Good day, ladies and gentlemen, and welcome to the Alpha and Omega Semiconductor conference call, fiscal Q1 2018 earnings conference 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, please press star then zero on your touchtone telephone. As a reminder, this conference will be recorded. I'd now like to introduce your host for today's conference, Ms. So-Yeon Jeong of Investor Relations. Ma'am, you may begin your conference.
Thank you. Good afternoon, everyone, and welcome to the Alpha and Omega Semiconductor conference call for fiscal 2018 first quarter 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, November 2nd, 2017, after the market closed. The release is also posted on the 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 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 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 Yifan, our CFO, to provide an overview of the first 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, then I will turn the call over to Mike, our CEO, who will review the company's business highlights. After that, I will follow up with our guidance for the next quarter. Finally, we will reserve time for questions and answers. Revenue for the September quarter was $104.9 million, an increase of 7% from the prior quarter, and an increase of 7.7% from the same quarter last year. Our diversified and new products across all segments continue to show growing momentum. In terms of product mix, MOSFET revenue was $83.7 million, up 9% sequentially and up 17.1% year-over-year. Power IC revenue was $18.1 million, flat from the prior quarter and down 21.3% from a year ago.
Service revenue was approximately $3.1 million as compared to $3 million for the prior quarter and $2.9 million for the same quarter last year. Regarding the segment mix, this quarter's computing segment represented 38.8% of the total revenue, consumer 24.6%, power supply and industrial 19.1%, communications 14.5%, service 2.9%, and others 0.1%. Gross margin for the September quarter was 26.3% as compared to 25.6% in the prior quarter and 22.5% for the same quarter last year. The increase in gross margin quarter-over-quarter was mainly driven by the improved product mix and higher utilization, partially offset by the cost increase in raw materials and foundry services, as we had mentioned in our previous earnings call. Operating expenses for the quarter were $22.9 million compared to $21.5 million for the prior quarter and $18.2 million for the same quarter last year.
The increase in operating expenses quarter-over-quarter was mainly due to an increase of annual merit-based compensation adjustments that started in July. More variable compensation accrue because of the higher profitability, the growing startup expenses associated with our Chongqing joint venture, and the increased R&D engineering expenses to support our growth. Income tax expense was $1.3 million for the quarter as compared to $0.8 million for the prior quarter and $1.2 million for the same quarter last year. Net income attributable to AOS for the quarter was approximately $4.8 million or $0.19 earnings per share as compared to $0.17 earnings per share for the prior quarter and $0.14 earnings per share for the same quarter last year.
Non-GAAP EPS attributable to AOS for the quarter was $0.27 earnings per share as compared to $0.25 earnings per share for the prior quarter and $0.19 earnings per share for the same quarter last year. Non-GAAP EPS excluded the effect of share-based compensation expenses of $2 million. 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 $12.3 million for the September quarter compared to $13.5 million for the prior quarter and $9.3 million for the same quarter last year. EBITDA for the September quarter was $15 million compared to $14 million for the prior quarter and $12.3 million for the same quarter last year. Moving on to the balance sheet.
We completed the September quarter with cash and cash equivalents balance of $180.2 million as compared to $115.7 million at the end of last quarter, and $118.8 million a year ago. The $180.2 million cash balance at September 30th, 2017, consisted of $79.1 million from our Chongqing joint venture and $101.1 million from AOS. During the quarter, the joint venture received $97 million capital contribution, including $87 million from the Chongqing funds and $10 million from AOS. As of the September quarter end, the joint venture had received a total of $120 million capital contribution from the Chongqing funds, and AOS capital contribution has been completed. Net trade receivables were $25.4 million as compared to $28.4 million at the end of last quarter and $27.1 million during the same quarter last year. Day sales outstanding for the quarter was 32 days, same as the prior quarter.
Net inventory was $79.2 million at the quarter end, up from $76.3 million for last quarter and from $70 million from last year. Average days in inventory were 90 days for the quarter, compared to 92 days in the prior quarter. Net property, plant, and equipment balance was $159 million as compared to $139.4 million last quarter and $123 million for this prior year. Capital expenditures were $28.3 million for the quarter, including $7.1 million from AOS, $21.2 million from our Chongqing joint venture for building construction and purchase of equipment. We have made significant progress in construction of the joint venture's building infrastructure, which is close to completion. We have included a picture of the building in our prepared remarks document, which can be found on our IR website under the Events and Presentations page.
