Alpha and Omega Semiconductor Limited (AOSL) Earnings Call Transcript & Summary

[indiscernible] elsewhere. My name is Marco Lagos. I am a Managing Director with Deutsche Bank's Investment Banking unit. I run our semiconductor, electronics and IP investment banking business. With me today, I'm extremely pleased to have Yifan Liang, the CFO of Alpha and Omega Semiconductor; and Stephen Chang as well. The company is going to walk us through a short presentation on the business, and we're going to follow that up with some Q&A. [Operator Instructions] And we can get started. So, Yifan, honored to have you. Thank you so much for joining us again this year. Why don't you and Stephen, take it away, please. Thank you.

Right. So thank you for joining us today, and thank you for your interest in Alpha and Omega Semiconductor. So Alpha and Omega, our vision is to be -- our vision is to be the total solution provider in the vast power semiconductor market. So under this goal, we have been not only growing our business, but also building a strong foundation that enables a rapid as well as diversified growth. So being able to provide total solutions is important to us because this power semiconductor market gives us tremendous opportunity to grow, grow and grow fast. This market is over $40 billion in market TAM, which gives us that room to grow. And AOS has actually been outpacing the market as we have successfully been expanding our footprint into key applications. Power content itself has been increasing with emerging trends such as advanced computing as well as electrification of motors. And furthermore, we are well positioned to accelerate our growth at double-digit percentage rates in the next 4 to 5 years as our investments in technology and manufacturing are beginning to bear fruit and materialize. AOS produces a wide diversified portfolio of power management, discrete devices and ICs. And this is built on our core competencies of silicon packaging as well as intelligent ICs. And this includes a wide range of MOSFETs, from low voltage to high voltage, addressing a variety of applications, from computing to smartphones and various power supplies. We have also expanded into IGBTs, which enabled AOS to penetrate into the home appliance market. We've also developed a range of application-specific power ICs and modules that combine the best of our silicon with optimized ICs in a co-package solution that is a perfect fit for the customer's application. Now to support business growth and protect our proprietary technology, we must, in parallel, build a reliable and comprehensive supply system. Manufacturing is a key part of our company's success. Not only does it support our growth and drive down cost, it's also a source of innovation, and it is a key part of the R&D engine for AOS, to bring best-in-class technology and products to the market. So we take a 3-pronged approach to our supply: in-house, our joint venture, and also our foundry and OSAT partners. So first, we established in-house capability. We bought our own and set up our own Shanghai assembly and test facility back in the early days of Alpha and Omega. And we also, in 2012, acquired our own 8-inch fab that's in Oregon in the U.S. Secondly, we also invested in a joint venture with its Chongqing municipality to set up both a 12-inch wafer fab as well as the accompanying assembly and test facility. This is already fueling our growth today. And third, we also leverage our supply partners, both boundaries as well as OSATs in order to expand our capacity and reach to keep up with our demand. So with that, let me share with you our plan to achieve $1 billion by -- and our plan is to achieve this by the 2024-2025 time frame. So the first stage, we already passed this. We already built the core team, established the core technology as well as build up a comprehensive capacity to support our growth. In the second stage, we've actually achieved this in this past June quarter by surpassing $600 million in the fiscal 2021. Our original plan was to achieve this by the end of this calendar 2021, but we were able to pull this in 6 months earlier. So this includes filling up on Chongqing Phase 1 with our joint venture. And today, we have a market leader today in both computing as well as the smartphone application, and that's with addressing both battery packs as well as quick chargers. So in this third stage, we -- our next milestone is to hit the $1 billion mark. And we want to do this around 2024, 2025 depending on market and the situation. And especially as we expand our market leadership into advanced computing as well as industrial applications. So at this point, we expect to achieve a higher economy of scale with a broad base of business in several high-volume applications. And we also expect profitability to accelerate with higher value, higher-margin product mix, making a bigger contribution into our revenue. So let's talk about our market and business that we address. Today, we serve 4 main markets. Computing, starting on the bottom right, is our biggest segment, where we are a leader today in notebook and desktops. And we're also expanding into the graphic space, and we'll be moving into server and AI as well. Going to -- clockwise to the bottom left is our consumer segment. And this is another growing segment where we have targeted both home appliances and gaming. And the top left is our communications. Here, today, we are focused mainly on smartphone that has explained a lot of our growth in the past few years, but we're also getting into the telecom 5G market as well. And rounding it out on the top right is our power supply and industrial market. Here, we address a variety of applications, including quick chargers, power tools, solar, AC/DC and various industrial applications. So let me highlight a few of the notable segments within these markets that we addressed. Let's start with computing. So computing has gotten a lot of attention, especially with shelter in place mandates. And demand certainly has search for laptops as well as