Alpha and Omega Semiconductor (NASDAQ:AOSL) Q4 2020 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by and welcome to the Alpha and Omega Semiconductor Report's financial results for the fiscal fourth quarter of 2020 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Gary Dvorak, investor relations representative. Thank you. Please go ahead, sir. Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2020 fourth quarter and year-end financial results.

0:51 I'm Gary Dvorak, investor relations representative for the company. With me today are Dr. Mike Chang, our CEO, our CFO, and Stephen Chang, our Executive Vice President. 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. Mike will begin with a review of the business overview for the quarter. Then Stephen will provide a detailed segment report. After that, Yifan will continue with a review of financial results for the quarter and fiscal year and provide guidance for the next quarter. Then we'll have the question and answer session. The earnings release was distributed by Business Wire today, August 11, 2020, after the close of market. The release is also posted on the company's website.

1:43 Our earnings release and this presentation include certain non-GAAP financial measures. We use the non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the gap measures that we provide. A reconciliation of these non-gap measures to comparable gap measures is included in our earnings release. We remind you that during the course of 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 from such expectations. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC.

2:32 We assume no obligation to update the information provided in today's call. Now I'll turn the call over to our CEO, Mike, to provide an overview of the business. Mike? Thanks, Gary. Welcome, everyone. Before we discuss our fourth quarter results, I want to briefly address the COVID-19 situation which continues to impact families, businesses, and the market across the globe. I want to thank our employees for staying resilient and being flexible as we navigate this new working environment. Our primary focus is to ensure the safety and well-being of all our employees and their families. Meanwhile, we continue to work closely with customers to support them in every way we can during this challenging time.

3:30 Now, some key highlights of the June quarter. Solid execution enabled us to deliver results ahead of expectations. Fueled by our product strength and growing customer penetration, revenue of $122 million was up 9% year-over-year and above the high end of our guidance range. Coupled with tightly controlled operating expenses, this resulted in non-GAAP earnings per share that exceeded the consensus. Our core business generates solid operating cash flow of $20 million and free cash flow of $11 million.

4:18 Yifan will provide the details of our two-quarter results later on the call. The favorable financial results were driven by high demand in certain segments and solid operating execution. Shiftments rebounded for our products in computing and gaming applications, driven by the recent shift to work, learn, and Entertainment from Home Environment. We also focused on our cost structure and prudently managed our expenses. We reduced non-essential spending and benefited from tribal banks while still pursuing strategic and critical R&D projects to expand our customer reach.

5:14 The strong fourth quarter kept a solid fiscal year. This is very encouraging given the backdrop of COVID-19 pandemic heightened trade tension between US and China and global economic uncertainty. Our results demonstrate the strength of our business strategy, diversified product portfolio, and expanded customer base. Next, I will discuss our strategic plan. to further strengthen the foundation to achieve our longer-term objectives. First, our joint venture FAB in Chongqing.

6:00 As part of our strategic plan, we built this FAB to fulfill growing customer demand. Indeed, during this quarter, the GFE FAB made a major contribution to capture surging demand. Even though the COVID-19 pandemic has slowed ramp-up production, we were able to make persistent progress. Importantly, this effort allowed the GAV to achieve positive epidemic for the June quarter. We expect to approach our target run rate by this time next year. Second, our focused R&D is driving broader and better product innovation.

6:52 As a solution provider, we are able to deepen our relationships with customers, becoming their trusted strategic partners. As such, our new products are driving growth primarily by expanding our BOM content in core applications. The design of our products, especially our PowerIC solutions, into an upcoming gaming system and a new PC graphics card demonstrates the opportunity created when we secure trust and confidence from our customers. In looking back in the fiscal year, we are pleased with our accomplishments.

7:37 The power semiconductor industry is a large market and we are making significant progress the temperature opportunities and the increased market share. We also recognize that conditions are still fragile. Economic conditions could change at any moment due to factors beyond our control, including the COVID-19 pandemic resurgence. Because of this, we continue to operate cautiously and take prudent actions even as we identify and see new opportunities. I would like to thank our customers, business partners, and shareholders for their continued support and competence in AOS.

8:29 I especially want to acknowledge our employees as our success could not have been possible without their hard work, dedication, and sacrifice in the past year. I will turn the call over to Stephen for a detailed segment report. Stephen. Thank you, Mike, and good afternoon. Let me start with computing. It represented 40.2% of our total revenue in the June quarter. Revenue was up 4.1% sequentially and flat year over year. While sell-in was okay, sell-through was quite dramatic. Many customers that had paused production in the first calendar quarter were catching up in the June quarter. End demand is strong, and we were able to meet it with ramping supply from our JV fab.