The next major step is to construct the clean rooms, which is expected to be completed by the first half of next calendar year. The overall project is progressing well according to our plan. We expect to start trial production in mid-next calendar year. Net intangible asset balance was $13 million for the quarter, including $12.6 million license fee capitalized under the license agreement with STMicroelectronics that we entered in September 2017. During the quarter, we paid $5.6 million toward license fee. The remaining balance is expected to be paid in the next few quarters based on a payment schedule set forth in the license agreement. Also in September, reflecting increased confidence in AOS profitability and cash generation capability, our board approved a $30 million share repurchase program, which underscores our commitment to enhance shareholder value.
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. AOS achieved another outstanding quarter. It reached several important milestones. For the September quarter, we have surpassed the $100 million quarterly revenue mark for the first time. Driven by the new products across all market segments, the quarterly revenue came in at the top of our guidance range at $104.9 million, establishing an all-time record. The favorable product mix contributed to the 10th consecutive quarter of gross margin expansion. Our gross margin improved 380 basis points year-over-year, which resulted in a healthy bottom line. Earlier this year, I shared our strategic vision of how we can achieve the ultimate goal of becoming a total power semiconductor solution provider. The first step was to develop and introduce differentiated products in four target markets.
The next step was to grow the business on the strength of our new product cycle and key product executions to turn into a larger, more sizable force in the marketplace. The strong product momentum and healthy business pipeline presented us with the exciting opportunities that will further expand the addressable market and diversify our product offering. In support of our growth trajectory, we signed a joint venture agreement with Chongqing government in 2016. The JV project is moving well according to our plan, as Yifan mentioned earlier. We expect the JV to improve and enhance our manufacturing capability and allow us to expand and diversify our market in China. I am very pleased to report that we recently took yet another critical step toward executing our strategic plan during the September quarter.
We entered into a license agreement with STMicroelectronics, which will lead us to expand into new markets with digital motor phase controllers, primarily for applications in computer servers. By adding a motor phase controller product line to our Power IC and MOSFET products, we can offer a complete solution to customers in the server market. The digital capability is one of the fundamental building blocks of AOS strategic plan. That will elevate us to become a total solution provider of power semiconductor. We plan to introduce new products addressing the server market in two to three years, and the entire team at AOS remains committed to deliver fine executions for our near and long-term plans. Now, let's move to a detailed review of our business. Beginning with computing segment. It represented 38.8% of total revenue in the September quarter.
We post a 1.4% sequential increase and a 16.2% growth year-over-year. The increase from a year ago was driven by the continuous gains of market share in notebook applications. Considering the strong demand for our product, partially offset by supply constraint, we expect the computing segment to maintain or slightly improve in the December quarter. Second, consumer. It was 24.6% of the total revenue. It grew 6.7% sequentially and it decreased 5.9% compared to the prior year. The wafer shortage at third-party foundries continued to affect our consumer business. However, the rising shipment of our new product for home appliance that were developed and shipped from our own fab result in a sequential growth. As we look into the low seasonality for our consumer business, we anticipate this segment to decrease in the coming quarter. Third, power supply in the industrial segment.
It was 19.1% of the total revenue, which was up 14.6% sequentially and down 1.9% from the same quarter last year. We are encouraged by customer excitement for the recently introduced high performance AlphaSGT 5 high voltage MOSFET product platform. That offers high power density in smaller and more efficient packages. The solid sequential growth was attributable to the revenue contribution from the AlphaSGT 5 product line and the low voltage products for various power tool applications. While we continue to be more selective in high voltage product allocation, we expect to see demand for the medium voltage product in industrial power supply applications to grow in the next quarter. We anticipate that this segment's revenue will maintain or slightly improve in the December quarter. Lastly, the communication segment. It represented 14.5% of total revenue. It increased 16.8% sequentially and 32.6% year-over-year.
