Good day, ladies and gentlemen, and welcome to the Alpha And Omega Semiconductor Fiscal Q2 2018 Earnings Call. At this time all participants are in a listen only mode. And as a reminder, this call is being recorded. I would now like to introduce your host for today's conference Ms. Soyoung Zheng, Investor Relations.
Ma'am, you may begin.
Thank you. Good afternoon, everyone, and welcome to the Alpha And Omega Semiconductor's conference call for fiscal 2018 second quarter financial results. This is Soehan Jong, Investor Relations representative for the company. With me today are Doctor. Mike Chang, our CEO and Yifan Liang, our CFO.
This call is being recorded and broadcasted live over the web and can be accessed for 7 days following the call via the link in the Investor Relations section of our website at www.aosmd.com. The earnings release was distributed by GlobeNewswire today, February 7, 2018 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 for both historical and forecast financial information. 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 measures to comparable GAAP measures is included in our earnings the conference call will make 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 and uncertainties, please refer to we assume no obligations to update the information provided in today's call. Now I'll turn the discussion over to our CFO to provide an overview of the second fiscal quarter financial results. Yifan?
Thank you, Sohyong. Good afternoon, and thank you for joining us. To begin, I will discuss financial results for the quarter Then I'll turn it over to Mike, our CEO, who will review the company's business highlights, and I will follow-up with our guidance for the next quarter. Finally, we will reserve time for questions and answers. Revenue for the December quarter was $103,900,000, down 0.9% sequentially and up 9.7% year over year.
Our new products continue to show strong momentum during this seasonally lower quarter. In terms of product mix, modified revenue was $85,100,000, up 1.7% from the prior quarter, and up 21.9% from the same quarter last year. PowerAC revenue was $15,800,000, down 12.9% from the prior quarter and down 27.9% from the same quarter last year. Service revenue was $3,000,000 as compared to $3,100,000 for the prior quarter and $3,000,000 for the same quarter last year. In terms of segment mix, this quarter's computing segment represented 42.6 percent of the total revenue, consumer 20.3 percent, power supply and industrial 20.1%, communication, 14%, service, 2.9% and others.
1%. Non GAAP gross margin was 27.4 percent for the December quarter as compared to 26 0.6% in the prior quarter and 23.6% for the same quarter last year. The increase in non GAAP gross margin quarter over quarter was driven by the improved product mix $400,000 of share based compensation charge for the December quarter as compared to $300,000 in the prior quarter and $200,000 for the same quarter last year. Non GAAP operating expenses for the quarter were $21,300,000 compared to $21,200,000 for the prior quarter and $17,900,000 for the same quarter last year. Non GAAP operating expenses excluded $3,600,000 of share based compensation charge as compared to $1,700,000 in the prior quarter, and $1,400,000 for the same quarter last year.
The higher share based compensation charge quarter over quarter reflected more variable compensation or cool that resulted from higher profitability achieved for calendar year 2017. Non GAAP operating expenses for the December quarter included $2,000,000 startup expenses from our Chongqing joint venture and $400,000 for expenses related to our digital power team. By the end of the December quarter, we hired close to 1 third of of the digital team power team that we plan to build. And most of the people joined us in the second half of the December quarter. Income tax benefit was $2,100,000 for the quarter including a one time tax benefit of $2,700,000 as a result of the recent U.
S. Tax reform. As compared to tax income tax expense of $1,300,000 for the prior quarter and $1,100,000 for the same quarter last year. Net income attributable to AOS for the quarter was approximately $6,800,000 or $0.27 earnings per share as compared to $0.19 earnings per share for the prior quarter and $0.11 earnings per share for the same quarter last year. Non GAAP EPS attributable to AOS for the quarter was $0.32 earnings per share as compared to 27 dollars earnings per share for the prior quarter and $0.18 earnings per share for the same quarter last year.