tablets as both workers and students have been stuck at home the last 1.5 years. And while we know and agree that much of this demand is temporary, we believe that computing will always be a core part of AOS business, both due to share gain as well as content expansion. So we have been growing and competing even before COVID and shelter in place mandates. AOS is a market leader today in both notebook as well as desktop market as we continue to gain share at major computing makers. Our advanced MOSFETs and Power IC solutions power both the Vcore as well as system power applications within the PC. And in addition to share gain, we continue to expand into higher-value sockets, especially surrounding the Type-C port, including as well as the graphics card applications. This is increasing the bottom content in the PC application. So we also expect that in the next Intel platform that they will be bringing back additional power rails, which basically translates into more power and MOSFETs as well as ICs and being used in the next platform. So in parallel, we're also developing digital power content, including controller as well as smart power stage to address advanced computing applications such as high-end gaming -- sorry, high-end graphics cards as well as servers. So let me take -- I mentioned gaming. And the reason I mentioned that because gaming is actually considered -- basically, consider it as a high-end computer. So -- and we actually have many dollars of content going into one of the gaming consoles that launched at the end of last year. So this is -- we're excited about this because we actually have multiple socket wins in this application with our power and MOSFETs as well as our Power ICs going into various end sockets, addressing the graphics, addressing the application as well as the control report, which is basically a type-C port, similar solutions that we're selling into the PC market today. So we look forward to continuing to ramp up with this gaming console maker throughout this year, and this is going to be a long 6-, 7-year cycle. And we continue to participate in the upcoming design refreshes that will be taking place year after year. So let's shift gears and talk about mobile. So we've expanded beyond the PC market to get into the mobile space, mainly addressing 2 key applications for smartphones. The first is battery protection, and this is where our MOSFETs are being used inside the battery pack inside the smartphone. Our high-density in MOSFETs help our -- the battery packs used inside these smartphones to run more safely, longer as well as with higher, more robust performance. AOS is 1 of 3 vendors that can produce the high-performance chip scale MOSFETs being used inside these battery packs. So the second application in smartphones is the quick charger. AOS was on the very first quick charger that shipped back in 2014 in China. Ever since then, all the major smartphone makers have adopted this quick charging technology. And AOS has been a leader all along the way. And the trend going forward is for quick chargers to shift to even higher output power. And by doing this, they have to increase either the voltage or the current of these chargers, which basically translates to higher performance MOSFETs being used on the secondary side of these applications. So it's not uncommon to see chargers going up to 24 watts or even all the way up to 65 watts shipping with flagship smartphones. All right. Let's shift gears to talk about the third biggest growing segment for us, and that's in home appliances. And we've been able to get into this space because we introduced our IGBTs in the past few years. And this has opened up the market for us to home appliances such as refrigerators, washing machines and air conditioners. Air condition and -- actually, all of home appliances have done quite well in the past year due to shelter in place mandates as demand has been driven up because of home comfort needs. And the underlying growth driver underneath all this is the increasing regulations for energy and efficiency. And in order for our customers to comply with these regulations, they have to redesign the motors used inside these big home appliance applications in order to meet these stringent requirements. So combine that with the shorter situation to date, this creates a very welcoming environment for new suppliers like us, AOS, to enter in this market. Our module solutions combine up to 17 chips inside a single module. And this is in a co-packaged solution that includes IGBT's ICs and dials within that single package. So you can see that this combines the best of our core competencies, our silicon, our packaging as well as our ICs. That, bundled together with our application know-how. So our customers choose us because our compact solution offers a smaller footprint compared to the competition, with better efficiency and more protection features for our customers. So our target is to grow our IGBT by more than 40% year-over-year. And we have a lot of room to grow. The SAM here in this space is over $2 billion. We've been growing over 40% year-over-year, and we continue to do so this year. So these applications, especially PC, smartphone and home appliances is driving much of AOS' growth today, in addition to several other applications that we didn't have time to go into today. So our focus in AOS is to grow, grow and grow fast, not only revenue but also EPS. So in summary, AOS has deep expertise in technology for power semiconductors, enabling high-performance MOSFETs in ICs, IGBTs and modules. We're growing fast in Tier 1 customers in PC, smartphone as well as home appliance market today as well as many other applications. And in order to support this growth, we have a strong manufacturing base to support our growth that's vertically integrated with both 8-inch and 12-inch capability as well as our own back-end facilities. So with that, let me pass the time over to our CFO, Yifan Liang, who will introduce the company's financials as well as our target model. All right. Yifan?

