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. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, you may press star then zero on your touch-tone telephone to speak with an operator. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Ms. So-Yeon Jeong, investor relations. Ma'am, you may begin.
Thank you. Good afternoon, everyone, and welcome to the Alpha and Omega Semiconductor conference call for fiscal 2018 second quarter financial results. This is So-Yeon Jeong, investor relations representative for the company. With me today are Dr. 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 seven 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 7th, 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 GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. We would like to remind you that during the course of the conference call, we'll 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 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 discussion over to our CFO to provide an overview of the second fiscal quarter financial results. Yifan?
Thank you, So-Yeon. Good afternoon, and thank you for joining us. To begin, I will discuss financial results for the quarter. I will 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. We will reserve time for questions and answers. Revenue for the December quarter was $103.9 million, 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, MOSFET revenue was $85.1 million, up 1.7% from the prior quarter and up 21.9% from the same quarter last year. Power IC revenue was $15.8 million, down 12.9% from the prior quarter and down 27.9% from the same quarter last year.
Service revenue was $3 million as compared to $3.1 million for the prior quarter and $3 million for the same quarter last year. In terms of segment mix, this quarter's computing segment represented 42.6% of the total revenue, consumer 20.3%, power supply and industrial 20.1%, communication 14%, service 2.9%, and others 0.1%. Non-GAAP gross margin was 27.4% for the December quarter as compared to 26.6% 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 and operational efficiency. Non-GAAP gross margin excluded $0.4 million of share-based compensation charge for the December quarter as compared to $0.3 million in the prior quarter and $0.2 million for the same quarter last year.
Non-GAAP operating expenses for the quarter were $21.3 million compared to $21.2 million for the prior quarter and $17.9 million for the same quarter last year. Non-GAAP operating expenses excluded $3.6 million of share-based compensation charge as compared to $1.7 million in the prior quarter and $1.4 million for the same quarter last year. The higher share-based compensation charge quarter-over-quarter reflected more variable compensation accrual that resulted from the higher profitability achieved for calendar year 2017. Non-GAAP operating expenses for the December quarter included $2 million startup expenses from our Chongqing joint venture and $0.4 million for expenses related to our digital power team. By the end of the December quarter, we hired close to one-third of the digital 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 $2.1 million for the quarter, including a one-time tax benefit of $2.7 million as a result of the recent U.S. tax reform, as compared to income tax expense of $1.3 million for the prior quarter and $1.1 million for the same quarter last year. Net income attributable to AOS for the quarter was approximately $6.8 million, 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 $0.27 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 million, or $0.16 per share, and a one-time tax benefit of $2.7 million, or $0.11 per share from the impact of the tax reform. The diluted earnings per share calculation was based on approximately 25 million weighted average shares. We continue to generate positive cash flow. Cash flow from operations was $9.6 million for the December quarter, compared to $12.3 million for the prior quarter and $8.8 million for the same quarter last year. EBITDA for the December quarter was $16 million, compared to $15 million for the prior quarter and $12.2 million for the same quarter last year. Moving on to the balance sheet.
We completed the December quarter with cash and cash equivalents balance of $146.2 million, including a balance of $57.1 million at our Chongqing joint venture, as compared to $180.2 million at the end of last quarter and $122.8 million a year ago. Net trade receivables were $24.3 million, as compared to $25.4 million at the end of last quarter and $24.5 million 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 $85.7 million at the quarter end, compared to $79.2 million for the last quarter and $70.2 million for the prior year. Average days in inventory were 98 days for the quarter, compared to 90 days in the prior quarter.
Net property, plant, and equipment balance was $193.3 million, as compared to $167.9 million for last quarter and $122.7 million for the prior year. Capital expenditures were $36.5 million for the quarter, including $16.1 million from AOS and $20.4 million 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 of $40 million-$45 million to support our near-term revenue growth. Reflecting confidence in our business and plans, our board previously authorized the repurchase of up to $30 million of our common shares. During the December quarter, we repurchased approximately 347,000 shares for an aggregated cost of $6 million. With that, now I would like to turn the call over to our CEO, Dr. Mike 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 the high end of the guidance range, resulting in $0.32 per share on a non-GAAP basis. Our operating expense, as you can see, were slightly higher than our guidance range. This reflects primarily the investment we are making to bring to fruition the two growth initiatives we have discussed in past calls. One of these initiatives is our joint venture in Chongqing, China. Let me start with an update on this initiative. As the demand of our new products has increased in the last year or so, we have experienced and expect to continue to experience supply and manufacturing constraints.
