Alpha and Omega Semiconductor's (AOSL) CEO Mike Chang on Q4 2014 Results - Earnings Call Transcript

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Alpha and Omega Semiconductor Limited (NASDAQ:AOSL)

Q4 2014 Earnings Conference Call

August 12, 2014 17:00 ET

Executives

So-Yeon Jeong - Head IR

Mike Chang - Chairman, CEO

Yifan Liang - Interim CFO, CAO, Assistant Corporate Secretary

Analysts

Craig Ellis - B. Riley

Evan Wang - Stifel

Tom Sepenzis - Northland Capital

Operator

Good day, ladies and gentlemen, and welcome to the Alpha and Omega Semiconductor Fiscal Fourth Quarter 2014 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 be given at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to So-Yeon Jeong.

So-Yeon Jeong

Thank you. Good afternoon, everyone and welcome to the Alpha and Omega Semiconductor's conference call for fiscal 2014 fourth quarter and year-end financial results. Our fiscal year ended June 30, 2014. This is So-Yeon Jeong, Investor Relations Representative for the company. I'm joined by Dr. Mike Chang, the Chairman and CEO; and Yifan Liang, Interim CFO of the company.

This call is being recorded and broadcasted live over the Web, and can be accessed for seven days following the call via a link in the Investor Relations section of our Web site at www.aosmd.com. The earnings release was distributed by GlobeNewswire today, August 12, 2014 after the market close. The release is also posted on our company's Web site.

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 this 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 obligation to update this information provided in today's call.

Now, let's hear from Yifan, who will provide an overview of the fourth fiscal quarter and the fiscal year 2014 financial results. Yifan?

Yifan Liang

Thank you, So-Yeon. Good afternoon and thank you for joining us.

Today on our call, I will discuss the key financial results for the quarter and for the fiscal year. Then 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. Revenue for the June quarter was $82.3 million, an increase of 9.2% from the prior quarter and an increase of 6.6% from the same quarter last year.

MOSFET revenue was $63.4 million, up 8.2% sequentially. Power IC revenue was $14.3 million, up 11.4% quarter-over-quarter. And our service revenue was approximately $4.6 million as compared to $4 million for the prior quarter.

Our product revenue MOSFET together with Power IC performed better than normal seasonality in this quarter. In terms of segment mix, this quarter's computing segment revenue represented 46.8%, consumer 17%, power supply and industrial 18.3%, communication 8.9%, others 3.3% and service 5.7%.

For the fiscal year 2014, revenue was $318.1 million down 5.7% from last fiscal year primarily driven by the continued decline in the PC market. However, we saw the PC market stabilize in the June quarter. Gross margin was 19.4% for the June quarter as compared to 16.3% in the prior quarter and 17.1% for the same quarter last year. The increase in gross margin quarter-over-quarter was mainly due to the overall higher factory utilization.

For the fiscal year, gross margin was 18.6% as compared to last fiscal year's gross margin of 19.1%. Operating expenses for the quarter were $16 million as compared to $15.2 million for the prior quarter and $16.1 million for the same quarter last year. The higher operating expenses quarter-over-quarter primarily reflected higher R&D expenses reporting new product introduction activities and higher stock-based compensation charge.

Operating expenses for the fiscal year was $59.3 million compared to $63.3 million after adjusting out the impairment charge for the fiscal year 2013. This reflected cost saving measures that we took during the year.

Income tax expense was $0.5 million in the quarter as compared to $0.4 million in the prior quarter. The June quarter income tax expense reflected fiscal year-end to quarterly estimates. Income tax expense for the fiscal year was $3 million compared to $4 million for the last fiscal year.

Net loss for the quarter was approximately $0.5 million or $0.02 loss per share as compared to $0.13 loss per share for the prior quarter. Net loss in the June quarter included $1.2 million stock-based compensation charge compared to $0.9 million in the prior quarter. Net loss for the year was $3.3 million or $0.13 loss per share as compared to $5.6 million loss or $0.22 loss per share for the prior fiscal year.

Non-GAAP EPS for the June quarter was $0.03 earnings per share as compared to $0.09 loss per share for the prior quarter. Non-GAAP EPS for the year was break-even compared to $0.37 earnings per share for the prior year after adjusting out the impairment charge and inventory write-off.

EBITDA for the June quarter was $8.2 million compared to $4.8 million from the prior quarter. EBITDA for the year was $31.1 million as compared to $32.9 million in fiscal year 2013.

Cash flow from operations was $10.7 million for the June quarter and we generated about $7.8 million free cash flow. Cash flow from operations for the year was $37.6 million compared to $28 million for the prior fiscal year. We generated $28.2 million free cash flow in the fiscal year 2014 while fiscal year 2013 free cash flow was $10.4 million.