Non GAAP earnings for the quarter excluded the effect of share based compensation expenses of $4,000,000 or $0.16 per share and one time tax benefit of $2,700,000 or $0.11 per share from the impact of the tax reform. The diluted earnings per share calculation was based on approximately 25,000,000 weighted average shares. We continue to generate positive cash flow. Cash flow from operations was $9,600,000 for the December quarter compared to $12,300,000 and $8,800,000 for the same quarter last year. EBITDAS for the December quarter was $16,000,000 compared to $15,000,000 for the prior quarter and $12,200,000 for the same quarter last year.
Moving on to $146,200,000 including a balance of $57,100,000 at our Chongqing joint venture. As compared to $180,200,000 at the end of last quarter $122,800,000 a year. Net trade receivables were $24,300,000 as compared to $25,400,000 at the end of last quarter $24,500,000 for the same quarter last year. Day sales outstanding was 33 days for the quarter as compared to 32 days for the prior quarter. Net inventory was $85,700,000 at the quarter end compared to $79,200,000 for the last quarter and $70,200,000 for the prior year.
Average days in inventory were 98 days the quarter compared to 90 days in the prior quarter. Net property, plant and equipment balance was $193,300,000 as compared to $167,900,000 for last quarter and $122,700,000 for the prior year. Capital expenditures were $36,500,000 for the quarter, including $16,100,000 from AOS and $20,400,000 from our Chongqing joint venture. Primarily for building construction and purchase of equipment. We expect AOS capital expenditure for fiscal year 2018 to be in the range to support our near our board previously authorized the repurchase of up to $30,000,000 of our common shares.
During the December quarter, we repurchased approximately 347,000 shares for an aggregated cost of $6,000,000. With that, now I would like to turn the call over to our CEO, Doctor. Jack Chang, who will provide the business highlights for the quarter. Mike?
Thank you, Yifan. I am pleased to report another solid quarter, driven by the continuing momentum of our new products in December quarter, Revenue and gross margin came in at a high end of the guidance range, resulting in $0.32 earnings per share on a non GAAP basis. Our were slightly higher than our guidance range. This reflects primarily the investments we are making to bring to fruition the 2 growth initiatives we have discussed in past calls. One of these initiatives is our joint venture in Chongqing, China.
Let me start with a an update on this initiative. As the demand of our new products has increased in the last supply and the manufacturing constraints. These capacity constraints have caused us to forego potential revenue on an annualized basis in order in the order of tens of 1,000,000 of dollars. We believe this joint venture will provide us with the needed manufacturing capacity for our products and to support our Recently, the joint venture has completed construction of its building. Now it our turn to fulfill the operational requirements for preproduction, including equipment installation qualification, trial production and staffing.
When completed, the Chongqing joint venture will consist of an assembly and the test facility and a 12 inches fab. This fab will be one of the very few 300 millimeter fabs in the world dedicated to power semiconductors. All fab is being built in phases and we are now gradually equipping the phase 1 clean room. Ahead of our original plan. When the phase 1 cleanroom is fully ramped, it can support approximately $150,000,000 of additional annual revenue.
We expect this towing fab to provide 3 key benefits: 1, it will solve our supply constraint for many years to come. 2, it will give us a manufacturing cost advantage in our high volume markets. 3, it will provide us with better capability to design advanced products to further sharpen our competitive leverage, which in return creates more demand. Now an update on our 2nd initiatives, Digital Power. The newly added digital power capability is one of the fundamental building blocks for our future growth.
The technology we acquired has been commercially proven, and we will integrate with it with our existing Mars fat and the power IC products to offer a total solution for power semiconductors with multiple benefits. With digital power capability, we have opportunities to expand into broad markets where the Semiconductor content is rapidly increased This included this included the computer server market, which has an additional $400,000,000 bomb content for us to tap. In addition, this digital capability will also elevate our position to the upper stream of design cycle. This will enable us to engage earlier with OEM customers. Sharpen our product definition and accelerate time to market.