9:27 With so many people around the world working, creating, and learning from home, PCs have become even more indispensable. Because we did not shut down fully in the March quarter, we were able to meet this resurgence in demand. Going forward, we continue to optimize our production mix to satisfy the anticipated high demand for PC-related products. We are especially excited about the ramp of our high-performance driver MOS and digital power solutions in some key customers' upcoming graphics card platforms. We expect computing revenue to be strong in the September quarter with mid-teens sequential growth.

10:15 Now turning to the consumer segment, it represented 22.5% of total revenue in the June quarter. Revenue increased 37.5% sequentially and was up 31.7% year over year. COVID-driven home sheltering boosted sales of gaming, and Home Appliances, enabling those segments to achieve healthy growth. Gaming was up significantly sequentially and is expected to grow rapidly. We have multiple sockets across multiple products, Power IC and MOSFET, in an upcoming gaming system that is expected to launch in the second half of 2020.

11:01 Looking to the September quarter, we anticipate strong double-digit growth in the consumer segment, driven by home entertainment, gaming, and TVs. I want to note that PowerIC is regaining traction. Since 2018, we realigned our PowerIC product line by focusing on our core competencies of proprietary MOSFET technology, advanced packaging, and intelligent ICs, ideally suited for the application. We chose to go after high volume applications within the computing and consumer segments given our established MOSFET business. As a result, today, our multi-chip package products deliver the small size and high efficiency required in the latest gaming and graphic card platforms.

11:53 As you can see in recent computing and consumer design wins. Now let's discuss the power supply and industrial segment. It accounted for 19.4% of total revenue, up 24.2% sequentially, and up 3% year over year. After a pause in the March quarter, this segment rebounded in the June quarter, driven by higher demand for adapters used for PCs and gaming systems. Our ACDC power supply business was up significantly versus the March quarter, tracking the surge in PC sales. Demand was good in medium and high voltage products. Once again, we were able to meet high voltage demand with supply from our JVFAB.

12:42 We expect this segment to be down somewhat in the September quarter due to a bit softer demand for quick chargers and DC fan. Finally, let's move to the communications segment, which was 16.2% of total revenue in the quarter. up 3% sequentially and up 16.1% year-over-year. Telecom drove the growth, although over time we expect unevenness as the 5G rollout advances. Meanwhile, the smartphone market was subdued. One large customer slowed production in the June quarter, so our battery protection line was down slightly sequentially. Looking to the September quarter, this segment appears to be resuming growth across all our core customers. We expect the communications segment to be up single digits sequentially in the September quarter.

13:38 With that, I will now turn the call over to Yifan for a discussion of our fiscal fourth quarter financial results and our outlook. Thank you, Stephen. Good afternoon, everyone, and thank you for joining us. Revenue for the June quarter was $122.4 million, up 14.5% from the prior quarter, and up 9.4% from the same quarter last year. In terms of product mix, MOSFET revenue was $100 million, up 11.2% sequentially, and up 3.8% year over year. PowerIC revenue was $20.3 million, up 29.2% from the prior quarter, and up 47.1% from a year ago.

14:33 As Stephen discussed earlier, this is a welcome reversal for our PowerIC product line, the result of our focus on regaining traction with new and better solutions. Assembly service revenue was $2.1 million as compared to $1.3 million last quarter and $1.7 million for the same quarter last year. For the fiscal year 2020, revenue was $464.9 million, up 3.1% from fiscal year 2019. Non-GAAP gross margin for the June quarter was 27.5%, flat with the prior quarter and up slightly from 27.4% for the same quarter last year.

15:26 Non-GAAP gross margin excluded $0.3 million of share-based compensation charges for the June quarter as compared to $0.4 million for the prior quarter and for the same quarter last year. Non-GAAP gross margin also excluded $4.4 million of production ramp-up costs related to the JV company for the June quarter as compared to $6.6 million for the prior quarter and $2.6 million for the same quarter last year. For the fiscal year 2020, Non-GAAP gross margin was 27.9% as compared to 28.4% for the prior year.

