Good afternoon. My name is Jason and I will be your conference operator today. At this time, I would like to welcome everyone to the Alpha Endomega Semiconductor Financial Results for the fiscal 2019 third quarter ended March 31, 2019 Conference Call. Session. Thank you.
Session.
Thank you, Jason. Good afternoon, everyone, and welcome to the Alpha And Omega Semiconductor's conference call for fiscal 2019 third quarter results. This is Soyan Zhang, Investor Relations representative for the company. With me today are Doctor. Mike Chang, our CEO Yifan Liang, our CFO and Stephen Chang, our Senior VP of Marketing.
This call is being recorded and broadcast live over the web and can be accessed for 7 days following the call, get a link in the Investor Relations section of our website at www ataosmd.com. Yifan will begin the call with a review of the financial results for the quarter. Then Mike will review the business highlights, followed by Steven, will provide a detailed segment report. After that, Efan will follow-up with the guidance for the next quarter. Finally, we'll reserve some time for questions and answers.
The earnings release was distributed by Business Wire today, May 2, 2019, after the market closed. The release is also posted on our company's website. Our earnings release and this presentation include 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 GAAP measures is included in our earnings release. We would like to remind you that during the course of the conference call, will 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 the actual and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligation to update the information provided in today's call. Now I'll turn the discussion over to Yifan our CFO. To provide an overview of the 3rd fiscal quarter financial results. Yifan?
Thank you so young. Good afternoon and thank you for joining us. Revenue for the March quarter was $109,100,000, down 5.1% when compared to the prior quarter and up 6% from the same quarter last year. The quarter over quarter decrease was primarily due to worse than expected PC CPU shortage. In terms of product mix, modified revenue was $89,900,000, down 3.6% sequentially and up 7.1% year over year.
ParIC revenue was $17,600,000, down 9% from the prior quarter and up 12.4 percent from a year ago. Assembly service revenue was $1,600,000 as compared to $2,200,000 for the prior quarter $3,200,000 Regarding the segment mix, computing segment represented 47.5 percent of the total revenue, Consumer 18.9% power, supply and industrial 19.5% Communications 12.5%, service 1.4% and others 0.2%. Non GAAP gross margin for the March quarter was 27% as compared to 29.2% in the prior quarter, and 26.8% for the same quarter last year. The quarter over quarter decrease in non GAAP gross margin was primarily due to the lower factory utilization of back end operations, largely attributable to the decrease in revenue and the Lunar New Year holiday. Non GAAP gross margin excluded $500,000 of share based compensation charge for the March quarter as compared to $500,000 for the prior quarter $400,000 for the same quarter last year.
Non GAAP gross margin also excluded $3,400,000 quarter as compared to expenses were $23,200,000 compared to $25,100,000 for the prior quarter and 21 $700,000 for the same quarter last year. The quarter over quarter decrease in the Non GAAP operating expenses was mainly due to the lower variable compensation accruals and fluctuation of engineering expenses. Non GAAP operating expenses excluded $2,600,000 of share based compensation charge as compared to $3,900,000 in the prior quarter $2,000,000 for the same quarter last year. Non GAAP operating expenses also excluded $3,600,000 of pre production expenses related to Chongqing Joint Venture as compared to $3,700,000 in the prior quarter and $2,800,000 for the same quarter last year. Both GAAP and non GAAP operating expenses included $2,300,000 of digital power controller team expenses for the quarter as compared to $3,100,000 for the prior quarter and 1 $1,000,000 for the same quarter last year.
Our digital power controller team continues to work with customers in product designs and is making steady progress toward our product roadmap. Income tax expense was $600,000 for the quarter as compared to $700,000 for the prior quarter and $800,000 for the same quarter last year. Non GAAP EPS attributable to AOS for the quarter was $0.22 per share as compared to $0.30 per share for the prior quarter and $0.23 per share for the same In the March quarter, we generated $99,500,000 operating cash flow attributable to AOS as compared to $22,100,000 for the prior quarter and $700,000 for the same quarter last year. The March quarter cash flow included $5,000,000 customer deposit for securing future shipments from AOS. Cash flow used in operations attributable to our Chongqing joint venture was quarter compared to $9,100,000 EBITDA for the March quarter was $11,800,000 compared to $13,500,000 for the prior quarter and $12,300,000 We completed the March quarter with cash and cash equivalent balance of $139,100,000 including $48,200,000 cash balance at our Chongqing joint venture as compared to $146,600,000 at the end of last quarter, which included $53,000,000 cash balance at the JV company.