These capacity constraints have caused us to forego potential revenue on an annualized basis in the order of tens of millions of dollars. We believe this joint venture will provide us with the needed manufacturing capacity to meet the demand for our products and to support our longer-term revenue growth. Recently, the joint venture has completed construction of its building. Now it is our turn to fulfill the operational requirements for pre-production, including equipment installation, qualification, trial production, and staffing. When completed, the Chongqing joint venture will consist of an assembly and a test facility, and a 12-inch fab. This fab will be one of the very few 300-millimeter fabs in the world dedicated to power semiconductors. Our 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 clean room is fully ramped, it can support approximately $150 million of additional annual revenue. We expect this 12-inch fab to provide three key benefits. One, it will solve our supply constraint for many years to come. Two, it will give us a manufacturing cost advantage in our high-volume markets. Three, it will provide us with better capability to design advanced products to further sharpen our competitive advantage, which in return creates more demand. Now, an update on our second initiative, 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 it with our existing MOSFET 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 increasing. This includes the computer server market, which has an additional $400 million BOM content for us to tap. In addition, this digital capability will also elevate our position to the upper stream of the 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 turning the company around and growing our earnings, we won't settle for the current rate of our growth. We want to escalate 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 two 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 confidence. With that, I will now move to the core business review, beginning with the computing segment. It represented 42.6% of total revenue in the December quarter. We post an 8.8% sequential increase and a 21.7% growth year-over-year. The surge 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 Vcore application.
March quarter being typically the lowest season for our computing business, we expect this segment's revenue to slightly decrease. Second, consumer. It was 20.3% of total revenue. It decreased 17.9% sequentially. It 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 million 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. We expect the IGBT line to offset the low seasonality in TV market, helping the consumer business maintain its revenue level in the March quarter. Third, the power supply in the industrial segment.
It was 20.1% of total revenue, which was up 3.8% sequentially and up 5.3% from the same quarter last year. The growth was attributable to our new products for a wide range of applications, including power tools and industrial power supply. This is a diverse market where many small-scale applications span a large number of customers. We believe our highly efficient products will allow us to continue to expand our market footprint. We anticipate that this segment's revenue will maintain or slightly drop in the March quarter on seasonalities. Lastly, the communications segment. It represents 14% 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 AlphaDFN product for smartphone battery management applications. Our telecom network products continue to grow based on the strong demand for our medium voltage MOSFET 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 calendar 2018, even under supply constraints. Solid performance of our core business enables us to fund strategic investment into our Chongqing joint venture and digital power to open the door to new market and greater growth. We are determined to invigorate our earnings power with focused execution of our business plans. With this, let our CFO, Yifan Liang, to give you guidance. Yifan?
Mike. As we expect the clean rooms of our Chongqing joint venture to be completed in the March quarter, we are excited 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 for the third quarter of fiscal year 2018. Revenue is expected to be in the range of $99 million-$103 million. Gross margin is expected to be approximately 26%, ±1%. Non-GAAP gross margin is expected to be approximately 26.3%, ±1%.
Non-GAAP gross margin excludes $0.3 million of estimated share-based compensation charge. Operating expenses are expected to be in the range of $26.5 million ±$1 million. Non-GAAP operating expenses are expected to be in the range of $22 million ±$1 million. Both GAAP and non-GAAP operating expenses include expenses of $1.5 million-$1.7 million, expenses relating to the development of our digital power team. By the end of the March quarter, we expect to have hired nearly two-third of the digital power team that we plan to build. Non-GAAP operating expenses exclude an estimated share-based compensation charge of approximately $2.2 million, an estimated joint venture pre-production expenses of approximately $2.5 million. Tax expenses are expected to be in the range of $0.8 million-$1 million. Loss attributable to non-controlling interest is expected to be around $1.9 million.
Non-GAAP loss attributable to non-controlling interest is expected to be around $0.7 million. The $1.2 million 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. With that, we will open the floor for questioning. Operator?
Ladies and gentlemen, if you have a question at this time, please press star and then one on your touchtone telephone. If your question has been asked or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Edgar Roche with Citi. Your line is now open.
Yes. Hi, good afternoon or evening. One question, if I may, on-
Hi.
Hi, how are you?
I'm good.