16:12 Non-GAAP operating expenses for the June quarter was $25.3 million as compared to $25.8 million for the prior quarter and $22.6 million for the same quarter last year. Non-GAAP operating expenses for the quarter excluded $2.4 million of share-based compensation charges and $2.6 million of legal expenses related to the government investigation. This compares to $2.5 million of share-based compensation charges, $2.1 million of legal expenses related to the investigation and $0.6 million impairment charge related to an investment in a privately held startup company for the prior quarter.

17:05 as well as $2.1 million of share-based compensation charges and $3.9 million of pre-production expenses related to the JV company for the same quarter last year. Both GAAP and non-GAAP operating expenses included $3 million of digital power team expenses for the quarter as compared to $3.1 million for the power quarter and $2.3 million for the same quarter last year. In July, we made the first shipment of our digital power product. Non-GAAP operating expenses for the fiscal year 2020 were $102.5 million compared to $95.3 million for the prior year. Non-GAAP operating expenses excluded $8.9 million of share-based compensation charges $4.7 million of legal expenses related to the investigation and $0.6 million for an impairment charge in the current fiscal year as compared to $11.2 million of shared base compensation charges and $15.8 million of pre-production expenses related to our JV company in the prior fiscal year.

18:31 Income tax expense for the quarter was $0.4 million compared to a tax benefit of $1 million for the prior quarter and $0.6 million for the same quarter last year. The tax benefit in the prior quarter was primarily driven by relief from the CARES Act. Income tax expense for the fiscal year was $0.3 million compared to $1.3 million for the previous fiscal year. Non-GAAP EPS attributable to AOS for the quarter was 29 cents per share as compared to 11 cents for the prior quarter and 35 cents for the same quarter last year.

19:18 Non-GAAP EPS attributable to AOS for the Fiscal year was $0.88 as compared to $1.23 for the prior fiscal year. AOS continued to generate positive operating cash flow. AOS on a standalone basis generated $20.2 million of operating cash flow in the June quarter as compared to $29.5 million in the prior quarter and $15.2 million in the same quarter last year. Cash flow provided by operations attributable to the JV company was $20.1 million in the June quarter, primarily due to a refund of accumulated value-added tax paid previously.

20:10 Cash flow used by the JV company in the prior quarter and the same quarter last year was $15.2 million and $6.9 million, respectively. Cash flow from operations attributable to AOS for the fiscal year was $58 million as compared to $65.3 million for the prior year. Cash flow provided by operations attributable to the JV company was $4.4 million for the year compared to $33.9 million of cash used in the prior year. Consolidated EBITDAs for the June quarter was $14.9 million compared to $8.8 million for the prior quarter and $14.2 million for the same quarter last year.

21:07 EBITDAs attributable to AOS for the quarter was $12 million as compared to $6.5 million for the prior quarter and $15.1 million for the same quarter last year. the JVE company achieved its first positive quarterly EBITDAs of $1.1 million in the June quarter as compared to negative $1.1 million for the prior quarter and negative $5.6 million for the same quarter last year. Consolidated EBITDAs for the fiscal year was $52 million as compared to $55 million in the fiscal year 2019. EBITDAs attributable to AOS for the year was $44.8 million as compared to $61 million a year ago.

22:01 Now let's look at the balance sheet. We completed June quarter with cash balance of $158.5 million, including $110.3 million at AOS and $48.2 million at the JV company. This compares to $110.2 million at the end of last quarter, which included $99.5 million at AOS and $10.7 million at the JV Company. Our cash balance a year ago was $121.9 million, including $100.7 million at AOS and $21.2 million at the JV Company. The bank borrowing balance at the end of June was $173.4 million, including $32.7 million at AOS and $140.7 million at the JV Company.

22:59 During the June quarter, the JV Company borrowed a total of $47.1 million. AOS and the JV company repaid $2.1 million and $25.4 million of existing loans respectively. Net trade receivables were $13.3 million at the end of June quarter as compared to $17.5 million at the end of the prior quarter and $24.3 million for the same quarter last year. Day sales outstanding for the quarter were 18 days compared to 22 days in the prior quarter.

23:53 Net inventory was $135.5 million at the quarter end, up from $127.4 million last quarter, and up from $111.6 million in the prior year. Average days in inventory was 127 days for the quarter compared to 131 days in the prior quarter. Net property flat and equals $4.3 million flat compared to the prior quarter and up from $409.7 million last year. Capital expenditures were $13.2 million for the quarter, including $9 million at AOS and $4.2 million at the JV company.