Our cash balance a year ago was $125,200,000 including $46,000,000 at the JV company. During the quarter, Our JV company borrowed a working capital loan of approximately $3,000,000. And a CapEx loan of approximately $28,300,000 with $2,100,000 compensating balance which was recorded in the long term restricted cash and investment. The JV company paid down $1,800,000 for the financing lease and AOS paid down $2,100,000 for the outstanding loans. Net rate receivables were $28,400,000 as compared to $33,900,000 at the the end of last quarter $28,900,000 for the same quarter last year.
Base sales outstanding for the quarter was 22 days compared to 23 days in the prior quarter. Net inventory was $107,900,000 at quarterend, up from $103,000,000 last quarter and from $90,500,000 in the prior year. The inventory increase primarily occurred at the JV company as we are ramping up mass production of assembly and test and preparing inventories for the 12 inches fab. Average days in inventory were 114 days for the quarter, as compared to 106 days in the prior quarter. Net property, plant and equipment balance was $391,600,000 as compared to $380,800,000 last quarter and $258,800,000 last year.
Capital expenditures were $24,000,000 for the quarter, including $15,800,000 from the JV company and $8,200,000 from AOS. Before I turn the call over to Mike, I would like to say a few words on the progress of our Chongqing joint venture. We are pleased that during the March quarter, we completed 20 customer audits most of them being our tier 1 customers. The assembly and test production continued to ramp up and the 12 inches fabs product sampling and customer qualification process went well. We expect to start small mass production at our 12 inches fab in the month of June of July, while we continuing to ramp up the assembly and test production toward its targeted production level.
With that, now I would like to turn the call over to our CEO, Doctor. Mike Chang, who will provide the business highlights for the quarter. Mike? Thanks,
Yifan. Good afternoon. Our team demonstrated solid execution in the challenging near term market environment. We delivered revenue and EPS within our expectations. Our top line grew 6% year over year.
This marks company's 13th straight quarter of year over year revenue growth. We also responded quickly to the changing market conditions by prudently managing our costs, resulting in a significant reduction of our operating expense by almost $2,000,000 as compared to December quarter. Additionally, AOS continued to generate healthy operating cash flow. The soft market conditions we mentioned on our past earnings calls specifically in the home appliance and smartphone market. Played out as expected, and we navigated them well.
We offset that softness with our high value product including IGBT and the medium voltage demos. I am very pleased with a major win at a Korean home appliance customer, coupled with our share expansion in the China market in both home, appliance, and smartphone, quick charger applications. Steven will discuss this recent developments in detail shortly. The unexpected trend in the March quarter was the prolonged CPU shortage. We had initially expected better supply demand balance, which will be preceded by size of supply as early as March.
Now the shortage continues in the June quarter, and we expect that it should improve in the second half of calendar twenty nineteen. Even with the CPU constraint, the strategic relationships with our customers stand strong. As an example, we received $5,000,000 deposit from another computing customer in the March quarter, while the CPU delay will cause temporary slowdown in our computing business in June quarter. We believe a recovery of processor supplied in the second half will be a tailwind for us. Looking at our new product and design win pipeline, I am very excited about the opportunities ahead of us With our strong focus on product diversification, we had a planned seat for multi year growth drivers in the past few years.
Some of those opportunities are bearing fruit today. For example, we embarked on our mobile strategy and now we are a market leader in smartphone battery protection and quick chargers. Additionally, we debuted our IGBT line and module solutions for the home appliance market. As a matter of fact, This new business are already ramping now, which we expect to further accelerate in the second half of this calendar year resulting in meaningful revenue contributions. More importantly, our high value new products are gaining strong traction at a number of Tier 1 customers improving our market position as one of the top tier suppliers.
This is exciting for us for 2 reasons. First, they're bringing us a multitude of design wins with attractive potential revenue. 2nd, it enables to strengthen our market leading position, generating stickier and more sustainable revenue. To support this growth as well as the anticipated rebound of our computing business, we remain focused on ramping up the Chongqing joint venture in order to secure much needed capacity, and that is our top near term priority. I remain confident in our ability to realize our mission.