Thank you, Stephen. Good morning, everyone. Stephen just talked about our market and our core competencies, our product expansions, our growth drivers and some of our wins in the market place. So now let's take a look at how those wins in the marketplace have been reflected in our financial performance. This slide shows 4 quarters year-over-year quarterly revenue comparison. As you can see, in the past 3 quarters, on the left 3 bars, we had phenomenal top line growth. Grew 30%, 40%, even 50% year-over-year. Our business has been really elevated from $110 million, $120 million per quarter level to currently $180 million per quarter level. So that's really significant. Both the fiscal year, we just finished at June 30, we grew our annual revenue by over 40-some percent year-over-year, reached $657 million. This strong top line growth also dropped down to the bottom line. As you can see from this slide, for the same corresponding quarters, our non-GAAP EPS really grew even faster than our top line growth. This clearly demonstrated the scalability of our business. In the most recent quarter, which is June 30, 2021, we just finished, our quarterly revenue grew 45% year-over-year. And while our non-GAAP EPS grew more than 200%, actually 228%. So our EPS has really increased from about $0.20, $0.30 per quarter level in the last few years to currently, $0.95 per quarter level. So approaching $1 per quarter. So that's a very significant improvement. For the fiscal year 2021, our annual non-GAAP EPS more than tripled year-over-year to $2.93. So let's take a look at -- from the cash perspective. From this chart, you can see, we have been consistently generating healthy EBITDA in the past 5, 6 years. Again, for the fiscal year 2021, on the far right, our EBITDA more than tripled year-over-year as our other profitability improved. Then last year or so in the growth supported by the supply side as well. And we formed this joint venture 5 years ago, we own 51% of the joint venture. Right now, they are ramping up their Phase 1 of the 12-inch fab. So basically, we expect that they can ramp up to the targeted run rate in the September quarter, basically, this current quarter. The joint venture has been EBITDA positive since the June quarter of last year, 2020. So they have been EBITDA positive for the past 5 quarters already. We will continue to ramp this place. The current status for this joint venture is they are in the process of doing financing for their Phase II expansion. So therefore, since we own 51% of this joint venture, so their financials are consolidated into our -- AOS financials. So this may create some confusions for investors. So this slide shows some breakdowns between the AOS and the CQ joint venture and as well as consolidated numbers. So to me, with this AOS and the joint ventures are 2 separate legal entities. Other than we purchased the wafers and assembly and test services from them, we're totally 2 separate entities. I cannot touch their cash. They cannot touch my cash. And even though we report $165 million of consolidated debt, as you can see from the far right in those 3 columns, for the consolidated debt balance as of June 30, 2021. But actually, AOS only had $24 million of debt. So I mean AOS is not a guarantor of the JV's debt. So that I want to make sure investors look at the breakdowns we provided in our earnings release, to get some detailed breakdowns. So let's move on to our target financial model. We published this model by the -- 3 years ago or so. At that time, calendar year 2021, we were shooting for $600 million in revenue. So as Stephen just mentioned, we have surpassed this goal already 6 months ahead of our plan. So this calendar year 2021, middle column model implies about $2 EPS. So right now, our fiscal year 2021, we already achieved $2.93. So on the far right, on this column, it was our longer-term target model for calendar year 2024, 2025. And right now, it becomes our next target. So this is basically -- we're targeting over $1 billion in revenue in 2024-2025 time frame. We want to target over 30% gross margin. Today, we are already at 34%, 35% time frame -- the level. So we want to maintain around 20% as our pack. So basically, I mean this model would imply about around $5 EPS. So in summary, we play in this very large power semi space with a lot of room to grow. We focus on the areas that fit well with our core competencies. And we are constantly expanding our core competencies as well that Stephen mentioned some of the areas, product portfolios and growth drivers already. So it was a growth story. And I mean, we -- our mission, as Stephen just stated, we want to grow, grow, grow. And so that's how -- in the business model, we aggressively grow our top line. And with a reasonable gross margin, we leverage down to the bottom line, EPS and growth and so on. So that's our business model, which served us well in the past, and we believe it will serve us well in the future. So with that, I would like to leave some time for some Q&A,.