Some people may ask me why we do this? While we are proud of ourselves for the turning our turning the company around, and growing our earnings, gained our earning and cash flow to sustainably fund more innovative solutions for our customers. Increase return to our shareholders and make a better workplace where successful people want to work. This is why we do this, what we focus on and how we bring compelling value to diverse stakeholders of AOS. I strongly believe that these 2 initiatives in the long term will invigorate higher earnings and profitability, even though we expect to increase our expense in the short term.
In the meantime, our core business continues to demonstrate solid strength with healthy cash flow allowing us to commit to all the required investments with convenience. With that, I will now move to the core business review beginning with Computing segment. It represented 42.6 percent of total revenue in the December quarter. We posted an 8.8% sequential increase and 21.7% growth year over year. The 3rd search from a year ago was driven by the continuous gains of market share of our higher ASP products in notebook applications across the board.
Especially with vehicle application. March quarter being typically the lowest season for our computing business, we expect this segment's revenue to slightly decrease. 2nd, consumer. It was 20 point 3% of total revenue. It decreased 17.9% sequentially and decreased 12.1% compared to the prior year.
The year over year drop was due mainly to the decrease in our major TV OEMs production volume. Partially offset by the increased shipments of the new product from our own fab. For instance, our IGBT product line has crossed an important threshold of $10,000,000 annual revenue mark. At the end of calendar year 2017. This product line is gaining solid momentum as the design cycle is finally starting to convert into revenue.
Set the low seasonality in TV market, helping the consumer business maintain its revenue level in the March quarter. 3rd, the power supply and industrial segment, it was 20.1% of total revenue, which was up 3.8% sequentially and up 5.3% from same quarter last year. The growth was attributable to power tools and industrial power supply. This is a diverse market where many small scale applications span a large number of customers and we believe our highly efficient products will allow us to continue to to expand our market footprint. We anticipate that these segments revenue will maintain or slightly drop in the March quarter on seasonality.
Lastly, the communications segment, it represents 14 percent of the total revenue. It decreased 4.1% sequentially but increased 28.8% year over year. Year over year growth was driven by the increasing shipment of our ARFA DFN product for smartphone battery management applications. Our telecom network product continue to grow based on the strong demand for our medium voltage phosphide products. We expect the communication revenue to increase in the March quarters.
In closing, I am pleased with our business momentum. Through our hard work and effort in the past few years, we have established a strong core business as a foundation. That is profitably growing and generating cash. With the strength of our new products, we expect to grow our revenue in high, single digits in the calendar 2018, even under supply constraint. Solid performance of our core business enables us to fund strategic investments into our Chongqing joint venture and digital power to open a door to new markets and greater growth.
We are determined to invigorate our earnings power with focused execution of our business plans. With this, that's our CFO, Yifan Liang, to give you guidance. Yifan?
As we expect the clean rooms of our Chongqing joint venture to be completed in the March quarter, we are cited that our joint venture will enter into the pre production stage. During the March quarter, we expect to install equipment conduct qualification processes and perform trial production. To support this, we will also add headcount A large portion of the pre production costs cannot be capitalized under GAAP accounting. Because these expenses do not reflect our normal business and operations, we plan to exclude such pre production expenses in our non GAAP operating expenses. With that, here are our expectations Revenue is expected to be in the range of $99,000,000 Gross margin is expected to be approximately 26% plus or-1 percent.
Non GAAP gross margin is expected to be approximately 26.3percentplusor-1percent. Non GAAP gross margin excludes $300,000 of estimated share based compensation charge. Operating expenses are expected to be in the range of $26,500,000 plus or minus $1,000,000. Non GAAP operating expenses are expected to be in the range of $22,000,000, plus or minus $1,000,000. Both GAAP and non GAAP operating expenses include expenses of $1,500,000 to $1,700,000 expenses relating to the development of our Digital Power team.