That is to become a total solution provider in the power semiconductor business. We have a proven business strategy, technology capability, manufacturing expertise and the most importantly, an ever stronger talented and dedicated team. All of these solidifies our foundation and positions us well for accelerated growth for years to come. While we are taking decisive actions in response to near term challenges, we are committed to achieve our mid term target model of $600,000,000 in annual revenue by calendar year 2021. The long term demand outlook for AAOS products remains very healthy, with tremendous growth opportunity across multiple markets.
We continue to execute our strategy to drive sustainable long term growth. With that, I would like to turn the call over to our Senior VP of Marketing Steven to report the status for each business segment. Stephen?
Thank you, Mike, and good afternoon. Let me start with computing. It represented 47.5 percent of total revenue in the March quarter. While it decreased by 7.1% sequentially, It increased 21.9% year over year. As Mike mentioned earlier, the CPU shortage caused a marginal negative impact to the March quarter, of calendar 2019.
Our customers are counting on us to supply them when the market rebounds. At this moment, we as well as other high growth business in other segments. Despite the near term challenges, our computing business is healthy and strong as a result of tablet application business that I shared on our last call continued to expand in the March quarter. We have also designed in our high value driver Moss into leading notebook customers. As such, we are a major supplier for all leading PC OEMs and ODMs.
Now let's discuss the Consumer segment, which was 18.9% of total revenue during the March quarter. As per our expectation, this segment increased to 11% sequentially but slightly decreased year over year. The increase was due to strong design wins with home We are now ramping our IGBT based module solutions into a Korean customer's refrigerator application. Our modules are highly integrated as we co package multiple discrete and IC dies into a single package This reduced footprint simplifies the design and allows our customers to develop smaller form factor motor assemblies. Such as the compressor motors used in the refrigerator application.
In parallel, our discrete IGBT products are gaining a stronger foothold in the China home appliance market for a variety of applications. We are on track to increase our IGBT line by over 40% in calendar 2019. For the June quarter we expect to see a slight growth in our overall consumer segment. Next, let's turn to the power supply and industrial segment. This segment accounted for 19.5 percent of total revenue, down 4.6% sequentially and down 2.7% year over year.
Our ACDC power supply business for computing slowed down in the March for smartphones continued. Our quick charger business demonstrated healthy growth in the March quarter despite the soft global smartphone market. As we continue to expand our top smartphone customers, we expect strong growth in our quick charger business, which we believe will more than offset further softness in the ACDC market. Finally, let's discuss the Communications segment, which was 12.5 percent of revenue in the March quarter. Segment revenue decreased 14.2% and 1.2% sequentially and year over year, respectively.
As we expected, this segment troughed during the March quarter due to smartphone weakness coupled with low seasonality. That being said, we are excited to see strong momentum in our battery pack business as we continue to design into more premium phones. During the March quarter, we achieved another major design win in battery pack and quick charger with a top Chinese smartphone OEM. This design win broadens our customer base to include all and half of calendar twenty nineteen as newly introduced high end phones are entering the market. We are already ramping 5G gradually rolls out.
For the June quarter, we expect a strong rebound in this segment. With that, I will now turn the call over to Yifan for
fiscal year 2019, we expect revenue to be between $110,000,000 $114,000,000, as we assume that CPU shortage will continue in the June quarter. Gross margin to be approximately 22.3 percent plus or minus 1 percent. Non GAAP gross margin is expected to be approximately 27.3 percent plus or -1 percent. Non GAAP gross margin excludes $500,000 of estimated share based compensation charge and $5,100,000 of estimated production ramp up costs relating to the Chongqing Joint Venture. Operating expenses to be $4,000,000 plus or minus $1,000,000.
Non GAAP operating expenses are expected to be in the range of $24,800,000 plus or minus $1,000,000. Both GAAP and non GAAP operating expenses include $2,800,000 relating to the development of our digital power controller business. Non GAAP operating expenses exclude an estimated share based compensation charge of approximately $2,500,000 and estimated pre production expenses relating to the joint venture of $3,100,000. Tax expects to be approximately $500,000 to $700,000. Loss attributable to non controlling interest to be around $5,600,000 on a non GAAP basis, excluding estimated pre production expenses and production ramp up costs relating to the joint venture.