24:50 With that, now I would like to discuss the guidance for the next quarter. We expect the revenue to be between $134 million and $138 million. gap gross margin to be 26% plus or minus 1%. We anticipate non-gap gross margin to be 27.7% plus or minus 1%. Note that non-gap gross margin excludes $0.4 million of estimated share-based compensation charges and $2 million of estimated production ramp-up costs relating to the JV company.

25:37 GAP operating expenses to be in the range of $32.8 million plus or minus $1 million. Non-GAP operating expenses are expected to be in the range of $27.8 million plus or minus $1 million. Both GAP and non-GAP operating expenses include $3.1 $2 million to $3.5 million of estimated expenses related to the development of our digital power business. Non-gap operating expenses exclude $2.5 million of estimated legal expenses related to the government investigation and $2.5 million of estimated share-based compensation charges.

26:29 Income tax expense to be approximately $0.5 million to $0.7 million. Loss attributable to non-controlling interest to be around $1.2 million. On a non-GAAP basis, excluding estimated production ramp-up costs relating to the JV company, this item is expected to be approximately $0.2 million. as part of our normal practice were not obligated to update this information. With that, we will open the call for questions. Operator, please start the Q&A session.

27:15 Thank you. At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Craig Ellis from B. Reilly FBR. Your line is open. Yeah, thanks for taking the question and congratulations on the nice execution in the quarter, guys. Yifan, the first one's really just a clarification. Did you mention what the JV Phase I revenues were in the quarter and what are they expected to be inside of the fiscal first quarter outlook? Yeah, this...

28:00 During the June quarter, majority of our revenue increase was supported by our joint venture. So you saw the joint venture achieved the first EBITDA positive quarter. We're happy with that. Right now, because of the uncertainty of this pandemic situation, we expect that we'll continue to ramp this joint venture FAB. Right now, our September guidance also factored in those support from the joint venture. So, as Mike mentioned, we'll were going to progressively continue to ramp this JV FAB during the course of fiscal year 21.

29:10 Okay, and as long as we're just talking about the FAB ramp and what happens in the fiscal year before coming back to some other near-term items, how should we expect that to play out through what's typically a seasonally softer part of the business in fiscal 2Q and 2Q3. Would we expect fab production and fab sales to mirror historic seasonality? Or is there something about the design wind profile you've been able to achieve with products from phase one that would allow that fab to continue to grow output and revenue sequentially through next year when you expect to get to that original $37.5 million target? I would expect, you know, there are some seasonalities along the way, you know, in this fiscal year 21.

30:04 On the other hand, yes, we have some design wins and, you know, company specific and, you know, we're going to continue to run the joint ventures and FAB. Overall, I would think, you know, some still some uncertainties down the road in terms of December quarter, March quarter. We just go quarter by quarter. So right now, our September quarter's guidance reflected our expected ramp, continued ramp.

30:49 Okay, thanks for that. The next one is a question for Stephen. Stephen, I think three months ago we We thought that the new gaming platform might deliver $6 million in sales, and it looked like consumer was up significantly enough that that $6 million might have been $7 million, $7.5 million. One, can you confirm what the revenue contribution was from the new gaming platform? What would you expect in the fiscal first quarter and somewhat similar follow-on as I had for Yifan? Given the highly seasonal nature to gaming platforms, would we expect revenues from this set of design wins to moderate in fiscal 2Q and 3Q before re-accelerating mid-next year?

31:34 We are very excited about the gaming business that's ramping up now. We saw that ramp up already happening in the June quarter. This gaming console is not going to release until the later part of this year, more towards the end of Q3, beginning of Q4. However, obviously, the production has already started for that. I'm not quoting any specific numbers for these quarters, but it's very healthy, and we expect another big jump going into the September quarter. Beyond that, we have to see how the acceptance of this console to the market and see whether there's also any production hiccups or anything on our customers. And so far, we don't see anything. Right now, we are pretty happy with this business.

32:22 And as Yifan mentioned, this is one of the key design wins for new business that we are counting on for the December quarter. Okay, great. And then interesting teaser about server power shipping in the June quarter. So can you give us some further color on what happened there and what's happening in the back half of the year? Sure. So Digital Power, we're very excited to be in one of the upcoming graphics card platforms. This is going into one of the high-end models that gets released at the start of the platform release. So we have our SPS product going to be shipping already in this September quarter as well as ramping going into the December quarter. So naturally, as we talked about before, our digital power is focused on two key markets going after advanced computing as well as telecom. So it's not too surprising that we see the first business win coming more from a client-side portion of the computing portion of the business. So we're pretty excited about this.

