Alpha and Omega Semiconductor's CEO Discusses F4Q 2013 Results - Earnings Call Transcript

Aug.13.13 | About: Alpha and (AOSL)

Alpha and Omega Semiconductor Limited (NASDAQ:AOSL)

F4Q 2013 Earnings Call

August 13, 2013 05:00 PM ET

Executives

So-YeonJeong - IR

Mike Chang - CEO and Chairman

Mary Dotz - CFO and Corporate Secretary

Analysts

Ross Seymore - Deutsche Bank

Craig Ellis - B Reilly Caris

Jason Butler - JMP Securities

Gus Richard - Piper Jaffray

Operator

Good day, ladies and gentlemen, and welcome to your Alpha and Omega Semiconductor fiscal Q4 2013 Earnings Call. At this time, all participants will be in a listen-only mode but later there will be a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, this call may be recorded. And now, I would like to turn it over to your first host So-YeonJeong. Please go ahead.

So-YeonJeong

Thank you, good afternoon everyone and welcome to the Alpha and Omega Semiconductor Fourth Fiscal quarter of 2013 Conference Call. This is So-YeonJeong, Investor Relations Representative for the company. I am joined by Dr. Mike Chang, the Chairman and Chief Executive Officer and Mary L. Dotz the Chief Financial Officer & Corporate Secretary of the company.

This call is being recorded and broadcast live over the web and can be accessed for seven days following the call, we have the link in the investor relation section of our website at www.aosmd.com.

The earnings release was distributed by Globe Newswire, August 13, 2013 after the market closed. The release is also posted on our company's website. Our earnings release and its presentation includes certain non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful formation 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 this conference call, we will make forward-looking statements including discussions of business outlook and financial projections for calendar 2013 and fiscal 2014. These forward-looking statements are based on management’s current expectations and involve risks and uncertainties that could cause the actual results to differ material from such expectations.

For more detailed description of these risk and uncertainties please grab a report to our recent and subsequent filings with the SEC. We assume no obligations to update that information provided in today’s call, AOS 2013 fiscal year and fourth fiscal quarter ended on June 30th, 2013.

Now, let's hear from Mary who will provide an overview of the fourth fiscal quarter 2013 financial results. Mary?

Mary Dotz

Thanks So-Yeon. Good afternoon and thank you for joining us. Today, on our call, I will discuss the key financial results for the quarter, then I will turn it over to Mike Cheng our CEO who will review the company’s business highlights and I will follow up with our guidance for the next quarter.

Revenue for the June 2013 quarter was 77.2 million an increase of about 3% from the prior quarter and a decrease of about 18% from the same quarter last year.Our MOSFET revenue was 60.5 million, up 3.6% sequentially. Power IC revenue was 13.1 million up 7% from the prior quarter and our service revenue was 3.6 million or a decrease of 18% from the prior quarter. The increase in revenue quarter-over-quarter reflects growth in AOS’ consumer and communications product areas, primarily in television and mobile devices. The largest regional growth for these applications was in Korea and China.

Our GAAP gross margin was 17.1% for the June 2013 quarter, as compared to 7% in the prior quarter and 26.5% for the prior year. The sequential change in GAAP gross margin reflects the non-recurring inventory write down of 7.7 million and that was recorded in March of 2013. Our non-GAAP gross margins were relatively flat quarter over quarter.

For operating expenses, our GAAP expenses were about 16.1 million for the June 2013 quarter as compared to 18.4 million for the prior quarter and 17.3 million for the June quarter last year.

GAAP operating expenses in the March quarter included 2.6 million in asset impairment charges.

Our income tax expense was 1.1 million reflecting the impact of our fix rate tax structure. The March 2013 quarter reflected a retroactive R&D tax credits.

GAAP net loss for the quarter was approximately 4.1 million or $0.16 per share as compared to a GAAP net loss of $0.52 per share for the prior quarter. This reflected the non-recurring item that I mentioned above in the March quarter.

Depreciation and amortization expenses were $7.1 million for the quarter.The non-GAAP loss for the June 2013 quarter was $0.11 as compared to $0.07 for the prior quarter. The change quarter over quarter reflects primarily the benefit we received last quarter for the R&D tax credits.

Now moving on to our balance sheet, we completed the June 2013 quarter and fiscal 2013 year with cash and cash equivalents of approximately 92 million as compared to 104 million at March 31, 2013, and $82 million at June 30 of last year.