This item is expected to be approximately $1,200,000. As part of our normal practice we are not assuming any obligations to update this information. With that, we will open up the floor for questioning.
Your first question comes from the line of Jeremy Kwan from Stifel. Your line is open.
Yes, thank you. And it's nice to see the progress on the China JV. I guess, a question on the the JV. It looks like operating cash flows there tend to fluctuate quite a bit. Can you give us, I don't know, some of that tends to be timing of payments and things like that.
But can you give us a sense of maybe one where you might see, where might we might start to see that start to stabilize or or moderate? In terms of the cash burn. And then in terms of the cash financing needs, the $28,000,000 in CapEx loan. Is that all you'll need to drive it to, to get to production where you want it to be?
Sure, Jamie. In terms of cash flow. Yes. Right now, for the March quarter, actually, the joint ventures, Cash burn for the operations stayed at about the same level as prior quarters. The increase in this quarter was primarily due to the build up some working capital, some inventories and those things.
So, as we ramp up production. So that's I would expect that, yes, it will stay at that level to continue to build up some inventory because assembly and test will continue to ramp up to its targeted level and 12 inches fab we would like to see, going to mass production probably in the month of June of July timeframe. So right now, we're gearing up for the, preparation. So then, I mean, overall, I mean, this quarter, got close to $30,000,000 of CapEx loan. For the CapEx, that pretty much in there.
So we're probably okay for the phase 1 production And then, well, right now, still in the negotiation for working capital loans, so we need a little bit more working capital loans. So then that's largely right now is cash flow is in line right now is in place to support our production ramp.
And just to clarify, I guess, can you give us a sense of how much the working capital loan, how much do you expect that would be?
It's in the, I would say, $20,000,000, $30,000,000 range.
And then, for the CapEx loan, can you give us the interest rate that you're paying on that, you know, maybe some of the key terms?
Oh, sure. The March quarter, our loan was for 6 years in the loan. And, the interest rate, it was, around 5, 6 percent range.
Great. And then I guess in terms of the you mentioned the AOS actually paid back $2,100,000 in outstanding loans. Is that, is that for the JV? Is there a portion of the loans for JV that?
That one is for AOS alone. Like, we took for the expansion of our Oregon fan. South we took like last year.
Got it. Great. And speaking of the organ fab, are you still supply constrained there with some of the maybe moderation in growth levels here, do you guys have a little bit more flexibility now at the working fab or are you still pretty tight?
Right now, it's still full. So, I mean, you know, very tired for the, certain products. So managing the mix right now, and also align with the, ramp up with our Tongqing Joint Venture.
Got it. And is the, the mass capacity still if everything humming, is that still in the 115,000,000 type range or, are you still Yes,
at this stage, yes, and still around there.
And one last question before I, you know, give it up at this point. For the the $600,000,000, target for calendar 2021, is that on a run rate basis that you hope to hit by the end of 2021, or is that your expected aim for all of calendar 21?
It's a annual revenue in calendar year 2021.
In calendar year 2021. Got it. Yes. And any idea of target margins at that level?
We're targeting above 30% at this point.
Great. Thank you very much.
Your next question comes from the line of Craig Ellis from B. Riley SBR. Your line is open.
Hey guys, this is Carlin Lynch on for Craig Ellis. Congrats on the execution in a tough quarter. Just wanted to touch on that, just wanted to touch on the CPU weakness, particularly in the June quarter and in the back half of the year, are you guys expecting any improvement in CPU supply in the June quarter or are you guys guiding that kind of or are your expectations kind of flat quarter over quarter? And then, do you have like any initial expectations or any color for what the CPU supply kind of as it comes back online will look like through year end?
Sure. This is Steven. Thanks for the question. So, of course, we look very closely and monitor the CPU shipments. What we originally expected at the beginning of the year was that the supply would resume sometime in the Q2, per intel's statements right now and from what we see and what we hear in the market and that is being prolonged into the second half.
