Q2 2024 Alpha and Omega Semiconductor Ltd Earnings Call
Participants
Steve Pelayo; IR; Alpha and Omega Semiconductor Limited
Stephen Chang; CEO; Alpha and Omega Semiconductor Limited
Yifan Liang; CFO and Corporate Secretary; Alpha and Omega Semiconductor Limited
Craig Ellis; Analyst; B. Riley Securities
David Williams; Analyst; Benchmark Company LLC
Tore Svanberg; Analyst; Stifel Financial Corp.
Presentation
Operator
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We'll do been experimenting very it Good afternoon. Ladies and gentlemen, thank you for joining today's Alpha and Omega Semiconductor Fiscal Q2 2024 earnings call. My name is Tia, and I will be your moderator for today's call (Operator Instructions) I would now like to pass the call over to your host, Steve Pelayo. Please proceed.
Steve Pelayo
Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2024 second quarter financial results. I am Steven Pelayo, Investor Relations representative for AOS. With me today are Stephen Chang, our CEO. and Yifan Liang, our CFO, this call is being recorded and broadcast live over the web replay will be available for seven days following the call via the link in the Investor Relations section of our website. Our call will proceed as follows. Today, Stephen will begin business updates, including strategic highlights and a detailed segment report. After that, Yifan will review the financial results and provide guidance for the March quarter.
Finally, we will have the Q&A session. The earnings release was distributed over the wire today, February sixth, 2024, after the market closed the release is also posted on the company's website. Our earnings release and this presentation include 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.
A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of the 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.
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 the information provided in today's call. Now I will turn the call over to our CEO, Stephen Chang. Stephen?
Stephen Chang
Thank you, Steve, and welcome to Alpha and Omega fiscal Q2 earnings call. I will begin with a high-level overview of our results, and then I'll jump into segment details.
We delivered fiscal Q2 results in line with our guidance. Revenue was $165.3 million. Non-GAAP gross margin was 28% and non-GAAP EPS was $0.24. The bottom line finished at the high end of our guidance, primarily driven by overall operational control. These results were driven by continued recovery across notebooks, desktop computing and smartphones, offset by ongoing inventory correction in gaming and weak demand for quick chargers in solar.
Looking back on the full calendar year 2023, it was undeniably a challenging period for our entire industry. Aos revenue experienced a significant decline of 19% following a record-breaking 2022. This drop was primarily due to the inventory correction in PCs and smartphones that commenced in late 2022 and broader macro headwinds in the second half of calendar 2024.
Our performance was further hampered by inventory corrections and slowdowns in demand across other segments, while revenue declined in calendar 2023. I think it's important to recognize that challenges resulting from the post COVID semiconductor cycle are nearing completion, and we are approaching the recovery phase of the next cycle over our 23 year history.
We have navigated many boom and bust cycles in this industry, emerging EBIT-R, stronger and more resilient on the other side. Looking forward, we expect stabilization across most of our business lines, notwithstanding normal seasonality. While near-term visibility is limited, we remain cautiously optimistic about a broader market rebound in the second half of calendar 2024.
Fundamentally, we are extremely well positioned for future growth as the market recovers today, our market position is stronger than ever, supported by our leading technology, more diversified product portfolio and tier one customer base in all of our business segments. More importantly, whether it's a isolators digitalization, advanced connectivity, electrification or the transition to a low carbon society. Power management lies at the core of these trends.
We remain committed to executing our technology roadmap, introducing innovative new products and solutions to our customers and focusing on long-term growth drivers that will allow us to surpass industry growth rates and establish ourselves as a sustained outperformer in the long.
With that, let me now cover our segment results and provide some guidance by segment for the next quarter. Starting with computing, December quarter revenue was up 12.3% year over year and up 2% sequentially and represented 43.4% of total revenue. These results were ahead of our original expectation for a low single digit decline sequentially and were driven by a continued recovery and stabilization in shipments across notebook and desktop computing applications. The recovery has been driven by high end driver ICs and mask sets for powering CPUs.
Looking forward into the March quarter, we expect the segment to be down mid-single digits. Our normal seasonality and the impact of Chinese New Year. Notably, the inventory correction in graphics cards is coming to an end and tangential markets such as AI accelerators are becoming a meaningful portion of our data center related business.
In summary, we are not immune to seasonality and broader market conditions, but solid rebound expected in graphics cards and continued contributions from a high related products demonstrate the diversity of our computing sites.
Turning to the consumer segment, December quarter revenue was down 50.2% year over year and down 24.4% sequentially. And represented 14.2% of total revenue. As we indicated last quarter, gaming is undergoing an inventory correction after extremely strong shipments into the number one console manufacturer between mid-calendar 2022 and mid-calendar 2023, similar to what we saw in PCs and smartphones in early calendar 2023.