The increase in shipment of our AlphaDFN products for smartphone battery management applications and surge protection products drove the significant growth during the September quarter. As we see healthy design-ins and wins with AlphaDFN products, we expect to maintain the revenue level next quarter. In closing, I am pleased with our sustainable growth and continued momentum. As we are consistently delivering near-term objectives, we are also investing in long-term initiatives that will ultimately transform AOS into a total power semiconductor solution provider. As we secure the right balance in near-term commitments and long-term investments, I believe we are well-positioned to capture great opportunity today and in many years to come. With this, I would like to turn over to Yifan, our CFO, to give you next quarter guidance. Yifan.
Thank you, Mike. As we look forward to the second quarter of fiscal year 2018, we expect our December quarter's revenue to be in the range of $100 million-$104 million. GAAP gross margin is expected to be approximately 26% ± 1%. GAAP operating expenses are expected to be in the range of $23.5 million ± $1 million, as we expect the Chongqing joint venture-related expenses continue to increase to support our joint venture's development plan. Tax expenses are expected to be about $0.9 million-$1.1 million. Loss attributable to non-controlling interest is expected to be approximately $1.8 million. Our share-based compensation should range from $2 million-$2.2 million. As part of our normal practice, we're not assuming any obligations to update this information. With that, we will open up the floor for questioning. Operator?
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then the one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press your pound key. Our first question comes from Jeremy Kwan from Stifel Nicolaus. Your line is open.
Hi. Yes, this is Jeremy Kwan, calling for Tori from Stifel Nicolaus. Congrats on the record quarter, you guys.
Thank you.
Looking at the STMicro digital power controller opportunity, it sounds like it could be a potentially nice new market for you guys. I know it's still relatively new, but can you give us an update on this area in terms of progress in building the team, and what the R&D ramp we can expect coming from this?
Thank you. We definitely is very excited about this new venture, and that was such a good partner with STMicroelectronics. This moment, we had a very lean skeleton, which we just recruited, and we also actively recruit the rest of the team. It's just the beginning, but with a very strong, healthy footing.
Great. Can you give us a sense of maybe the relative size of the team you want to build? Whether that's in terms of the engineers or
Okay. The team, how do I say? I'll say probably 30 plus members, yeah. The team will be, that's about our current plan.
Great.
We are still far away from that.
Okay. In terms of the support you might expect to receive from STMicro, is there any other transfer of expertise, maybe to help you accelerate that R&D program?
Actually, we are very fortunate, okay? We got a few top-notch guys in the field, okay? They have the total knowledge, okay, on the scope of what we intend to participate in. Of course, we very much appreciate our partner, STMicroelectronics friend. They are very helpful. I would say this is a beautiful team, altogether. We're very happy.
Well, Jeremy, let me add on a little bit of color on the license agreement. Based on this agreement, yes, we have a license, and we also have some additional development agreements that ST will fulfill in the next few quarters. That would give us additional support to our team while we are building our own team right now. The overall, this opportunity is very exciting. As we stated in our press release, it will address primarily the server market, along with our Power IC and the MOSFET products, so that we are targeting to provide total solutions to our customers.
Great. Thank you. That's very helpful. Just one of the last question on this, if I may. It does sound like a very potentially transformative opportunity for you guys. Can you give me an idea of when we might expect initial product announcements you might be targeting? What potential market size opportunity that you're trying to address with this? Thank you.
As we reported, we're going to expect to introduce a product between two to three years. The market size so far, immediately, we are looking for at least a $300 million size, which of course can be expanded to even more, definitely. We have to do one step at a time. That's what the current picture is, yeah. Does that answer your question?
Yes, it does. Thank you very much.
Yeah, thank you. Thank you.
Thank you. Our next question is for Ed Roach.
Yes. Hi. Congratulations, guys.
Thank you.
Thank you, Ed.
First question is just on the wafer cost increases. I know that that impacted you, but it seems like you passed them through pretty effectively because the gross margin still trended up nicely. Do you see any moderation at all in the ramp-up in those costs?