We do know that they are expanding their capacity and going into the second half. And so we are anticipating for recovery at that time. In Q2, right now, what we're seeing is more of a mix management, even on the processor side, with more allocation going course towards server and and then consumer last. So we likewise are also adjusting our business and production to match that for the June quarter.
Got it. And, I guess, moving on, for the consumer business, congrats on the design win. Can you provide any color there about what that, like, how that changes your expectations for that business through year end. Was that kind of a big 1 quarter benefit? I know you guided that slightly up in, the second quarter, but I'm just wondering how we should think about that new relationship and as the refrigerator revenues ramp?
Sure. So we've been investing into this EBT line and our module line for the past few couple of years. So we are very excited to see this win at this major customer. And this particular customer just switched to us recently. We got the design win late last year, and we've been starting to ramp up in anticipate that this will also roll out into additional models.
But right now, we're counting on a gradual increase, not a sharp uptick, but gradual increase quarter by quarter because of this.
Got it. And then, for the power segment, I know, you guys had touched on kind of increased content in smartphone. We've had some of the bellwethers report the last couple of days, and they seem to be guiding kind of flattish year on year smartphone units. How should we think about content increases in high end smartphones for you guys you know, in a flat smartphone unit environment, and also kind of thinking about with 5G I guess here now, what does your content increases look like? How should we think about that this year?
And then also next year, assuming more of a smartphone, a more normal smartphone unit growth?
Sure. Let me honestly, I understand the question is 2 parts, Sabra. Regarding the communications. So let me touch up on the client side first. And this is more near term for us on the smartphone.
Our business and smartphone is actually in two different areas. 1 is in the battery protection and the second is in the quick charger side, the main growth driver for us is that we're actually winning and getting our products designed into more Tier 1 customers. So a lot of the ramp up that we've been reporting on is due to that because more Tier 1 customers are adopting our products in their smartphones. So even amidst kind of soft global smartphone market, we've been able to win share because we didn't have a strong share before. Before that.
And on the quick charger side of it, shipped with the smartphones are the quick chargers. And there is a trend that's happening in this market as well moving towards higher power as battery packs get larger and larger The charges themselves, the output power also has to increase, which creates opportunity for us and increase ASP. So we are also seeing more content being or higher power MOSFETs being used in the application. So it was a story of BOM increase as well as share expansion on the client side. Now moving to the infrastructure side for telecom 5G, This is a great opportunity, for, actually, for everyone playing in this space.
But for us specifically, because AOS hasn't really participated much in the 4 g space before. So right now, our products are very well suited for this application. And, right now, we are being designed into major customers. We're starting to see some ramp right now in these coming quarters in this past couple of quarters and that will continue in the next coming quarters as well.
Got it. Got it. And did you guys see, I know that a few people had said that, you know, that they saw maybe unexpected 5G infrastructure strength this last quarter. Did you guys see any of that or is it still kind of too early for you guys to be seeing some of that maybe surprise strength?
We did see an uptick in this last quarter. And for us, it's still a little bit early. We're still also in design in space to get into more sockets and more customers. But we for our own business that we see right now, yes, did go up in Q1. And we're anticipating it will gradually grow in the coming quarters too.
Got it.
And if I could just ask one last question. Has the lower, you guys had thrown out a 10% year over year growth target. Has the the lower first quarter kind of changed your confidence in that at all is, for calendar 2019. I kind of assume that once the joint venture comes online, that'll, you know, obviously be a big benefit, but I'm just kind of trying to get a sense of what the back half revenue will look like if that has been any change in your thinking there. Thanks.
Sure. So for the March quarter June quarter, it was largely because of the CPU shortage situation. So we see some reductions on our revenue. In the second half of the year, we expect we have some tailwind probably for the computing plus like Stephen mentioned and in other areas, smartphone battery pack and quick chargers and home appliances will expect it to grow. So I mean, we would expect the second half and that we can resume back on track to continue to grow.
On the other hand, on our supply side, yes, we we are expecting our Chongqing joint venture 12 inches fab can start ramping up in the month of June July to support our further growth. Those capacities are much needed And otherwise, we will be capped at our current capacity. So we do need a joint venture's ramp up. Got it. Got it.
Thank you. And I'll hop back in you.
Thank you.
Our next question comes from the line of Jeremy Kwan from Stifel. Your line is open.