By the end of the March quarter, we expect to have hired a nearly 2 third of the digital power team that we plan to build. Non GAAP operating expenses exclude an estimated share based compensation charge of approximately $2,200,000 and estimated joint venture pre production expenses of approximately $2,500,000. Tax expenses are expected to be in the range of $800,000 Loss attributable to non controlling interest is expected to be around $1,900,000. Non GAAP loss attributable to non controlling interest is expected to be around $700,000. The $1,200,000 difference is due to the exclusion of estimated pre production expenses in non GAAP operating expenses.
As per our regular practice, we're not assuming any obligations to update this information.
Our first question comes from the line of Edgar Roche with Sidoti. Your line is now open.
One question if
I may on capacity. I've thought about the high end of your quarterly revenue rate is about $105,000,000 at this point. First of all, is that about in the right range? And then in which quarter might we expect that to step up
Okay, sure. Yes. And as we approached an almost $105,000,000 in revenue in the September quarter. This December quarter is more reflected in some holidays, I mean, this when you have holidays and major holidays, the productions and then just one last March as in the normal capacity. So that's a couple of $1,000,000 of loss there.
In terms of March quarter, that's about the same situation. In the March quarter, we're having Chinese New Year in February. So that would give us some inefficiencies in the production side. In terms of another step up in the capacity, And we are expecting in the starting in the June quarter, we should be able to see some increase. And then rest of the increase probably come in the September quarter.
So that's our current capacity expansion plan in our organ fabs. So right now, listen, we're doing some debottlenecking to open up some capacity from our own fab. So going forward, we hope our joint venture will start take over, starting calendar year 2019.
Great. And then the last step up, I believe, was about $5,000,000 in sort of peak, quarterly shipment potential. Would you expect a larger step in this next increment?
In the June quarter, I would say probably in the same magnitude, and then another, similar step up in the September quarter.
Thank you for that. And I did join a little bit late. So I apologize, if you covered any of this, but A couple of questions on your new high voltage AMOS 5 product line. And if you could help me understand a little bit I know it wasn't this past quarter, but September quarter launch. But whether that addresses new applications, or whether it improves on a previous generation of AOS products?
And maybe where you'd expect the largest revenue wins, whether on the home appliance or industrial business?
Okay. This is Mike. Okay. Thank you for the question. After March 5, we have a 2 purpose.
1, of course, that's what you said, which represents some old product there, but mostly it's for the new application. Okay, which is a once in the industrial and also in the solar the good energy side there and also in some degree in the TV area also, yeah. So this really, we have a lot of expectation from this newer market and the sound so far has got a good track record, yeah.
That's great. I'll get back in queue. Thank you.
Thank you. And our next question comes from the line of Craig Ellis with B. Riley. Your line is now open.
Thanks for taking the question and congratulations to the team on the very good December quarter execution.
Thank you.
Yeah, you're welcome. I wanted to start with a follow-up to a point that I think Mike made in his prepared remarks with regards to, high single digit revenue growth potential this year. As we look at 2018 and the company I think is targeted mid to high single digit growth. As we look at the end markets that the company participates in PC consumer, industrial and power supply and communications, which of your end markets would be growing above the high single digit rate and which of the end markets would be more likely to grow
In terms of the growth driver in calendar year 2018 went First of all, we're expecting, yes, the growth from our communications segment and you saw in the calendar 2017, we had a pretty good growth. We would expect similar growth in the calendar year. 2018 in our battery pack management and applications and telecom areas. Another higher growth areas is in the power supply and industrial area. So we would expect just a moment ago my commented on a off premise 5 flight voltage platform, which is rolled out and last quarter or so, we would expect to continue to get some good traction from there.
And the other product lines also contributed to this, the mass, this power supply and industrial area concern that we do have some application. So in case you know, we're doing some great design wins and design wins. In terms of below the high single digits and we would expect computing probably will slightly below, on high single digit growth. And then, I mean, just the overall PC market, we still assume the volume will continue to modestly decline. And then by offsetting that, we are growing our market share in the high ASP and high margin sagas and then our new products performing pretty well against the competition.