33:28 This will ramp up some more next year as well. At the same time, we have other opportunities that are being cooked up at the moment for the other applications. Okay, that sounds good. And then lastly, just a long-term question to Yifan and maybe even for Mike. So guys, thanks for clarifying the phase one FabRAMP target. Got it. Fiscal 1Q22, it sounds like. How should we think about what was the calendar 23 $1 billion revenue target? Is calendar 23 still the right period for that revenue target or would that shift out due to the COVID crisis? Well, I'll take the first question. You know, the original target of $1 billion in revenue for calendar year 2023, I would expect that, yeah, probably more so pushed out by one year because of this 20 years pandemic situation.

34:32 So that's our current view, and I mean, It may change down the road depending on the market situation. So I'll leave it that way. This is Mike Chen. Let me follow up with Yifan a little bit, give a little bit of in-depth. You know, when we are looking to the future business, especially like kind of far away to 2023, and Billion Dollar, which of course are always our challenging goal. Actually, the only thing I made is your technology in a new product development and acceptance, which does take time and patience. And we are quite encouraged during this difficult time, this pandemic time there, our products start to get accepted, which is a tremendous encouragement to our people, to us. So I agree with Yifan.

35:40 We cannot fight with nature, right? So this will affect us, but the momentum is there. We believe it should not no more than delay one year. That's helpful, Mike. And then if I could just follow up on that useful color. Since you mentioned long-term technology roadmap, where does wideband gap fit? Silicon Carbide GAN on your long-term technology roadmap and where are you in development of those technologies? This is another slow cooker. So we've been in this area for quite many years. Recently, we just want to release one pretty good silicon carbide 1200 volt product.

36:26 However, I don't want to create too much excitement there because such kind of thing will take time for customers to accept. So you've got product there, pretty good product there, but you just happen to take time for customers to really accept, to buy, and to expand. So I can only tell you that we have a capability, we have R&D there, but I will put it longer term. Thanks for the help, guys. Thank you. Your next question comes from the line of David Williams from Loop Capital Markets. Your line is open. Thank you, and I appreciate you letting me ask the question, guys.

37:13 Congrats on the solid quarter and the guide. Thank you. So the gross margin came in a little better than we had expected and, of course, ahead of the guide. Can you maybe talk through any puts and takes there of the margin? Was that more mix-related or just productivity out of the JV? Or what really led to the better margin profile this quarter? Oh, sure. I mean, the gross margin came in at the high end of our guidance. So, I mean, we are pleased to see that. Since the majority of the increase of our revenue was from our joint venture. So, you know, our non-GAAP growth margin, you know, we performed out production run-up cost, so that actually, you know, make the normalized non-GAAP growth margin already. So, you know, the June quarter's non-GAAP growth margin was flat compared to the March quarter, so are relatively stable compared to the March quarter.

38:36 In terms of product mix and factory utilizations and so on, basically the $2.2 million reduction in the production ramp-up cost from the March quarter's $6.6 million to $4.4 million in the June quarter That $2.2 million, basically, that would be the margin increase if we did not perform off the production ramp-up cost. So that would be the margin gain there. But since we already normalized the non-GAAP margin, so the two quarters margin was reduced, are basically stable compared to the March quarter.

39:30 Okay, great. And then maybe if you can just maybe rank order the growth of the underlying trends that's going to continue to support the growth. If you kind of exclude some of the shorter-term trends that you're seeing, what are the, I guess, the largest maybe secular growth drivers that you see that will support you to that $1 billion run rate that you talked about? Hi, David. I can take that question. We're definitely heading more towards diversification. In order to get to the $1 billion revenue, we're expecting contribution from all the core markets. Of course, we'll continue to be strong in computing. And even in computing, we are finding ways to expand BOM content. We expect that with the future platforms coming from Intel and AMD that our BOM content is actually going to increase.

40:22 and also not only for the vCore and system power but also finding new sockets like getting into Type-C as well as some other areas that we are investing in. So computing would definitely be strong. We even have the server market as part of the mid-term growth for computing. Communications has also been strong for us in the past and will continue to be strong with strength in the battery protection going into phones. We have a very good position going into that that we talked about during the earnings release. We expect that to continue going forward as we also look to supplement that also with business from our telecom side. We also expect to see our power supply grow as well. Right now in the short term, It's been growing mainly with the PC boom because of the work from home situation.