Our net trade receivables were 38.3 million compared to 29.8 million last quarter and 38.9 million last year. DSO for the quarter was about 45 days.

Rate inventory was 68.3 million at the quarter end compared to 67.1 millionfor the prior quarter and 65.8 million for the prior year. Average days in inventory were approximately 95 days for the quarter. The channel inventory was also down at the June 2013 quarter end.

Our net property, plant and equipment was 138.1 million, a decrease of 4.8 million quarter-over-quarter. Capital expenditures were 3.5 million for the quarter. We anticipate about 10 million in capital expenditures for calendar 2013 and we spent about 5 million for the calendar year today.

Our cash flow from operations was negative 8.2 million for the June quarter reflecting a decrease in net loss quarter-over-quarter offset by the increase in accounts receivable. For the fiscal year ended June 30, 2013, our cash flow from operations was over 28 million and capital expenditures were 17.6 million.

Now, I’d like to turn the call over our CEO, Dr. Mike Chang, who will provide the business highlights for the quarter. Mike?

Mike Chang

Thank you, Mary, and good afternoon everyone. Fiscal year 2013 was a year of transformation for AOS. We began to evolve from being a nimble fabless supplier to our ultimate goal of becoming a technology reached market leader in a field of power semiconductors and the fab-lite model. We continue to lay the foundation of our business and model which is built on three important pillars of technology, customer service, and the operational expertise.

These are the key part of our DNA, so let me begin by reiterating AOS business model. Technology, technology is fundamental to win desirable business. For the last two years, we have dedicated our efforts to build up a solid technology development base. This effort has provided our R&D team with a (inaudible) wafer fab and a packaging facility and resources to accelerate our technology department whose pace has more than tripled in the last calendar year with six technology platform releases.

This new platform has produced extreme (inaudible) cost products which are fueling our designing and design win momentum allowing us to obtain new customers and the penalty into new market. We could not have achieved this high level of technology output relying on our previous fabless model.

Customer service, viewed as strong culture of customer service and support because of our reliability, flexibility, and responsiveness of customers like to do business with AOS, and they know that they can count on us for stable and long-term support. We continue to expand our loyal customer base.

Technology, customer service and operational excellence together will drive high volume manufacturing which is a key ingredient for us to achieve our long term margin goal of 25% and high level of profitability. In spite of the worse drop in PC demand in the last 20 years and experiencing a major OEM customer issue, we successfully navigated through those challenges.

Now, I would like to take a few minutes to discuss the quarterly results and the perspective on each business segment. The computing business represented 45% of revenue in fiscal year Q4. Please note that Q3 and Q4 computing business revenue was lower than expected due primarily to the decline in the global PC market and the OEM customer issue that we have since resolved.

We will gradually reduce our reliance on computing market; however, we are also committed to continue to support to our computing business via strategically increasing our form of feel of material, content, and optimize product mix for better margins.

Communication business grew 11% of total revenue in June quarter. The strength came from battery packs and the various applications in mobile handset. (Inaudible) form factor technology supports a wide range of mobile requirement. We expect this trend to continue in future quarters.

Consumer business was slightly up sequentially representing 21% of revenue. The increase was primarily driven by TV applications coupled with a significant design win at a major gaming console OEM, this business segment to remain healthy next quarter.

Industrial power supply and the rest were down sequentially and representing 18% of revenue due to the decrease in PC related power supply however I am pretty (audio gap) to see the design win traction and the revenue growth of our (inaudible) devices, used in high efficiency power supplies. With that, this segment to resume growth in near future.

In closing we're encouraged by our renewed strength in technology, new product and customer traction. We see a turning point in our business, starting June quarter and picking up speed in the September quarter. I am looking forward to significant growth in revenue and profit in the coming years.

Now I would turn the call over to Mary. Mary?

Mary Dotz

Thank you Mike.Over the last fiscal year we focused our efforts on several key elements of our business, including the strategic initiative of transitioning to a fab wide model as Mike mentioned. First, we cut back on capital expenditures, after completion of the build out of our base foundation of our fab and back end assembly and test facilities.

Our capital expenditures going forward will focus on optimizing capability. For fiscal year 2013 we reduced capital expenditures to 17.6 million. For fiscal year 2014 we are planning about 15 million in capital expenditures. Now remember earlier I mentioned 10 million and that was on a calendar year basis, so for our fiscal year 2014 we're planning about 15 million.