Given the speed of the current correction, we believe demand will revert back to a new normal in a couple of quarters. Factoring in that the console is now in its midlife part of the platform cycle. Further, we see opportunities to increase buying content within the current console platform as part of its refresh this year.
Longer-term, we believe our relationship with this customer is very strong and are already engaged in discussions for the next module design for the March quarter. We anticipate stabilization in this segment and are forecasting a low single-digit sequential decline ex.
Let's discuss the communications segment. Revenue in the December quarter was down 18% year over year and down 6.6% sequentially and represented 17.5% of total revenue shipments to the Korea and China smartphone OEMs were strong. However, this was more than offset by a pullback in shipments to the Tier one U.S. smartphone customers.
Note that customer had strong shipments in the September quarter in 2023 ahead of their fall device launch. Looking ahead, due to strong shipments from Chinese OEMs, we anticipate this segment to remain flat sequentially, outperforming seasonality.
Now let's talk about our last segment, Power Supply and Industrial, which accounted for 21.1% of total revenue. December quarter revenue was down 15.4% year over year and down 16.6% sequentially. These results were driven by reduced quit charters following our peak season shipments to our Tier one U.S. smartphone customer in the September quarter and continued weakness in solar.
Our tools were a notable standout in the December quarter, further solidifying their strong growth and contribution throughout calendar 2023. For the March quarter, we expect this segment to further decline in the mid-10s sequentially, mainly due to reduced quick chargers following the peak season and lower solar demand.
While power tools will also see a seasonal decline, we expect strong sequential growth in our e-mobility segment, driven by deepening customer relationships for e-bikes and e-scooters. In closing, we delivered fiscal Q2 in line with our expectations. While we are not immune to the macroeconomic headwinds. There are indications that the cycle has bottomed and we are looking forward to the recovery phase.
Therefore, it is important to emphasize that our core fundamentals remain strong, a testament to the strategic investments we have made over the past years. These investments have positioned us well for growth, and we continue to focus on driving the company towards growth beyond our $1 billion revenue target on the other side of the cycle, supported by our leading technology, more diversified product portfolio, tier-one customer base in all of our business segments and expanding manufacturing capability and supply chain.
With that, I will now turn the call over to Ivan for a discussion of our fiscal second quarter financial results and our outlook for the next quarter. Yifan.
Yifan Liang
Thank you, Dave, and good afternoon, everyone, and thank you for joining us. Revenue for the quarter was 1$65.3 million, down 8.5% sequentially and down 12.4% year over year.
In terms of product mix, Demos revenue was $108.8 million down 10.5% sequentially and down 20.9% over last year. Power IC revenue $50.3 million, down 4.6% from the prior quarter. And up 0.6% from a year ago. Assembly service revenue was$0.7 million as compared to $0.7 million last quarter and $1.2 million for the same quarter last year.
License and engineering service revenue was $5.5 million for the quarter versus $5.6 million in the prior quarter. Non-GAAP gross margin was 28% compared to 28.8% in the prior quarter and 29.5% a year ago. A quarter-over-quarter decrease in non-GAAP gross margin was mainly impacted by ASP erosion and increased inventory reserve, partially offset by the improved product mix.
Non-GAAP operating expenses were $37.9 million compared to $40.8 million for the prior quarter and $32.8 million last year. The quarter-over-quarter decrease was primarily due to lower R&D engineering expenses and more vacation taken during the holidays. Non-GAAP quarterly EPS was $0.24 compared with $0.33 last quarter and $0.67 a year ago.
Moving on to cash flow, operating cash flow was negative $23.5 million, including $11 million of repayment of customer deposits, an $11.3 million deposit that we made to secure silicon carbide wafer supply. By comparison, operating cash flow was $13.8 million in the prior quarter and $0.3 million a year ago. EBITDA for the quarter was $20.7 million compared to $23.3 million last quarter and $31.8 million for the same quarter last year.
Now let me turn to our balance sheet. We completed the December quarter with a cash balance of $162.3 million compared to $193.6 million at the end of last quarter. Net trade receivables decreased by $2.5 million sequentially. Days sales outstanding remained at 18 days for the quarter. Net inventory increased by $4 million quarter over quarter.
Average days in inventory were 141 days compared to 129 days in the prior quarter. CapEx for the quarter was $9.1 million compared to $12.5 million for the prior quarter. We expect CapEx for the March quarter to range from $8 million to $12 million.
Now I would like to discuss March quarter guidance. We expect revenue to be approximately $150 million, plus or minus $10 million. GAAP gross margin to be 23.5%, plus or minus 1%. We anticipate a non-GAAP gross margin to be 25% plus or minus 1%.