41:16 A big part of that is because we've been able to service the high voltage market which we have ignored in the past due to allocation. Now because we have CQ and we have the ability to support that, this is going to be a new area of growth for us to support not only power supplies for for PCs, but also for gaming systems, for industrial power, and for solar and other applications. And, of course, gaming and consumer we've been talking about. That's a brand new area for us. Gaming will be a big part of consumer going forward, but so will our other existing business. We're pretty pleased with our home appliance business there. based on IGBTs in our module solutions. And this is one area that will continue to grow.

42:01 We're still on track to grow by more than 40% year over year for the calendar year. And as well as our TV business will continue to be strong. So in the end, we have to grow by diversification. We can't count only on just a few areas of the market. We've gotten big enough and established enough in our current applications and we are expanding into new applications to help us to get to that $1 billion. Great. That's very helpful. Thank you. And then maybe, or Mike, on the digital controller front, you're obviously making some very nice progress, shipping in the queue. How do you think that layers in as you move forward? What does that ramp look like? Is it slow and steady or could we expect to see maybe a nice, more hockey stick approach as you get into the middle part of next year?

42:55 We expect it to be more slow and steady. We do expect, again, the client portion of the business to grow a little sooner and faster just because of the nature of the shorter design cycles for going into client computing. The longer ones are going into the server platforms and going to the telecom platforms, which we are engaged in, but they simply just take more time to both design in as well as to ramp up. So I think steady is probably the right word for that. This type of business takes longer to design in, but it's much stickier and will stay for much longer because these platforms endure for a much longer time. Any thoughts on the BOM content addition that you can pick up?

43:40 The content can be pretty large, but it really depends on the end application. There's different scales of base stations and servers. It depends how many rails there are. looking to use digital power for. But it can be on the tens and twenties of dollars per system. But it's a pretty wide range depending on the application. And one more if I can. Just kind of thinking about the health of the inventory, can you maybe talk about the different puts and takes there? in terms of the inventory that's maybe in the channel and are you shipping to consumption or are you seeing any type of build that could be helping your 1Q guide? Sure.

44:26 Our channel inventory right now is what I consider pretty healthy. It's within the targeted range of two to three months and right now it's close to the midpoint of that target range. So we don't have much concerns about the channel inventory at this point. Great. Thanks so much, guys. Appreciate it. And best of luck on the quarter. All right. Thank you. Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Jeremy Quad from Starlight. Jeremy Kwan from Stifel. Your line is open.

45:15 Thank you. And let me add my congratulations to the excellent results in Outlook and especially the cash flow generation. Thank you. Thank you. Thank you. I guess the first question, you know, maybe regarding the, you know, a follow-up on some of the seasonality questions, you know, it seems like some of the growth near term has been driven a lot by, you know, the consumer Gaming, graphics cards, some of the cell phone builds. Could you see potentially maybe a stronger seasonal trend coming up in the next couple quarters because of that? Are there certain design wins that can maybe make up for some of that potentially increased seasonality?

46:09 Sure. First, I want to comment that because of COVID, there's not much of a normal seasonality this year. But, you know, there's been a lot more disruption because of how COVID has affected our customers, both their demand as well as their production. Computing, you know, typically, you know, is a Q3, a September quarter, a major peak season. This year we basically saw that peak season pulled in from September into June. That's partly because also March was a pretty disaster quarter for our computing customers because their factories were located in China and a lot of them in the epicenter of where COVID was starting out from.

46:56 But because of the work from home and the strong demand, The June quarter was very strong and the September quarter remains very healthy also. So far we don't know how this will play out over the longer timeframe. Q4 so far looks still okay, but we really need to wait and see to see how demand changes. But right now that still looks strong. Going into smartphones, smartphone I would say is probably a little more depends on how each of the major players, customers in the space are doing. Some of them, one of our customers, they launched a new phone back in the March quarter and they actually didn't pull back production until the June quarter.

47:43 But then coming into the September quarter, they're actually starting up production pretty heavily again in anticipation of possibly another factory shutdown that may have to happen in the coming cold season. So we're seeing a lot of disruption like that happening. Overall right now, you know, smartphone typically is strong in Q3 and actually we do see that from all three vendors on demand is very healthy and strong going into the second half of this year. Now some of the newer areas for us are, at least for AOS, is gaming as well as graphics cards and both of these areas are relatively new for AOS, so it's not really seasonal. It's tied to their platform releases that are launching at the end of this, in the second half of this year. Graphics cards typically, their platforms last around two years. So this is the beginning of that cycle.