I wanted to ask one question, if I may, on capacity. I've thought about the high end of your quarterly revenue rate is about $105 million at this point. First of all, is that about in the right range? Then in which quarter might we expect that to step up?
Okay, sure. Yes. As we approached almost $105 million in revenue in the September quarter, this December quarter is more reflected as some holidays. When you have holidays, major holidays, then the production weren't as much as in the normal capacity. A couple million dollars are lost there. In terms of March quarter, that's about the same situation. In the March quarter, we're having Chinese New Year's in February, that would give us some inefficiencies in the production side. In terms of another step up in the capacity, we are expecting starting in the June quarter, we should be able to see some increase, then rest of the increase probably come in the September quarter. That's our current capacity expansion plan in our Oregon fab. Right now, we're doing some debottlenecking to open up some capacity from our own fab.
going forward, we hope our joint venture will start take over starting calendar year 2019.
Great. The last step up, I believe, was about $5 million 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. I did join a little bit late, so I apologize if you covered any of this, but a couple questions on your new high voltage αMOS5 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 it's on the home appliance or industrial business.
This is Mike. Thank you for the question. αMOS5 will have a two purpose. One, like what you said, which will replace some old product there, but mostly it is for the new application. Which is, one, it's in the industrial and also in the solar, the good energy side there, and also in some degree in the TV area also, yeah. This really, we have a lot of expectation from this newer market, and so far it's got a good track record, yeah.
That's great. I'll get back in queue. Thank you.
Thank you.
Thank you. 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 has 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 below high single digits?
Sure. In terms of the growth driver in calendar year 2018, first of all, we're expecting, yes, the growth from our communications segment, and you saw in calendar year 2017, we had a pretty good growth. We would expect similar growth in 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. We would expect, just a moment ago, Mike commented on αMOS5 high voltage platform we just rolled out in last quarter or so. We would expect to continue to get some good traction from there and the other product lines also contribute to this power supply and industrial area concern. We do have some application sockets, and we're doing some great design-ins and design wins.
In terms of below the high single digits, we would expect computing probably will slightly be below on high single-digit growth. Just the overall PC market, we still assume the volume will continue to modestly decline. By offsetting that, we are growing our market share in the high ASP and the high margin sockets, and our new products are performing pretty well against the competition. The flattish segment is in the consumer segment areas. In this area, we'll continue to expect it will subject to a supply constraint. On the other hand, we expect our IGBT product line will continue to take the momentum. In calendar year 2017, our IGBT product line crossed the $10 million revenue mark, that's a significant first milestone. We do expect we can continue to grow this product line.
This product line can address pretty broad market with a pretty big SAM size.
That's helpful, Yifan. 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. If we looked at the top three or four areas for content gain that would contribute to revenue growth across all end markets, what would they be?
I would say in the mobile area, the smartphone, our products are pretty competitive, performance-wise, and it is pretty good. Another one is in the computing area, we would expect some continued content gain, from our highest speed and high-margin products, in those areas. In some, like the power supply area, this is kind of related to the mobile, but it's on the power supply side and on the adapter, charger side. From our high voltage and quick charging and mid voltage product lines. That's about the top 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 gross margin is down 110 basis points sequentially in the third quarter. Was there anything unusual either in the fiscal second quarter or in the fiscal third quarter that accounts for a fairly substantial decline given that the revenue guidance is down less than $2 million sequentially at the midpoint?
Well, the gross margin is in March quarter compared to December quarter. If you look at the guidance range, it's similar to my December guidance range. March quarter is more, we accounted in some inefficiencies from the Chinese New Year. The Chinese New Year is a lot longer than U.S. Christmas and those holiday seasons. You know the situation over there. Almost a week prior to the holiday and a week after holiday, that's pretty much most of the workers and operators, they will go back to their hometown. We would expect some productivity loss, and that's pretty much the major factors we consider.
Okay. 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 2017?
It's either same or a little bit worse.
Is that across all foundry 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? Other, I really cannot comment.
Okay. For all the products that you're sourcing externally, things are a little bit tighter right now, is your point.
Right. Yes. Of course, maybe some, very little area can be a little bit okay, but mostly it's very difficult.
Okay. Got it. I think that is it, team. Thank you very much.
Thank you. Thank you.
Thank you. Once again, ladies and gentlemen, if you have a question at this time, please press star and then one. Our next question comes from the line of Jeremy Kwan with Stifel Nicolaus. Your line is now open.