A quarter-over-quarter decrease in gross margin mainly reflects the lower factory utilization due to the seasonality and then Lunar New Year holiday GAAP operating expenses to be in the range of $46.7 million, plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $39.5 million, plus or minus $1 million. Interest expense to be approximately $1 million and income tax expense to be approximately $1.1 million.
With that we'll open the call for questions. Operator, please started a nice session.
Question and Answer Session
Operator
Absolutely. We will now begin the Q&A session (Operator Instructions) Our first question comes from the line of Craig Ellis with B. Riley Securities. Please proceed.
Craig Ellis
Yes, thanks for taking the question. And I have one for Stephen and one for Yifan. So Stephen, starting with you like the color on how you're looking at the year and the fact that you see a cyclical recovery coming at a much stronger second half.
Can you just provide some further color on how that could play out on the top line. I'm not looking for specific guidance, but any sense on how the linearity plays out or what can happen as we look out in each quarter, the third and fourth calendar quarter of the year from, if you expect both of those to be up materially versus first half, would help us see a little bit of the things that you're seeing?
Stephen Chang
Sure. And thank you, Craig. Certainly and we are looking forward to the normal seasonality that will come in the September quarter. Which is the peak season, both for PCs as well as for smartphones and in both of those markets that we are continuing to continue to be well-positioned at our customers. So comparing first half to second half?
I think it's the generals on generally, we do expect the second half to be stronger compared against the first half. And the question more of is whether the macro-economic conditions overall is recovering. And right now, we are still relatively it's still in the we're hoping to be at the tail end of the or the overall broader revenue correction.
And depending on the macroeconomic conditions, if the if the market conditions are back to neutral or favorable, then we can expect to see also that the December quarter will also fall along with September. But right now, we're just looking we're looking our visibility isn't as clear on that far down. We are now preparing mainly for the September or September seasonal peak first.
Craig Ellis
Got it. Thanks. And I'll direct the next one to keep and if and I wanted to follow up on the gross margin for the first quarter. So the Lunar New Year impact is something that impacts the business every year. But I thought the impact was closer to 150 to 200 basis points or 1000 to 200 rather than the 300. So can you just detail on the factors that are causing gross margin to decrease by 300 basis points sequentially quarter on quarter, how much is the lower utilization for Lunar New Year?
And what are the other factors? And then beyond that, how would you expect gross margin to recover off of that 25% level, if we have the type of environment that Stephen was talking about, which is much better calendar second half demand. Thank you. Sure.
Yifan Liang
On the March quarter gross margin guidance. And we factor in a couple of things on primarily that utilization portion to some March quarter typically is our lowest quarter seven seasonality wise.
And then also on I mean the we also see some price erosions there and to the lesser extent, offset by some better product mix as some of you are probably. Right. And then I mean, 200, some basis points in that for the utilization portion than that than I am 50 to 100 basis points of the net of the ASP erosion and the better part of the mix. So that's a combination of those two factors.
Operator
Thank you. The next question comes from the line of David Williams with Benchmark. Please proceed.
David Williams
Hey, good afternoon. Thanks for taking my question. You will have certainly appreciated a lot of great color there. But just wondering if maybe you can give us a little color on some of the areas of weakness that you're seeing. And I know you expanded some in during the call, but just anything I guess, prime to square the recovery in the second half and is that is that really velocity of orders? Or maybe just any color there to help us get more comfortable the second half recovery does not materialize. Thanks.
Stephen Chang
Sure, David. Yes, and for a stronger second half, we're counting on not only on the seasonal factors, but also on the macro picture and the picture that I was looking at our end markets and many of our end markets have been going through inventory correction in the PC. The smartphone started earlier and sorry, were recently on graphics. Also, gaming went through that as well. Too.
We believe that now actually we're at the tail end of that. And then PCs and inventory can control, I think, is tapering down. It's more of a factor of end demand needs to come back in the store. We need the PC refresh cycles to be healthier and the overall macroeconomic to help raise the consumer spending.
And we also mentioned on the call that the inventory control for graphics also is starting to come to an end as well. And we're starting we anticipate a comeback of that together also with the gaming, which is all which have entered into inventory control about two or two quarters ago. And so those are nearing the end of in inventory before and we're looking now more mainly to the end demand once that can pick up that to at least neutral and our Back to Growth and that that can point us to a stronger second half.
David Williams
Great. Thanks. And maybe Yifan, if back to the gross margin, maybe trying to give a little more color, maybe what Craig had asked there, but can you I guess just how much of the impact are you seeing from utilization relative to just the leverage lost on the revenue side? And maybe what are the puts and takes there as we think about that gross margin longer term. And certainly we expect that bottom out a little higher than this. So just any help there. Thank you.