As we stated in the last earnings call, yes, starting the September quarter, we saw the wafer cost and plus some other raw material costs also increased. It started in the September quarter. This September quarter, actually, that impact is only partially flowed through because we still have previous quarter's inventory that consumed in this quarter. Those inventories were purchased at a lower cost. We are expecting, starting the December quarter, we may see even more pressure on this cost.
Let me also add a little bit. This raw material increase, which we have a phase 2, but on the other hand, it's almost next to impossible to pass down this increase to our customer if we want to be long. What are we doing is really, it was actively introduce or replace with new product, which bring the benefit to both customer as well as to ourselves to offset this headwind. As going forward, as Yifan mentioned, the challenge will be tougher, but we just have to manage it.
Okay. Thank you for that clarity. Looking at the communication side and maybe on the computing side, have you seen USB Power Delivery designs really pick up, and when would you expect to see some shipments related to those designs in your business?
Actually, we already start to engage in shipping. Of course, very small at the beginning. We do expect next year, going to see quickly. On the Quick Charge area, which you do know we already participate there, that area will continue to grow. I believe we're in a very healthy position.
Add more like if you see the significant increased adoption of PD, the USB Type-C, I would expect in the second half of next year is probably get to a more meaningful level.
Yes.
Right now, it's more like our customers has started some designs and on the USB PD standards are kind of getting adopted by the ODM customers. So if you ask us some meaningful impact, now probably I would say toward the second half of next calendar year.
Okay. Is it fair to characterize it as mainly a communications driver, or do you think on the computing side that that could also be significant for you?
I think both. Yeah, both.
Okay, great. Looking at inventory, I know that the days were in check, but it's up 13% year-over-year. It's about nearly double the sales increase. I know you have some more expensive wafers probably in there, but are you also feeling like you're getting caught up a bit on quantities? Because certainly had a nice revenue outlook for this December quarter. Could you comment a little bit on that inventory increase, please?
Okay, sure. The major increase in the inventory isn't actually in the raw material and the production WIP. The cost increased the sum, and that also contributed to the overall inventory increase. On the quantity wise, increased slightly, but not so much. Yes. Right now, if you ask me, I would rather to have more inventory to support us.
Understood. That's a good place to be. Thank you very much for the color.
Okay. Thank you. Thank you.
Thank you. Our next question is from Tom Sepenzis from Northland. Your line is open, sir.
Hey, thanks for taking my questions. I was wondering if you could provide some color, just there was a nice jump in the communications business in the quarter, and I just want to make sure I know what all the variables are there that's driving that.
Okay. Well, sure. In the communication areas, as you have been seeing in the past few quarters, yes, we grew nicely. Our AlphaDFN products got well accepted and recognized in the market field. For those battery management applications, we continue to grow nicely. In this quarter, also contributed to this quarter's growth in the communications segment are some sockets from networking and also for the surge protection sockets. Those are the areas that were picking up some additional shares.
Did you say that you expect that to continue to grow through the December quarter?
I would say maintain it in the range. I mean, right now is December quarter, as we enter into a little bit lower season. Right now, overall supply is tight, we got limited by the overall production, what we can do.
Sure. On that, how far along are you in terms of adding additional capacity to your current facility, when do you think the capacity bottleneck starts to dissipate for you guys?
Okay. Yeah, in the September quarter, you saw our revenue grew 7% quarter-over-quarter, that was because of the expansion of our capacity. We expanded some in the September quarter. I would expect for the next couple of quarters, our capacity probably will stay at this level, relatively. Next wave of expansion will come in probably more toward couple quarters later.
Okay. Well, two questions on the products with STMicro and servers. What's the impact for ASPs and gross margins for those products? Did I hear you right when you said you wouldn't expect revenue for at least two to three years on this?
Right. I mean, meaningful revenue, yes, we do expect it probably takes a couple of years, two to three years to materialize. Yes. In terms of the ASP, yes, the controller's ASP is higher. Yes, definitely. The margin, we would expect that it's higher, at least higher than our corporate average, for sure. The nice thing is, we can sell total solutions, not just the controller revenue. It can also bring in our drivers and the MOSFET along with the controller revenue. That's the piece on where we see the synergy.