Next, in order to right size our cost structure to better fit our reduced revenue streams; we reduced overall headcounts by about 400 employees or 13% from about 3,100 to 2,700. At the same time we also recognized that we need to invest in the future. We have and will continue to selectively increase our headcount in R&D and sales and marketingfor products and markets where we see sustainable growth.

And additionally the key to future profitable growth for AOS comes not only from growing our topline and managing our operating expenses, but also from improving our gross margins. In addition to revenue growth and driving an improved product mix as Mike discussed, we are improving our utilization rates.

For the long term, our market diversification and product growth should support utilization rates, which will drive a sustainable and improved margin profile. For the near term we've implemented a process to increase our utilization rates by transferring more wafers to our internal fab and reducing the reliance on outside foundries.While our utilization rates are not immune to the market conditions, our goal is to make them less vulnerable to fluctuations in the market.

And now our guidance for the next quarter. Revenue is expected to be 84 million plus or minus 2 million, GAAP gross margin is expected to be approximately 20% plus or minus 1%. GAAP operating expenses are expected to be approximately 16 million to 17 million, and our tax expense should be about 1 million to 1.3 million.

Our share based compensation should be approximately 1.2 million, depreciation and amortization for the September quarter should be about 7.2 million. As usual we are not assuming any obligation to update this information. And with that we will open up the floor for questioning. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). And we'll take our first question coming from (inaudible) from Stifel. Please go ahead with your question.

Unidentified Analyst

First of all Mary and Mike could you comment a little bit on your backlog coverage for the September quarter please?

Mary Dotz

So for the September quarter the backlog Tory as we stand today looks pretty good, I am comfortable that we're in the range of the low end of the guidance at this point, and I am hoping to get to that 84 number.

Unidentified Analyst

Very good. And how does it compare to when you entered three months ago, is it higher sequentially?

Mike Chang

Definitely.

Unidentified Analyst

Okay, very good. And could you also tell us what the in house versus external fab was in the quarter, the percentage?

Mary Dotz

Our percentage utilization of our internal fab was less than 50% for the quarter, but it's certainly getting closer to that target and Mike and I talked to you guys about before getting to a 50-50 level. And I think based on what I was mentioning as far as going forward, we're going to try to do even more than that. If we can transfer more into our internal fab than what we originally intended, that will certainly help our margins as we see the PC market in the board room.

Unidentified Analyst

Okay, and the gross margin improvement you are expecting in September quarter, is that primarily from utilization or is there a mixed element there as well?

Mary Dotz

It's primarily utilization, a little bit of mix too.

Unidentified Analyst

Very good. Last question from me, I was hoping you could talk a little bit about your largest end market which is computing. You certainly had some secular headwinds there also you have an OEM situation. I was just hoping you could talk a little bit about that, does it feel like things are stabilizing or do you expect the computing business to continue to decline in coming quarters?

Mike Chang

At this moment, we really very hard to tell the market because somebody say stop up there, so basically what we are doing today we introduce new products there for better product mixing. However, we also trimming down some of the low margin area and this area in short there we think we are going to hold on there. And of course we are dedicated to support our customers. You mentioned OEM issue, and I think we put into our announcement that (we) mentioned while ago we are so happy that, that issue is over and not all of this but our relationship with that OEM become even stronger.

Unidentified Analyst

Very good. I actually I had one last question. You mentioned you’d introduced six new technology platforms last fiscal year. I was just hoping you could maybe elaborate on some of them or just highlight one or two that would obviously drive your growth going forward.

Mike Chang

By the way those are currently at another fiscal year (inaudible) the technology platform is different to the product. This technology platform will keep us a whole family of new products. So on those six platforms there most of them are for the medium voltage and high voltage applications. We still have a little to sustain in our computing segment, so majority of our new market for the power supply for communication of the area.

Operator

Thank you. And, we’ll take our next question from Ross Seymore from Deutsche Bank. So, Ross, please go ahead.

Ross Seymore - Deutsche Bank

Thanks. Mike and Mary, just wondered what the linearity of bookings were like in the quarter? You upside surprised to the end of your range. Just talk a little bit about the positive surprise was that drove that, and how the bookings were throughout the quarter please?

Mary Dotz

Sure. What we’re seeing now in terms of our booking linearity is that actually in the June quarter where we were getting bookings for the September quarter, we started to see some strength, I would say, in the May time frame and then it stabilized off in the June time frame. But what we’re seeing are some of the areas that Mike had mentioned where our mid-voltage products are starting to gain traction because some of the design win activity, so one of the other things in the consumer gaming space where we have a design win and we’re certainly getting bookings there. And so, we’ve got a few of those areas that are going to help drive this revenue growth into the September quarter.