Yifan Liang
Okay, shorter. I mean, if you will recall that on March quarter 2023. And you know, our gross margin was around 25% range. So some and now it is a March 24 quarter, even though the top line is a little bit higher than that, a 2023 March quarter, your that you have location right now is about them similar to the March quarter 2023 at our factory in all overall.
You know, I would expect in oh one when our top line recovers and then and then I would expect on our utilization that would help them and also product mix and the yield I would expect to have come back on the heels of a better product mix as well. Thanks.
David Williams
Thanks so much. Appreciate the color.
Operator
Thank you. The next question comes from the line of Tore Svanberg with Stifel. Please proceed.
Tore Svanberg
Yes, good afternoon. And maybe if I could just touch on a different aspect of the on the gross margin question, it looks like inventories were up this quarter and it looks like it's going to be up again on While these days of inventory are going to be up here. Can you help us and how we should what we should expect inventories to go over the next couple quarters on and how much what do you see as a good operating level?
Stephen Chang
And in terms of both Dave and or Dan, short of that, I mean inventory balance and at the end of the December quarter increased by $34 million. And then on Jan and I mean And relative to the overall inventory size in Italy is sort of like a marginal harm for the March quarter, even though we would expect an inventory level maintains around a similar level in total and we were ready it slowed down our own production and also some purchases of the debt going forward,
would expect that both the inventory and it will be adjusted based on our expected business growth. And so we need some additional production to support that.
Yes, that will ramp up some production depending on the bottleneck areas. So that's and we manage it and on the bottom daily basis.
Tore Svanberg
And also, I guess maybe can you add some more color on the inventory reserve you touched on. I wasn't sure if I caught how much that was in and without that inventory reserve, where would the inventories have gone again?
Stephen Chang
The inventory reserve went up and pile up on a couple of million dollars and also in it December quarter. So we took some higher reserves.
Tore Svanberg
And is this something that you anticipate needing to do again going forward? Or is it kind of a one-and-done and we kind of reset from here?
Stephen Chang
Well, that's kind of it depends on the market conditions and then if and then it's overall environment and yet it's hard to say for inventory increase or No, generally, I would expect that probably back to the normal thing, you know that we received an additional inventory reserves of it.
Tore Svanberg
Got it. And also and I appreciate you provided CapEx guidance for the quarter. Can you give us kind of an outlook for the year and you expect it to remain in that $10 million range or can it be taken down a bit on and also the customer deposits on both the ones that you are returning back, how much is left and for the silicon wafer deposit or the fee, is this a one-time thing? Or do you have to secure additional supply down the line Thank you.
Stephen Chang
Okay. Sure. Regarding our own CapEx and the yen, I wouldn't expect throughout this calendar year. Our CapEx right now is at and what I call maintenance mode. We will do our regular upgrade, and that will solve some production bottleneck areas. And so we don't have a major plan to expand.
And generally, we target 6% to 8% of our revenue has a CapEx so than I would have expected this year, $10 million-ish per quarter, and that's probably in the ballpark in terms of a customer, the powders. And yes, I would say last year as calendar year 2023, we return about $30 million or so sold.
So this calendar year 2024, we expect to retire another $30 million, also a customer deposits in terms of our own deposit, we made an offer that's a one-time positive. So I would not expect further or well depends on the situation, but at this point, and that's a one-time deposits.
Tore Svanberg
And a quick follow-up on the deposit that you're returning. How much is left if you do that $30 million this year.
Stephen Chang
At the end of December last year, we had a $60 million of deposits on hand, some kind of a 2024, we'll retire another $30 million also.
Tore Svanberg
Got it. And then last question, if I could, Steven, appreciate the guidance that you gave on or by end market, if I'm doing the math right, it looks like licensing and other that kind of goes down to less than 1%, if that's the case, can you help me? We were at one world.
Stephen Chang
There was someone like a assembly services on this data here, a little bit. So that's the.
That's probably, yes, yes.
Tore Svanberg
Does that the expectations are for that? It does fluctuate and it's not expected to be like a material contributor that the way to look at it alone?
Stephen Chang
No, you're right, correct. I mean somebody service and that will just sit and do some services. Some for some idle capacity is not a not a major business for us.
Tore Svanberg
Okay. Thank you. I'll jump back in the queue.
Operator
Thank you (Operator Instructions) There are no additional questions left at this time. I will hand it back to the management team for closing remarks.
Stephen Chang
This concludes our earnings call today. Thank you for your interest in AOS and we look forward to talking to you again next quarter. Thank you.
Yifan Liang
Thank you.
Operator
That concludes today's conference call. You may now disconnect your lines.