48:40 For gaming systems, those last much longer. You're talking about typically six to seven years. And this is the beginning of that cycle. And even during that six, seven year, There's multiple revisions that are made to platforms along the way to create different price points for the customer or maybe cost down. So there's additional opportunities for us to get more business, get more sockets. And so I would say that that's not really a seasonal thing. It's more out of that product life cycle. We're at the beginning of that life cycle. And so it's additional business that we're layering on top of our current business. Does that help? Yes, that's very helpful. Thank you, Stephen. And maybe just a quick follow-up on the comment that some customers, especially in the smartphone industry, are building ahead of potential shutdowns later on. Is that something that you see? Is it pretty widespread within cell phones?

49:38 And do you see that across other industries? I see this particular vendor I think it's only one customer that's doing that more so than other ones. I wouldn't say it's necessarily reflective of the whole market or industry, but at least they're doing it much more than others are. The other major vendors are seeing their normal seasonality that's coming. Right now, we see all three vendors asking for product. Got it, great. And then maybe just, you know, can you give us an idea of, you know, linearity in the quarter, and maybe your backlog and visibility for the upcoming September quarter?

50:31 Sure, Jeremy. You know, our backlog has been healthy and steady since the month of March. If you recall, you know, back to the March and Yifan Liang. We saw the surging demand started and then backlog started filling in. I guess this reflected in the recovery of supply chains and then surging demand due to the work from home, learning from home, those things. And also, our company-specific design wins.

51:20 Of course, under this challenging and volatile pandemic environment, we want to be vigilant and cautious and then monitor the dynamic changes carefully. Right now, our backlog can support our September's guidance. Can you give us maybe a comparison on a relative basis, maybe this quarter versus prior quarters? Some of the other analog peers have reported very high backlog coverage. I'm just wondering if that's the same case for you guys. It has been steadily increasing, yeah, better than last quarter in position, I would say.

52:10 Great. And Yifan, just looking at the balance sheet, I noticed other assets was down about $26 million. Is this the VAT refund, the value-added tax, converting to cash? Yes, exactly. So then is that the full amount, so about $26 million if we look at – because the operating cash flow had a very nice bump from the March quarter to the June quarter. So if you take that out, would that be roughly the operating cash flow for excluding the refund? Yeah, I mean, for AOS, when we separate AOS from the JV, AOS generated about $20 million operating cash flow, $11 million free cash flow in a quarter.

53:07 JV, yes, that... about $25 million in refund they got from local government related to the value-added tax. You know, last couple years when they imported the equipment, then they had to pay, you know, value-added tax, like 13-some percent of each machine. That one has been accumulated for at least a couple of years. So in the June quarter, they got a refund, pretty much all of them, from the government.

53:53 So on the other hand, prior to that, they were using those receivables from the VAG tax against they borrowed from a local bank against those VAT receivables. So at the same time, when they got the refund, they also repaid them about $15, $16 million or so, those loans. So that's a net-net. Yes, they did get more working capital. Got it. And did you say all the... that tax, has it been fully refunded by now or is there still some waiting to be collected?

54:41 That's pretty much all been refunded already. Great. And then just a question as the JV has been ramping, I think Mike said earlier that you guys are expecting to hit the target around this time next year. So presumably you probably need to invest ahead of that. So can you talk to us about you know, CapEx plans and also just for the JV, you know, so it looks like the operating cash flow is still not quite break-even at this point. Do you have targets for when you might expect to hit operating cash flow break-even and also on a free cash flow basis? For AOS, our CapEx spending is pretty much in the normal range, I would say 6% to 8% of our revenue.

55:38 For the joint venture, yes, right now we are doing some planning work for the next round, but right now our main focus is to ramp up 12-inch fab first. So that will have a longer-term planning for the JV. So, sorry, were there any CapEx or break-even targets that you can give us? Well, that's... Target, we'll see, along with our business growth and expectations. So that's kind of a, you have to wait and see.

56:29 We will disclose when the time comes. Great. This is Mike. Can I maybe put in a few words about this GFA? Yes, please. Thank you. Okay. You know, I think first of all, we need to differentiate. This GAV is solely purpose-driven. It's a strategic investment to match with our business growth plan. So it's not a purely financial investment. Therefore, we really look into what our business growth, the AOSB's growth there. Then we tailor this venture to support that. Meanwhile, of course, this venture grows too. So there's a primary and secondary. The primary really is to support AOS growth.

