

Stephen Chang

We don't really quantify it that way. But in general, we are seeing design wins and progress on the accelerator card. This is why we're talking about that more now because that's, we believe, is much more tangible and near-term for us, and lines up the best for us with our end customer. I do also want to mention that, and in addition to this business, our business with this customer, we're also working with one of their suppliers that's producing and helping to supply into, I think we mentioned on the call, their intermediate bus converters. And we also have revenue even shipping today with our medium voltage MOSFETs. So powering, this is like the power stage before it gets to the point of load. And our customer is a big supplier to the A.I. accelerator card, AI/graphics card maker. So we also expect to see that business continue to grow beyond this year into next year as the A.I. customer moves into their new platform.

David Williams

Okay. Yes, that's really a great color. If I could just ask one last thing, kind of just thinking about how margins are going to change as your business kind of picks up into this new realm, are we going to see normalization back to kind of like historic peaks at around 30-ish, or is this sort of the new normal now with 25 to 28 kind of extending forward?

Stephen Chang

Yes, I mean, our overall midterm target model is still above 30% non-GAAP gross margin with a target revenue goal of $1 billion. So that model will still stay. So we believe in the -- when we continue to grow, then incremental business, we expect we can bring in the better product mix. So that would help us improve the gross margin gradually. Also, those incremental business would help us increase our utilization at factories.

David Williams

Okay. Thanks so much.

Stephen Chang

Thank you.

Operator

Thank you. The next question comes from the line of Jeremy Guan, Thank you. The next question comes from the line of Jeremy Kwan with Stifel. Please proceed.

Jeremy Kwan

Yes, good afternoon. Just wanted to -- there's a lot of interest, obviously, in the A.I. accelerator cards. Maybe a couple questions here. First would be, can you clarify if this is consumer cards that are being adapted for enterprise or small datacenter applications, or is this architecture designed from the ground up to be used in A.I. accelerator and datacenters?

Stephen Chang

Yes, our business today is mostly the first in that. They use a similar solution for their graphics cards from their previous platform to address some of the A.I. needs today. But what we're looking forward to and what I'm talking about is that with the new platform that's coming out from this customer, towards the end of this year, beginning of next year, that platform is a ground up, complete designed for A.I. And that portion also addressing A.I. accelerator cards in that portion, this is what we're looking forward to seeing the transition for.

Jeremy Kwan

Got it. And then with this, the new architecture platform is the socket, it sounds like there's maybe three opportunities here, and please correct me if I'm wrong. But one would be the core power, multiphase controller. The second one would be the multiple power stages. That's the 50 kind of DMOS [ph] that you've been talking about. And then the third would be this intermediate bus converter, which is at the 48-volt to like 12-volt step down power. Am I framing that correctly?

Stephen Chang

Actually, the first two are more of the same. So, whether it's on an A.I. accelerator card or on a main board, powering the GPU is still up to 50 power stages, powering that. So the first two are the same. And our end customer will have different configurations. But in the end, it's still a point of load in powering the GPU itself. So the second category, which I brought up just now, is yes, the intermediate bus converter using our medium voltage products. We actually have a number of other products also addressing going after AI. As a whole, actually, AOS is very well connected into this ecosystem already, largely actually because we've already been -- we're already in the graphics as well as the computing ecosystem. And a lot of that is shared. And to support this OEM, we're already working with the ODMs that are in Asia that are actually producing the boards as well as systems for this end customer. We're also engaged with the power supply maker that's making these intermediate bus converters. We're even addressing various fan makers as well regarding thermal management. So for us, this is actually -- AOS is very well suited to go after this market, both directly with OEM as well as indirectly with their suppliers.

Jeremy Kwan

Got it. That's very helpful. And just to clarify again, is the controller, the multiphase controller a piece of this or is that focused mainly on the [multiple speakers]?

Stephen Chang

It has been the leader [ph] product, and especially as we move into the new platform, we are selling the total solution controller, multiphase controller, in addition to the power stage.

Jeremy Kwan

Got it. And could you size your opportunity here just from a potential SAM, whether it's on a per GPU basis? Any insight there would be very helpful.

Stephen Chang

Sure. I'll quantify more at the board level what the content increases, and then the SAM will really depend on how fast they deploy and how many models they extend our solutions to. But as I mentioned before, in a graphics card, you use anywhere from 9 to 16 of these on a board, this number can go up to 50, powering each GPU. So it really just depends on the performance requirements of the card that it's going into. So, on a whole, tripling at least per GPU, and then just based on configuration, that's how much the opportunity can increase.

Jeremy Kwan

And how about the intermediate bus converter opportunity as well as the controller opportunity?

Stephen Chang

The controller is part of that. It's usually one controller pairing with those -- or multiple controllers pairing with those power stages. With the module solution, we're selling a medium voltage MOSFETs going into it. So, there's -- I don't really want to dollarize that here, but it's becoming something that's significant enough for us to talk about it in each of the segment reports. Let me just put it that way.

Jeremy Kwan

Got it. Very good. And just switching gears a little bit to the license and engineering. Is this from the license payment that you're receiving? I believe there was maybe $20 million left a couple quarters ago. Can you just give us an update how much license payments you're still to receive and how much of this was engineering versus licensing? Thank you.

Stephen Chang

Sure. I mean, this contract is up to early 2025, so we still have like a couple quarters to go. So that's the length of this agreement. So this agreement in total is for a 24-month period. And is the payment on a pretty consistent quarterly basis?

Stephen Chang

No. Actually, some tie to the products, once we qualify it, fully verified by our customer, and some portion is paid for our engineering services, which is based on the annual basis, like every 12 months they will pay.

Jeremy Kwan

Got it. And is this figure included in the operating cash flow? Or is that kind of a different thing?

Stephen Chang

Yes, yes, yes that's in there. That's part of initially when we received the payment, we record it as deferred revenue. Because the revenue recognition is based on the engineering hours that we spend relative to the total estimated engineering hours. So that's kind of varying each quarter. So we recognize revenue from our deferred revenue.

Jeremy Kwan

Great. Thank you. I'll get back in the queue. Thank you very much.

Stephen Chang

Thank you.

Yifan Liang

Thanks.

Operator

Thank you. There are no additional questions left at this time. I will now hand it back to the management team for closing remarks.

Steven Pelayo

Okay. Steven Pelayo here. Before we conclude, I’d like to briefly mention four upcoming events. The management team will be participating in and will be available for one-on-one meetings at the 5th Annual Needham Semiconductor and Semicap Conference on August 21 virtually, the 2024 Evercore ISI Semiconductor, IT Hardware & Networking Conference on August 27 in Chicago, the Jefferies Semiconductor, IT Hardware & Communication Tech. Summit on August 28 in Chicago, and the 2024 Benchmark Tech, Media & Telecom Conference on September 4 in New York. If you wish to request a meeting, please contact the institutional sales representative at each sponsoring bank. This concludes our earnings call today. Thank you for your interest in AOS and we look forward to talking to you again next quarter.

Stephen Chang

Thank you very much.

Yifan Liang

Thank you.

Operator

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