So the OEM recovery issue as Mike has mentioned the gaming and there is still some strength in the TV and the LED backlighting areas. You guys have probably heard in the news where several other folks in our space are actually exiting the PC market, and I think that we’re going to get an opportunity now to selectively look at that space and see what other areas we may have some opportunities so that’s a little bit more longer term but I think here in the near term, we’ve got some good growth drivers for the revenue we’ve guided towards.

Ross Seymore - Deutsche Bank

And, my next question is on the gaming side of things. Is that going to be more in your MOSFET or your Power IC side of the business? And, as much granularity as you can give, is that something that we have a seasonal ramp up and then we have to worry about the negative seasonality hitting us in either December or March?

Mike Chang

This is mostly in the MOS Power area, MOS product area. And then what happened is I think that this gaming comfort area is running in a changing model generating change time there. So it’s that the gaming should be good for a while.

Mary Dotz

Yeah, it’s definitely in the MOSFET area and as you know who the big three gaming console makers are. They typically do select Christmas season. So we are going to see some seasonal impact that we’re enjoying in the September quarter.

Ross Seymore - Deutsche Bank

And on the gross margin side of things, it’s good to see a pop up there, and I heard you say it was mainly utilization. Is this sort of roughly 50% incremental gross margin? Is that the sort of level we should think about as revenues grow going forward?

Mary Dotz

I’m sorry, 50% gross margins?

Ross Seymore - Deutsche Bank

Incremental gross margins, as your revenue grow the rate at which your gross margin grows as well.

Mary Dotz

So right now our gross margin growth that we forecasted in our guidance of around 20% is a level that we’re going to continue to grow if we can ramp our top line, because it’s clearly utilization is going to be the overriding factor for us and then to less extent of course mix and ASPs. But, I don’t want to guess too far out in the future of course but I think in the September quarter, we’re going to get to that gross margin range with some additional utilization.

Ross Seymore - Deutsche Bank

I guess the last question then from me. As we look into the December quarter, and I’ve realized you’re only guiding for September. But, are there any company specific unique drivers that you would see that would potentially allow you to overcome seasonality which, if I look back over time and I think you’ve been down sequentially for seasonal reasons and maybe even cyclical reasons in the December quarter every quarter since coming public. Is there anything this year that could change that or do you still think seasonality is a pretty powerful dynamic?

Mary Dotz

Well, I still think, to some degree, yes, some seasonality will come into play. But the other factor that I mentioned in the short term that we’re working on to make ourselves less vulnerable to that seasonality, is the transfer process that we’re undertaking in terms of bringing additional wafers from our outside fab to keep our own staff full. So we’re less vulnerable to that seasonality.

Mike Chang

And let me also add as well one line. As we mentioned we have six new technology platforms introducing in last calendar year, which is a three times increase from our previous activity. And so what we’re doing right now is our new best in class products started picking share, start to gain traction. So, yes, okay, nobody can be new from the seasonality there but we will be more toward product cycle.

Operator

Thank you and we'll take our next question from Craig Ellis from B Reilly Caris, please go ahead with your question.

Craig Ellis - B Reilly Caris

Thanks for taking the question Mike and Mary, the first question is a higher level and longer term question and it relates to the mix of business, the last couple of quarters we've seen PC mix drop by a couple of hundred percentage points quarter on quarter 200-300, as we look out over the next four to six quarters what should we expect with respect to PC mix as a percent of revenue and if there is a further decline what applications, whether it's communications or gaming or industrial should we expect to increase and offset the PC declines.

Mike Chang

Let me put in the right perspective about our company, since our recovery from this OEM issue, so we are on the way to gain back more share. So the PC market could decline, but however we believe we'd be able to maintain our revenue level going next few quarters. The total percentage our (inaudible) revenue but absolute number wise we'll be maintaining or maybe even increase, just we gained back our share, and of course our new (inaudible) product they also help us in these area. What we are doing on the medium voltage there, on the high voltage there even on some part of IC because we have a lot of that win in the PC area, the (inaudible) PC area.

Craig Ellis - B Reilly Caris

So Michael you're saying you expect your PC mix to bounce back, last quarter's 48% and say in the high 40s range is your lookout over the next four to six quarters.