Hi. Yes. Just a question. I think, Mike, you mentioned last quarter that there was some talk about customers cleaning up the backlogs. Is that still ongoing?
Is there anything different one way or the other with, you know, customer ordering patterns? And and putting black backlog in you guys? And maybe any comments on lead times?
Actually, yes, we actively cleaned up the back log in the last couple of quarters, okay, because I think they were clearly double ordered before. However, I think this whole end of our process there. And I would do see the booking coming back right now. Great.
And then a quick update on the digital power. Steven, it was it was really good to see, you know, the progress at APEC and and seeing a reference board. Can you give us a a update in terms of the timing of when you might expect to start penetrating that market and maybe seeing, revenues even. Thank you.
Thank you. This address is very, very interesting and very, potential good field there. In this area, okay, unfortunately or fortunately, okay, it's got totally deviated from the commodity market. So even though we have a, have some product platform for each application, but for every single customer almost a year to to special tune. You're more like a specific there.
So so it take time to get in, but one online, once you get in there, it's also a bit more stickier. So we do have a lot of, customer engagement there, and we expect unfortunately, the remedy power coming next year, not this year, yes. Maybe lucky made something small one this year, but most of it was anything significant will be next year.
Got it. Great. And just one last question in terms of the $5,000,000 deposit that you received. I think you got one last quarter too. And just wondering if that's part of the $90,000,000 that's on that you consider as part of AOS books.
And if there's any restrictions on those deposits?
Yes. In the March quarter, we received a second $5,000,000 customer deposit. Right now, there's no restrictions on the cash. Yes, it is sitting on AOS cash balance.
Great. Thank you very much. Thank you.
Your next question comes from the line of Craig Ellis from B. Riley SBR.
Hey, guys. Just wondering if you guys could provide any update on some of the server power management initiatives. I know we had seen some, commentary that maybe inventory digestion was going a little bit longer than expected. Does that change how you're thinking about the timing of that at all? Thanks.
Are you asking regarding on the Digital Power Initiative or for them or our current business
Digital Power Initiatives following up on, the last question.
Sure. So, right now, we're still in the product development stage and we are engaging with our customers to get our products designed in. So for us right now, there's no major impact to us. Actually, it helps gives us some time to engage more with the customers.
Got it. Got it. And then, one last question for me. I know you had said, the joint venture kind of coming online in the 2nd half. I know you guys probably can't give too much, but I was wondering if we could get any color on what the ramp of, the revenue ramp of that might look like through the back half of the year.
Just any color would be great. And that's it for me.
Okay, sure. Right now, we are expecting our 12 inches fab and from the joint venture can start small mass production in the month of June or July. And then gradually, ramp up in the September quarter and the December quarter. So our target is to ramp up to the phase 1, level probably in the December quarter of next year first half. So depending on the ramp up speed.
So because in fab need you can't ramp up in the fast. So, I mean, overall, our estimate is still a host for the phase 1, once we fully ramped up, you can support AOS for annual revenue of additional $150,000,000.
Got it. So we should expect kind of the the fab in December to be running at an annualized $150,000,000 in revenue. That's that's correct.
It will depend on the ramp up speed. I mean, right now either December quarter or next year, March or June.
Got it. Got it. All right. Thanks guys.
Thank you. Thank you.
Your next question comes from the line of Jeremy Kwan from Stifel. Your line is open.
Hi, sorry, just one last follow-up to that question. Can you, I recall that, the JV is going to have a slight potential impact on the gross margin or it sounds like it might be neutral. Is there, with gross margin right now in the 27% -ish range, And how should we think about that as we look out into fiscal 2020?
Right now, because the 12 inches fab has not started production yet, right now, with pro form a out and the production ramp up costs, until we ramp up to the target level. So when we ramp up to the phase 1 level, we our current estimate is our 12 inches fabs wafer on the die basis would be on par with our 8 inches fab, 8 inches wafers. So that's how our current estimate. So basically next year, we're expecting that cost level.
Great. Thank you.
Thank you.
At this time. I turn the call back over to team management for closing remarks.
Okay. This concludes our earnings call today. Thank you for your interest in AOS and we look forward to talking with you again next quarter. Thank you. Thank you.
This concludes today's conference call. You may now disconnect.