The flattish segment is in consumer segment areas. So in this area, what continue to, to expect it was subject to a supply constraint. But on the other hand, our we expect our IGBT product line will continue to take momentum in calendar year 2017, our IGBT product line crossed $10,000,000 in revenue mark So that's a significant first milestone. So we do expect that we can continue to grow this product This product line can address pretty broad market with a pretty big sized.
That's helpful, Yifan. And if we stay on just some of the longer term trends and look at 2018 a little bit differently from an incremental content gain standpoint because for a number of years AOSL has done a good job adding content in each end market. But if we've looked at the top 3 or 4 areas or content gain that would contribute to revenue growth across all end markets. What would they be?
I would say in the mobile area, business smartphone, our products are pretty competitive. Performance wise is pretty good. Another one is in the computing area, we would expect some continued content gain from our high ASP and a high margin products. So in those areas. And then in some, like the power supply area in, I mean, this is kind of related to the mobile, but then it's on the power supply side and then on the adapter charger side.
So from our high voltage and quick charging and mid voltage product lines. So that's about the top like an application areas. We expect to grow.
Okay. That makes sense. I wanted to move on to some manufacturing and gross margin related questions. First, stellar gross margin performance in the December quarter. I was a little bit surprised from there that our gross margin is down 110 basis points sequentially in the third quarter.
Was there anything unusual either in the fiscal 2nd quarter or in the fiscal 3rd quarter that accounts for a fairly substantial decline given that the revenue guidance is down less than $2,000,000 sequentially at the midpoint.
Well, this is a, I mean, the gross margin is in March quarter compared to December. Quarter. I mean, if you look at the guidance range, it's similar to December guidance range. And then March quarter is more accounted in some inefficiencies from the Chinese New Year. And I mean, the Chinese New Year is a lot of a longer than U.
S. Christmas those holiday seasons. So the situation over there, I mean, almost a weak part of the holiday and a week after holiday, that's pretty much most of the workers and operators, they will go back to their hometown So we would expect some productivity loss. And that's pretty much the major factor. So we consider
Okay. And then staying on manufacturing, helpful, responses to earlier question regarding your internal supply. How would you characterize foundry supply availability at present relative to what you saw last year in the middle of the year. Is it as tight? Has it tightened further?
Or is it actually a little bit more favorable to AOSL versus what it was in mid-twenty 17?
It's either same or variable worse.
And is that across all founder parts, Mike, or is that in just select processes or with select foundries?
I can only speak for the power semiconductor field. That's what we are engaged. Okay, are there already kind of comment.
Okay. But for all the All the products that you're sourcing externally, things are a little bit tighter right now, is your point.
Right, right, right, right. Of course,
and maybe there's some very little area can be a little bit okay, but mostly very tip values, very difficult.
Okay. Got it. I think that's it, team. Thank you very much.
Well, thank you. Thank you.
And our next question comes from the line of Jeremy Kwan with Stifel Nicolaus. Your line is now open.
Yes, hi guys. It's Jeremy calling for Tori. Hi.
Hi.
Hi. Hi. I was wondering if you could give us a little more color in terms of the it sounds like the TV market impacted the consumer business a bit here. Due to OEM production being limited, how are you seeing that shifting or changing And when do you see maybe these issues clearing up?
From what we see so far the device fortunately, because that's about the same. And the good thing is, okay, our we also opened some other OEM customer, one thing. And the second, as we mentioned a couple of times, okay, the GBT segment really help us in the consumer. So I think that the consumer area should should maintain that flat year.
Great. I guess, and switching gears now, Yifan, if you could help me understand a little bit more on the China JV side. The preproduction expenses of $2,500,000 is this something that you see ongoing? Is it or do you see it increasing throughout the course of the year? And how does that impact things from a cash flow perspective?
Sure. This is, $2,500,000 that we guided for the March quarter, and that's in I think that one, it will going up in the future quarters as soon will get into more into the preproduction trial runs. And also from the sequence of assembly house versus 12 inch fab. Right now, there's the cleanroom for the assembly house is almost ready. So on assembly piece, we'll do the on pre production first.