Let me also just inject a little bit more, just to follow what Yifan said. Currently, our product, in a way, pretty much at the low end of the food chain, okay? Basically, we don't have too much say at the beginning, I mean, in the system. We say, "Here's a power controller over there," we can participate with full total solution there. We can suggest what's better for customer, and enable to better utilize our technology always. Yeah.
Great. Thank you, Mike.
Thank you. Our next question is from Craig Ellis from B. Riley. Sir, your line is open.
Hi, guys. This is actually Tom Zerekov calling for Craig Ellis. Thanks for taking my questions.
Tom. Hi, Tom.
First, a follow-up on the OpEx question. Could you clarify or possibly provide more color on how should we think about the step-up in R&D related to the licensing agreement over the next couple of quarters? Is the OpEx trend we've seen over the last year or last couple of quarters indicative of that trajectory? How should we look at that step-up function?
Okay, sure. OpEx had been, in terms of the increase for the digital controller piece, and then we are in the process of assembling a team. In the September quarter was the minimum amount. In the December quarter, we factored in some. We have already hired a few people, and then we'll continue to do the recruiting. Next quarter, I would expect I can give you more color on the OpEx for the digital controller product line. In terms of the trajectory, for the AOS piece of the OpEx, I would expect in going forward, the two or three quarters, that that'll be stable, other than this digital power piece. On the other hand, we also include the joint venture's startup expense also in our G&A.
For that piece, I would expect continued increase for the next few quarters, because as you can see, we are gearing up to get us ready to do the trial production. We're hiring people and training people and get equipment, machine in, and get materials in. Right now, there's a lot of activities in the joint venture happening. I would expect that if you compare my guidance and the midpoint guidance with our September's actual number, not the incremental piece, that's primarily from the Chongqing joint venture's startup expense increase.
Okay, that's very helpful. My last question relates to the supply environment tightness. Could you possibly characterize your market share position given the supply availability and how the current market dynamics are playing across your end markets?
Sure. Overall, you saw depends on which segment. You saw in certain segments that we definitely gained shares, and if permitted by our supply capacity, some areas you saw that got hit a little bit because of the supply limitation. Overall, in the computing and communication areas, I think if you look at it year-over-year, we grew nicely. We're rolling out a new high-voltage platform, Alpha and Omega five products, as we speak. We would expect that gradually that platform will pick up more revenue into next calendar year.
Okay, that's very helpful. Just one last thing. Did you mention the computing? Are you expecting computing to be up next quarter, or was that flat too?
Yeah. I would say maintain to slightly up range. We saw the pretty good demand on our products. Only thing is if we can supply. We saw pretty healthy demand, especially in the notebook areas. Overall, we'll do whatever we can to manage the product mix. Overall, there is some positivity, there's some not as so encouraged area. Somehow, maybe we can divide by two line. One is what our internal manufacturing can support, what we depend outside it. That somehow you have color about our performance always.
Great. Thanks, guys.
Okay. Thank you.
Thank you. We do have a follow-up question from Mr. Jeremy Kwan from Stifel Nicolaus. Sir, your line is open.
Thank you. Yeah, just wanted to follow up in terms of the capacity question. It sounds like you expect the capacity tightness to persist for the next couple quarters. On the CapEx side of things, should we see a continued higher level of spending for the next few quarters to alleviate that?
Yeah. For the overall, this fiscal year 2018, I would expect CapEx in the range of $30 million-$35 million. Yes. We have seen our new products and design wins in the pipelines, so we do need to continue to expand our capacity to support our business growth. Yes, for the next few quarters, I would expect that the CapEx will be up there.
In terms of the long-term trend, when do you expect it to moderate down, and what should that level be on a steady-state basis?
Okay. In the long term, I would expect that once joint venture production capabilities goes up, gradually I would expect that, yes, our West side of the CapEx investment may be started tapering a little bit. We still need some CapEx to maintain on the maintenance basis.
Thank you.
Thank you.
Thank you.
Thank you. I'm not showing any further questions at this time. I'd like to turn the call back over to management for any closing remarks.
Okay. This concludes our earnings call today. Thank you for your interest in AOS, and we look forward to talk to you again next quarter. Thank you.