57:14 So I don't want to differentiate it a bit. That's very helpful. Thank you. And understood, it's strategic for AOS as a standalone and there's, you know, the cash flow implications are, it's a consideration, but it's not the primary one. Right, right. Of course, it would be very prudent. Yes. Thank you. Right. Great. Thank you. And just one last question. To help us model the government investigation, is it still going to be $2.5 million for the remainder of the year, or is there some drop-off that we can expect at some point? Well, this one is really hard to estimate, depending on the activities.

58:04 Right now, for the June quarter, I would The expenses were in the $2.5 million, $2.6 million range, so I wouldn't think, you know, I just use $2.5 million at this point for the guidance. You know, that's hard to estimate at this point. Okay, that's fair, and that's all I had, and congrats again on the solid results. Thank you. Your next question comes from the line of Craig Ellis from B. Reilly FBR. Your line is open. Yeah, a couple of them, and thanks for taking the follow-ups, guys.

58:49 First, I just wanted to get your views on how you're looking at production optimization and demand planning, and I want to do it in the following context. I think when we started into calendar 20, the company was optimizing its business for communication-centric growth. A lot's happened since you relied on your feed, and it looks like the back half of the year, we're really going to see mid-year, late-year. Our growth is driven by gaming platforms and compute, so good for you for realizing that. And I think the communications business has been fairly flattish from the first quarter. The question is, as we look at calendar 21, so the second half of your fiscal 21, first half of fiscal 22.

59:38 How do we think about the way you're optimizing your production and your demand planning? Is it going to stick with being much more of a compute and console incremental demand business or do you see the communications business coming back and contributing more to growth next year than it has over the last couple quarters? Yeah, this is Stephen. I can address that. So it's similar to what I was saying before, and even giving up the total picture. In the long term, we are heading more towards diversification. But in the short term, you're right. Right now, we're seeing big, strong growth in PCs because of work from home, as well as consumer because of the newer platforms that we're getting into for gaming. In the longer run, I do expect the other platforms also to continue to grow. Communications.

1:00:33 We do expect the cell phones still to be the main, I guess, the foundation of that. We have a very strong position in each of the three major markets, and that will continue to be strong going forward. On the power supply side, we saw the beginning of some growth over there because of our high-voltage business. Initially, again, going after the PC market, but that has the potential to expand to be more than that. So near term, definitely I think the gaming as well as the graphics cards will be big. And computing itself, you know, graphics cards as part of the computing segment will grow over there as well as with some BOM content increase in the upcoming platforms for Intel and AMD.

1:01:19 That's really helpful color, Stephen. And then the follow-up, I believe the company is spending about $3 million a quarter in its digital power R&D. So just trying to think through The dynamics that get that business to break even on an operating basis. So we started to ship product. It's going into gaming cart products. Do you feel like you've got visibility now to six to eight million in quarterly revenue for digital power? Or when would you expect to get that visibility so we would be at a point where on an operating basis we were break even on a quarterly basis? I think it's still further out. We expected digital power to take time to establish as a first player going into digital power, but also for the markets that we're going into, where we want to get into, both the server and telecom, we're still relatively new to those markets, so it simply just takes time to develop this business.

1:02:17 That said, where we're getting the early traction on is in the applications that we do know well, going into the client side on the graphics as well as client PCs. So we expect to see earlier traction there. It's not going to get to the break-even point that quickly. I think we'll be making steady progress towards that. So I think we're still a few years out, at least, in getting to the break-even. But, you know, this is just the beginning of the revenue. It's coming from one customer right now, but we hope to expand that in the coming quarters. Makes sense. Thanks, Stephen. This is Mike Chang. Can I add a few words? Yep. Go ahead, Mike. You know, what Stephen says is exactly true. However, I would like to also share some of our excitement there.

1:03:05 I see you hear some from Stephen, right? we are actually strong in clients okay you know the telecom which is kind of new you know the time there you know in the client side there there's a lot of synergy okay uh among ourselves digital power and our existing power i see there so even though they may not get a revenue uh as the hey what is this revenue come from this power but they will contribute greatly to the to the other side there so i think the benefits not not just the what does steven say so is there some There are no further questions at this time. I turn the call back to the presenters for closing comments. Earnings call today. Thank you for your interest in AWS and we look forward to talking to you again next quarter. Thank you.

1:04:10 Thank you everybody for joining. That concludes your conference call today. Have a wonderful day. You may now disconnect.