So later on, a little bit later, about a quarter or so later in fab will start in pre production activities. So I would expect some stack up production expenses in the later year of than this year.
Great. And then I guess in terms of the digital power team, it sounds like you've got 2 thirds of the team exiting the, exiting the March quarter How do you see expenses there ramping up throughout the rest of the year? Is that once you reach that 100% is that going to stay as a baseline for the next quarters after that, or do you still see a need to increase staffing maybe as you move towards, getting closer to you trials and sales levels? Thank you.
Yeah. And for this calendar year, I would expect most of the expenses come from on headcounts and headcount related expenses. So as I guided in the March quarters, so by the end of March, we would probably see like a twothree of the team probably will be there. So I would say another 1 third of the team, we still need to hire to build in the June quarter or maybe extend it to the September quarter.
And just one last follow-up related to the digital power. Can you give us an update in terms and it might still be early, but do you have more of an idea of maybe what, when we might be able to see initial product and what, which Intel platform you're targeting at this point?
This team, right now, we're building up the digital power team and then on what targeting and what developing new products for Intel's VR 13 C platform, so which will be we expect to be rolled out and close to the end of this year or early next year. Also. So in terms of revenue from this digital on the power team, would expect to give them a year or 2 to development products and then a year or so to design in qualified customers. And so I would expect probably 2 to 3 years down the road. We can expect some revenues from this team.
Thank you. And we do have a follow-up question from the line of Craig Ellis with B. Riley.
Yes, thanks for taking the follow-up question. I wanted to go back to cash generation, the cash balance. The company has done frankly a stellar job of of generating cash on a quarterly basis, the cash balance is up about $30,000,000 in just the last two quarters. So it's at $146,000,000, so almost $6 per share. But in the last six months, the stock really hasn't responded to that cash generation capability and frankly the $1.25 of increased value just from cash that is shown on the balance sheet.
I know you've got the share buyback, but what are the levers, Mike, that you see that you have with the strong cash generation that you have to help create shareholder value because over the last 6 to 12 months, while the business execution has been good stock doesn't seem to
be responding to that? Sure. Craig, I mean, how market react to our stock. And I mean, that one I cannot comment on. From the cash flow perspective, yes, the cash balance and, as of the end of September quarter than $180,000,000 and included some cash contributions from our joint venture partner.
So not entirely created by AOS business. So that's a it was 87,000,000 dollars contributed in the September quarter from our joint venture partner. Then right now, at the end of the December quarter, our cash balance included $57,000,000 on cash and balance from our joint venture. So joint venture is in the cash and I cannot touch on it. And so it's in the It's for joint ventures, the construction and the purchase of equipment and other expenses.
So, from AAOS side, right now, it is the cash and then you saw them, we are expanding a little bit our and Oregon fab. So, we'll put in a little bit more CapEx and then support our business growth in the year 2017 2018. So, that's our first priority. At the same time, our board showed confidence in our business and our plans and so on. Our board authorized $30,000,000 in buyback program in the September quarter.
So we did buy buyback $6,000,000 stock in the December quarter.
And can you just talk about your approach to the buyback is it intended to be steady on a quarterly basis or more opportunistic based on a matrix approach to where the greater amounts of repurchase activity if the stock dips lower. How should we think about the way you'll execute that buyback program?
Right now it is, right now it's under 10b5 plan. So I would characterize that asset steady from time to time, we'll buy back. But we don't rule out other opportunities. And then on a couple of years ago, we had $50,000,000 in the stock buyback initially we did a 10b5 plan repurchase. But, in July 2015, we did a $30,000,000 in Dutch tender offer.
So it was a combination at that time. So This time, $30,000,000 program, I would say, will reveal as it goes.
Thanks for the color.
This time. So I'd like to return the call to management for any closing remarks.
So 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.
Ladies and gentlemen, thank you for participating in today's