Mike Chang

I'll say revenue wise and number wise we'll get the dollar sign right there but percentage wise I need Mary to calculate.

Mary Dotz

I think we're going to see some strength in our power supply, mobile phones, gaining those types of areas going forward, so as we get, cement our foothold into those market segments well I think that's what we 're going to see continued traction based on the blind runs that we got now.

Craig Ellis - B Reilly Caris

And then the second question is on gross margins and its related to the former, as you see your application mix diversify and as you bring on the products from the different platforms that Mike mentioned, how should we think about that impacting gross margin on an intermediate term basis. Our guidance shows gross margin up at, as you look out into the fiscal '14 do you see the business getting back to say a 25% gross margin in fiscal '14 or should we think of it being in the low 20s as you get seasonal and product cycle uplifts in the June to September time frame next year.

Mary Dotz

Well as you know of course we don't guide out that far in the future but I think a lot of the areas that we’ve been talking about here, these mid voltage areas, some of the newer high voltage applications, those are areas that are going to drive stronger gross margins for us into the next year, so I think that overall in the bigger, longer term picture we certainly see improvements in the corporate profile where it comes to gross margins, because if we can selectively stay in the PC sockets that are higher value, higher margin areas, if we can keep our (inaudible) and factory full and we can traction into those new mid voltage and high voltage areas, I think you're going to see a better margin profile next year.

Craig Ellis - B Reilly Caris

Okay and it's the right way to think about the in sourcing Mary, but you can do it more quickly on the street because you wouldn't need to recall the part and it'll longer in power IC.

Mary Dotz

Definitely.

Craig Ellis - B Reilly Caris

Okay and then the last question from me, and thanks for the fiscal year CapEx color, as we think about where you all deploy that 15 million can you just specify how much of that is front end, how much is back end and is there any related to incremental capacity or is it all just maintenance CapEx?

Mike Chang

It's probably half and half, more portability for new capability.

Operator

(Operator Instructions) We'll take the next question in line from Gus Richard from Piper Jaffray, Gus please go ahead.

Gus Richard - Piper Jaffray

I just want to ask about gross margins on, effectively what's your long term model for gross margins, you know in the past you guys have bumped into the 30s you know and I believe historically was a 35%, high 30s gross margin, long term model. Is that still the case, or is it a different number these days?

Mike Chang

We still keep the same goal of about 35% in gross margin for long term goal and we are progressively toward the direction.

Mary Dotz

I think we're going have to you know see us get to that, get our utilization rates back up and some of these other factors but I think still the company's longer term goal is get up to that 30% to 35% range.

Gus Richard - Piper Jaffray

And then, when I think of, the internal versus externally resource, you know packaging and front end, you know as you assume you know, no mix effect in, you know full utilization, how many points of gross margin is it cheaper to source internally versus externally? Do you get a benefit if you source more internally does it cost you more to source internally?

Mary Dotz

I think if you look at the sort of big philosophical picture you know Mike's always talked about the fact that by having your own fab you're going to accelerate your development cycle. And it's certainly more costly in the U.S. (recently) than off shore. However you're not paying a manufacturing markup to somebody else to buy your (wafers) from them. So you do get a cost benefit there, but I think the bigger benefit is coming from the development cycle and as Mike mentioned you know you can launch six new platforms and now we can (inaudible) deliver the products from those platform launches. That is where we're going to see the bigger benefit in our gross margin profile and so if we look at the internal versus external, yes there's some amount of benefit because you're going to keep your utilization rates up.

Gus Richard - Piper Jaffray

Let me just ask very specifically, doing a like to like process and you're (running) the wafers internally does that wafer cost you more if you run it internally or does it cost you more if you run it externally assuming full utilization?

Mike

The important thing is you’ve been loading okay you’ve got a fab there you go order fixed cost. So, we did some calculation there with four loadings; our cost should equal or better than the (outside) of course because I see what they have marked up so I am not going to compare with same cost I am probably (inaudible).

Gus Richard - Piper Jaffray

Okay so you fully loaded your cost externally is effectively the same as you internal cost?

Mike Chang

We call better than it.

Gus Richard - Piper Jaffray

I got it all right. That’s it for me thanks so much.

Operator

Okay, so we will take our next question from Ross Seymore from Deutsche Bank. So Ross please go ahead.