Moving on to the balance sheet, we completed the June quarter with cash and cash equivalents balance of approximately $118 million, as compared to $111 million at March 31, 2014 and $92 million at June 30th last year.

Net trade receivables were $37 million almost flat compared to last quarter and last year. Day sales outstanding for the quarter was approximately 40 days compared to 44 days last quarter. Net income was $66.6 million at the quarter end, up from $59.8 million for the last quarter and down from $68.3 million a year ago.

The increase in inventory at the end of the June quarter this year was to prepare for the high seasonal quarter in September. Average days in inventory were 86 days for the quarter compared to 87 days in the prior quarter. Our channel inventory quarter-over-quarter decreased lightly, which is still within our targeted range of two to three months.

Net property plant and equipment was $123.3 million, as compared to $123.7 million last quarter. Capital expenditures were $2.9 million for the quarter. We spent about $9.4 million for the fiscal year, which is within our CapEx target of $10 million. For the fiscal year 2015, we expect our capital spending to be in the range of $15 million to $20 million as we plan to expedite our diversification activities in some key growth areas.

Regarding the stock repurchase program, we announced in early May, we repurchased approximately 120,000 shares from the open market total cost of $0.9 million during the June quarter.

With that now, I will like to turn the call over to our CEO, Dr. Mike Chang, who will provide business highlights for the quarter. Mike?

Mike Chang

Thank you, Yifan. Good afternoon everyone, and thank you for joining us.

I'm pleased to report another solid quarter of improving fundamentals, which allowed us to close the fiscal 2014 with more confidence and excitement. The revenue of $82.3 million came in on the high-end of the guidance representing over 9% sequential increase. Gross margin of 19.4% came in slightly over the mid-point of our guidance. I'm particularly pleased that the continued operating cash generation translated to a solid cash and a cash equivalent position of $118 million.

Now, I will share more details on the segment performance. The computing segment represented 46.8% of revenue supported by improving PC market condition. The strongest sales through in late March that we talked about it in the last call carried over and benefited June quarter's growth.

It is notable that the Power IC penetration is accelerating and is making a more meaningful contribution to the computing revenue. Based on the demand momentum that we see today increase on share gains in the low voltage MOSFET business and the material traction from Power IC, we feel confident that we can maintain if not improve the revenue position year-over-year from this segment.

The consumer segment represented 17% of revenue the design activities in TV area are very encouraging. We have secured our position with major TV customers for 2015. We continue to see growing opportunities to expand upon with market TV and 4K trend. And our winning new designs will surprise the MOSFET products. Based on a solid design activities and the strong sale through during the June quarter, we expect this segment to grow double-digit next quarter.

The Power Supply and Industrial segment represent 18.3% of the total revenue. We are very excited that our best-in-class mid-voltage MOSFET are designed into high value power supply at a growing pace. We are opening doors at more new customers that demand efficiency, power conversation solution. For high-voltage area, we are prioritizing our mix to improve the margin. Overall, we expect to maintain this business level in the near term.

The communication segment was 8.9% of the total revenue. We were able to demonstrate as steady growth in communication segment with some design wins in the networking business. As we start to convert more mobile design wins into revenue, we expect the communication segment continue to improve.

The recovery plan that we put in place about a year ago as resulted in steady improvement. We are regaining the competitiveness investing in core technologies and expanding our footprint into high gross opportunities. I'm very pleased with good progress, we had made so far in executing the initial phase of the recovery plan.

Our technology and product development enabled us to defend and also enhance the base business as well as grow the focused area. We are very encouraged by the greater than expected customer acceptance of our products in the diversified market segment. With this early sign of interest, we are enhancing our R&D, sales, marketing and application engineering to actively facilitate the customer penetration in applications such as industrial mode of control and home appliance. What is (indiscernible) moderately increase the OpEx. We expect that these investments shall secure our potential of continued revenue growth as we go forward.

In closing, the healthy demand and started fundamentals give me great confidence that AOS can successfully navigate the recovery as planned. Over time, I expect AOS to capitalize company with significant opportunities with accelerated execution, which shall result in improvement in profitability and the robust cash flow generation.

With that, I will turn the call over to Yifan Liang for guidance. Yifan?

Yifan Liang

Thank you, Mike. As we look forward to the first quarter of fiscal year 2015, we expect our September quarter revenue to be in the range of $85 million to $89 million. GAAP gross margin is expected to be around 20% to 22%. GAAP operating expenses are expected to be approximately $16.8 million plus or minus $1 million. Expected increase in OpEx quarter-over-quarter is primarily due to higher expected new product introduction expenses and annual merit compensation adjustment.

Tax expenses are expected to be above $1.2 million to $1.4 million. Our share based compensation should range from $1.2 million to $1.3 million. As euro we're not assuming any obligations to update this information.