Yes. Hi, guys. It is Jeremy calling for Tore.
Oh, hi. Hi.
Mike. 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? When do you see maybe these issues clearing up?
From what we see so far, fortunately, because that's about the same. The good things is, we also opened some other OEM customer, one thing. Second, as we mentioned couple of times, the IGBT segment really help us in the consumer. Overall, I think that the consumer area should maintain the flat area.
Great. I guess, switching gears now, Yifan, if you could help me understand a little bit more on the China JV side. The pre-production expenses of $2.5 million, is this something that you see ongoing? Do you see it increasing throughout the course of the year? How does that impact things from a cash flow perspective?
Sure. This is $2.5 million we guided for the March quarter, that's in, I think, that one, it will going up in the future quarters as we'll get into more into the pre-production trial runs. Also, from the sequence of assembly house versus 12-inch fab, right now, the clean room for the assembly house is almost ready. On assembly piece, we'll do the pre-production first. Later on, a little bit later, about a quarter or so later, our 12-inch fab will start pre-production activities. I would expect some stack-up pre-production expenses in later year of this year.
Great. I guess, in terms of the digital power team, it sounds like you've got two-thirds of the team exiting the March quarter. How do you see expenses there ramping up throughout the rest of the year? Once you reach that, 100%, is that going to stay as a baseline for the next couple quarters after that, or do you still see a need to increase staffing maybe as you move towards getting closer to trials and sales levels? Thank you.
Yeah. For this calendar year, I would expect most of the expenses come from on headcounts and headcount-related expenses. As I guided in the March quarters, by the end of March, Probably see like a two-third of the team probably will be there. I would say, another one-third of the team we still need to hire to build in the June quarter or maybe extend it to the September quarter.
Just this 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 when we might be able to see initial product and which Intel platform you're targeting at this point? Thank you.
This team right now, we're building up the digital power team, and then we're targeting and we're developing new products for Intel's VR13HC platform. Which we expect to be rolled out close to the end of this year or early next year also. In terms of revenue from this digital power team, I would expect, give them a year or two to develop products and then a year or so to design and qualify with customers and so on. I would expect probably two to three years, and down the road we can expect some revenues from this team.
Great. Thank you very much.
All right. Thank you.
Thank you.
Thank you. We do have a follow-up question from the line of Craig Ellis with B. Riley. Your line is now open.
Yeah. Thanks for taking the follow-up question. I wanted to go back to cash generation, the cash balance. The company's done, frankly, a stellar job of generating cash on a quarterly basis. The cash balance is up about $30 million in just the last two quarters, so it's at $146 million, so almost $6 per share. 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, what are the levers, Mike, that you see that you have with the strong cash generation that you have to help create shareholder value? Over the last six to 12 months, while the business execution has been good, the stock doesn't seem to be responding to that.
Sure. Craig, how the market react to our stock, that one I cannot comment on it. From the cash flow perspective, yeah, the cash balance as of the end of September quarter, that $180 million included some cash contributions from our joint venture partner, not entirely created by AOS business. It was $87 million contributed in the September quarter from our joint venture partner. Right now, at the end of the December quarter, our cash balance included $57 million on cash and balance from our joint venture. Joint ventures and cash, I cannot touch on it. It's for the joint ventures, the construction and the purchase of equipment and other expenses.
From AOS side, right now, the cash, you saw we are expanding a little bit our Oregon fab, we'll put in a little bit more CapEx and then support our business growth in calendar year 2017 and 2018. That's our first priority. At the same time, our board showed confidence in our business and our plans, our board authorized $30 million in buyback program in the September quarter. We did buy back $6 million stock in the December quarter.
Can you just talk about your approach to the buyback, Yifan? Is it intended to be steady on a quarterly basis or more opportunistic based on a matrix approach, to where 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's under 10b5-1 plan, I would characterize it as steady, from time to time, we'll buy back. We don't rule out other opportunities. A couple of years ago, we had $50 million in the stock buyback, initially we did a 10b5-1 plan repurchase. In July 2015, we did a $30 million Dutch tender offer, it was a combination at that time. This time, $30 million program, I would say, we'll review as it goes.
Thanks for the color, Yifan. Good luck.
Okay. Thank you.
Thank you.
Thanks, Mike.
Thank you. I'm showing no further questions at this time, I'd like to return the call to management for any closing remarks.
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 call. This does conclude the program, and you may all disconnect.