Ross Seymore - Deutsche Bank

Just a quick follow-up on the OpEx side of things, I realized what you guided for this quarter about 16.5 million. Given what you have changed in the headcount side of the equation, is that kind of a fully loaded number going forward? And it will move around with variable comp et cetera, but generally speaking is that the new base for the company and if so how should we think about that growing relative to revenues? Thank you.

Mary Dotz

So I think that that’s a good base for us to be at as we mentioned in our guidance, we are going to we got about a 16.5 million range but what we are going to do is while we recognize our other market opportunities other products that we want to go after. So if I need to invest in additional headcount our expenses for R&D and sales and marketing that’s primarily where you are going to see some of that growth going forward so as a percent of revenue basis in terms of operating expense as a percent of revenue I certainly want to keep that inline, but I am going to invest if I need to going forward and you are pretty right that the variable comp will come into play and that will certainly grow in future quarters.

Ross Seymore - Deutsche Bank

Is there any variable comp assumed in the September quarter?

Mary Dotz

Yes.

Ross Seymore - Deutsche Bank

Okay, is it like a full boat or if you get to 85 million you use the high-end of your range, would the OpEx go outside of the 16 to 17 range that you guided?

Mary Dotz

No, I don’t think so.

Ross Seymore - Deutsche Bank

Last question more of a housekeeping one for me, if you could just tell us again if you have it for both for June and then looking back at the March quarter the percentage of revenues I have for computing but for your other end markets segments if you could just rattle those off for me it would be very helpful. Thanks.

Mary Dotz

So for the March quarter as a percent of revenue, our computing was almost 48% and then in June about 45%. Our consumer was close to 19% and about 21% this quarter. So 19% in the March and about 21% this quarter. Then our communications was close to 8% last quarter and close to say 10.5% or so this quarter. And then power supply industrial makes up the other (inaudible) service revenue too in there but you can get a good (flavor) from that.

Ross Seymore - Deutsche Bank

In the service revenue, is the separate part that be in its own category, correct?

Mary Dotz

Correct.

Operator

And we will take our next question from Craig Ellis from B Reilly Caris. So Craig please go ahead.

Craig Ellis - B Reilly Caris

Just one more on CapEx; Mary, have you reset the CapEx intensity of the business structurally lower into the mid-teens level annually versus I think what was below 30s level in fiscal ’11 and fiscal ’12 or if the business does grow and gets back to that mid 2011 revenue level of nearly $100 million a quarter would we see capital expenditures move back up towards the short levels?

Mike Chang

This is Mike Chang, let me answer the question. We all along know that the technology is a major driver for business when you are comparing the market there is how good is the product. As a start up there, we didn’t have the (dilatory) or work shop to do our technologies. So we kind of get by with an advantage and of course the outcome of business is not so predictable. So by last two three years that we spent pumping money now that we want to build up our base, technology base, and thank god that base is complete. That’s why we don’t need to spend so much money and we only need ($10 million to $15 million) just to for incremental capabilities. So that’s (inaudible) we spend money not random because of what we have planned, what is necessary and thank god it’s complete and right now we have a technology a work shop there we can do almost anything that we want to do to compete. So for clock going forward definitely we are going to build that (inaudible) on (inaudible) you would go to then a slightly bigger company and that is another story.

Mary Dotz

So as you look at back end let’s say September of last year where our revenue was in the mid-90s, we were able to do that with our back end assembly also with the service revenue. And so I can do that level of revenue with what I have got in terms of capacity and I can modulate my service revenue as well. So, I am pretty optimistic that we are in a range now with capital expenditure forecast for the fiscal year ’14.

Mike Chang

I think maybe you are confident if our revenue is much higher, where are we going to do the production? Let’s (inaudible) so we still have everything in house but recently to our technology. So right now we have enough to do our technology development there. So anymore (inaudible) the opportunity will come there we can go to the outside and go to the foundry or go to (inaudible) to do the thing if our capacity falls.

Craig Ellis - B Reilly Caris

Okay so the point is you can’t jeopardy the ability to fracture internal fabbing intensity to keep track on intensity of our overall in the business and generate good free cash flow?

Mike Chang

Yes.

Operator

Okay so we have now reached the end of our question-and-answer session. I would now like to turn the call back to your host for any concluding remarks.

Mary Dotz

Well thank you all very much for participating in our call today and we look forward to reporting to again next quarter. Thank you all.

Operator

Okay ladies and gentlemen this does conclude your conference. You may now disconnect and have a great day.

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