With that, we'll open up the floor for questioning. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Craig Ellis from B. Riley.

Craig Ellis - B. Riley

Thanks for taking the question, and congratulations on getting to profitability in the quarter guys. Of course question is on the revenue guide and some at the prepared commentary. Mike, you mentioned an expectation per year on your PC growth and you also see in communications the potential for mobile starting to ramp.

So my question is given the mix shift in the business over the last few quarters and those two parameters are you saying that the revenue profile of the company has really changed, or is the business progressing in those two areas, but still quite seasonal as we would typically expect in your fiscal 2Q and fiscal 3Q?

Mike Chang

Well, thank you for the question. First okay, our business is (indiscernible) approaching, however, as you know each segment business company -- from quarter-to-quarter some fluctuation and – I made it very clear some of the -- this PC again really because of the strong sale through in last quarter does benefit that.

Craig Ellis - B. Riley

Okay. Thanks for that color. The second question dropping down to the gross margin guidance, Yifan, this may be more for you. It looks like the gross margin guidance implies incremental gross margins which go from the mid 50s to the mid 40s, so is that really a function of mix or is that really just easing back on manufacturing utilization through the quarter ahead of a seasonally softer fiscal 2Q and 3Q?

Yifan Liang

Yes. For the gross margin this quarter, the majority of the gross margin gain was from the factory utilization, although some products mix that are offset by some ASP erosion. So at this point, the revenue level $82 million-ish, I would expect that yes, the utilization is still a major factor. As we grow – then other factors such as mix would come in contributing more.

Craig Ellis - B. Riley

So are you saying that the sequential decrease in incremental gross margins and the fiscal first quarter is attributable to mix?

Yifan Liang

Contribute to more to the utilization.

Craig Ellis - B. Riley

Okay. And then just dropping down on the operating expense comments Mike in the investment, the company is making growth. I think the question that I have and the one that's come up to the quarter from investors as they think about operating expenses. Is the degree to which the company might make a one time investment for new products versus begin investing on a more sustainable basis, so with the increase in product related expenses is that something that we should expect to see in fiscal 2Q or 3Q or is this just a one quarter step up with flattish operating expenses from here?

Mike Chang

Far less than early acceptance sign and then we received from our customers. And so right now we are investing in this in operating expenses area to actively facilitate in this customer penetration and product, new product rollout. Sp basically we – pulling in a couple of quarters in this operating expense than ahead of our original plan. So basically we are pursuing market opportunities to fuel our further growth.

Craig Ellis - B. Riley

Thanks for the color guys. And I will get back in the queue.

Mike Chang

Thank you.

Yifan Liang

Thank you.

Operator

The next question comes from Tore Svanberg from Stifel.

Evan Wang - Stifel

Can you hear me? I'm sorry.

Mike Chang

Yes.

Evan Wang - Stifel

This is Evan Wang calling for Tore. Following on Craig's question about gross margin, can you tell us what your last quarter's utilization rate is and what it was this quarter? What do you expect it to be for the next quarter, so give sense of where you are – the trend in the gross margin?

Yifan Liang

Okay. Regarding the utilization this quarter is – was higher than last quarter before because in our revenues are growing. Right now, utilization is more tied to our revenue level. So we guided further growth in the September quarter, yes, we are expecting utilization and continue to contribute some to our gross margin gain.

Evan Wang - Stifel

I see. And are you – are you trending towards your operating goal of roughly 30% gross margin -- roughly what revenue level are you thinking?

Yifan Liang

This one we don't give out guidance thus far out, and you can use a historical numbers as reference, number back to September 2012 quarter, our revenue was $95 million and $96 million level. I think at that time our gross margin was close to 27 each around there. So once we get to that level – at that level our factories were pretty much fully loaded from there I would say our new products will contribute more to our gross margin gain.

Evan Wang - Stifel

Okay. That's very helpful. I guess my next question is for Mike and could you review for us what this new fiscal year, what do you expect to be your major growth drivers?

Mike Chang

The new fiscal year right now we have a few new product, some is already there. Some instances which would be okay. So we are going to see a very healthy growth in the low-voltage area because where new technology is going to be released in the – before the industry – end of the calendar year, okay? Then our medium-voltage is coming strong because it was best-in-class product there, which will definitely help. And even the Power IC which is great, finally it's starting to penetrate into the PC area as we are into – expand more into the TV. So all are pretty good things for us to grow.

Evan Wang - Stifel

Okay. Thank you very much.

Mike Chang

Thank you.

Operator

(Operator Instructions) The next question comes from Tom Sepenzis from Northland Capital.

Tom Sepenzis - Northland Capital

Hey, Mike and Yifan. Congratulations on the quarter and the guide.

Yifan Liang

Thank you.

Mike Chang

Thank you, Tom.

Tom Sepenzis - Northland Capital

I was wondering if you could talk a little bit about the switch over in the fab and seen with the MOSFET, is that now complete?

Mike Chang

Yes. That transition has been done. Yes, we thank god for that.

Tom Sepenzis - Northland Capital

Okay. And we spoke last looking at the new products coming in with a little bit better than corporate – current corporate gross margin averages and I'm just wondering, if you could talk a little bit about that and what you have planned over the next 3 to 6 months in terms of new products that might actually help the mix or not just from utilization factor?

Yifan Liang

Let me talk about it and then Mike you can.

Mike Chang

Sure.

Yifan Liang

Chime in. Like Mike said in his prepared remarks for one Power IC, you can see right now we had a very good momentum with good Power IC revenue quarter-over-quarter by 11.4%. Power IC gives us a better margin than corporate average. Another area is the mid-voltage area, we have best in class mid-voltage products and then we are actually getting into the diversified areas in communication in some high-end computer and the computing areas and some power supply and industrials, so those would add into our gross margin from the mix perspective.

Mike Chang

Actually Yifan covered most in that, one area is to mention just for our goal, we also on the way to release the new generation of our low-voltage which will at the end of this year. So we probably won't see immediate benefit right away but, however, even a couple of quarter we should see the benefit.

Tom Sepenzis - Northland Capital

Great, thank you. And then do you have any, is there any update or anything further on IGBT in terms of timing or potential customer win?

Mike Chang

IGBT as we mentioned before is -- which is -- take longer -- they have longer time for a customer to be back in for consideration okay. So let's say we're progressively but we need some patience for that.

Tom Sepenzis - Northland Capital

Sure. But you were talking to people now, I mean you have done from potential customers and it's just a question of testing or which is so longer to process?

Mike Chang

Yes. We too have a quite a few customer here. Let me, this area – one is by naturally longer time and second also needed some – name brand to break through because we are new okay, so it just take a little bit time there. So we got a very small amount of revenue embodied. We don't mean that not the basic as beginning right, but it will progressively will build up, okay; honestly, either I might have to teach patience for that.

Tom Sepenzis - Northland Capital

Yes. Okay, so that's -- it's a --

Mike Chang

Comparing it, but it's very small; it's small just why I didn't make a big fuzz on that.

Tom Sepenzis - Northland Capital

No problem. And then just lastly EBITDA, I see hasn't been shifted in the short-term, are you going to pay that off right away or is that going to be over several quarters or?

Yifan Liang

We'll evaluate it approximately before the end of this calendar year to see our cash position and our other opportunities and investment we need we'll see at that time.

Tom Sepenzis - Northland Capital

Okay, great. Thanks again and congratulations.

Mike Chang

Thank you, Tom.

Yifan Liang

Thank you, Tom.

Operator

The next question comes from Craig Ellis from B. Riley.

Craig Ellis - B. Riley

Thanks. Just cleaning up a few items here. One, on the balance sheet Yifan, the increase in accounts payable, what was the cause of that increase and what would you expect payables to do in the current quarter?

Yifan Liang

Payable increases is mainly related to inventory. Our inventory also increased over $6 million this quarter – quarter-over-quarter. So I would expect – yes, maintain that in payables level or slightly down and depending on largely tied to our inventory level and our CapEx.

Craig Ellis - B. Riley

And then speaking of CapEx, the guidance is for $15 million to $20 million in the current quarter. Can you give us some insight into the linearity of CapEx through the year and how much of the CapEx is really more capacity related versus maintenance capital versus anything that would be back end packaging related?

Yifan Liang

For this calendar, for this fiscal year 2014, we spend about a little bit over $9 million that's pretty much for the maintenance purpose. Going forward for the new fiscal year 2015, on top of the maintenance needs and we are growing into some diversified areas and so we need some CapEx to support those growth so that's where we spend some money on.

Craig Ellis - B. Riley

And the linearity of that CapEx, Yifan is that about ratable through the year or is it more front end or back end loaded in the year?

Yifan Liang

I would say spread out throughout the year not particularly tied to big chunk in the front or back end loaded.

Craig Ellis - B. Riley

Okay. And then lastly, I think ASPs were mentioned a couple of times, how is pricing behaving out there as you look at the MOSFET and the Power IC portfolio relative to normalized trends?

Yifan Liang

At this point, we don't see particular ASP erosion at a normal pace compared to the history.

Craig Ellis - B. Riley

Thanks Yifan.

Yifan Liang

Thank you.

Operator

(Operator Instructions) And there appear to be no further questions. I would now like to turn the call back over to the presenters.

Yifan Liang

Okay. This closes the call today. Thank you for your interest in AOS. We look forward to talking to you again next quarter. Thank you. Bye-bye.

Mike Chang

Thank you, all.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.

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