All right. Thanks, Yifan and Stephen. I appreciate the presentation. We have about 5 minutes for Q&A. So we'll try to hit some of the high points here. As you think about, thematically speaking, broader semiconductor ecosystem wise. We've obviously -- we're in the middle of a pretty well-publicized supply chain sort of constrained environment, right? Can you talk a little bit about what you're seeing big picture, sort of your thoughts on how that is going to play out in the fuller ecosystem? And then specifically, given the great sort of flexibility you have in your manufacturing model, have you been able to manage that supply chain constrained environment?

Here, let me address that more broadly. Yes, we definitely are in the middle -- right in the middle of all the shortages. And we -- it's affecting us and it's affecting. It's affecting our peers also. At the same time, we've also seen kind of, at the same time, tremendous demand also for our products, too. And both kind of hitting us and hitting our peers at the same level, too. Our strategy, as I outlined earlier is 3-prong for our supply. We are working on in-house capability by investing in our own fab to increase both capacity but also capability. Just keep in mind that our fab is also the source of our R&D and our silicon technology. We also -- we have a joint venture that's also ongoing and has room to grow, and we're happy to keep that is one. And we're working on plans to grow that even further. And the third one is we're also working with our foundry partners with outside in order to have another source of wafers and supply to support our growth.

That's terrific. Thank you for that. As part of that topic, I think Alpha and Omega has benefited pretty greatly from sort of the outsized PC demand during the COVID, right? What -- I guess, what does the post-COVID demand look like for PC, for you, specifically? And I focus on this because it's an important sector for the business. But then longer term, how do you think the PC market is going to grow and evolve?

For us, I want to mention that computing has been one of our core markets before COVID and shelter in place. And our strategy there wasn't necessary to grow on system strength and system growth because normal in a normal year, these things grow by 2%, 3% year-over-year. Our plan was always on both share gain in growing in big customers, which has some more room to grow as well as BOM content increase. So with the Vcore, with the Type-C port. This is all adding to BOM content. And even with the next Intel platform that's going to bring back more power rails, which mean more driver MOSFETs and advanced MOSFETs. We do expect and -- that systems right now are at an all-time high, but will go through some correction to get back to some kind of normal type of seasonality. But I do also think that the drilling base for PCs has increased because of shelter in place. Many people -- our kids didn't have PCs before. Even here in the U.S., a lot of people didn't have the work from home remote working option. And not only here in the U.S. but also overseas, in developing countries. I think that base has grown. It's certainly not going to stay at this all-time high, but it will still be a core part of what people around the world are using.

Great. And just a couple of questions here with the last 2 minutes we have here just quickly, right? Obviously, automotive is a very attractive market today. A lot of focus around both from the investor side as well as the broader semiconductor community. Can you talk about your automotive strategy and initiative? Where are you on that today? I know you launched silicon carbide not too long ago. What does that look like today? Any update and progress on that front, too?

For us, automotive is definitely an area that we set our eyes on and we already started some things in motion to address the space. We know that this is a long-term path for us simply because in -- the design in times for automotive under the hood application vary typically 3 to 4 years. We are releasing more and more products to address automotive, including the wide band product that you mentioned. And this is especially addressing -- that product was addressing onboard charging and -- which is a perfect application for silicon carbide. We have great silicon carbide technology. It is taking -- it will take some time, again, to design in, but it is something that we will work towards. But I don't expect to have something to materialize in the next year or so. It will be a few years later before we see the true revenue.

Got it. And then just one quick question to sort of wrap up. We're out of time here, but you look to have about $200 million of cash on your balance sheet. Can you just talk quickly about your capital allocation strategy and what it looks like between M&A and shareholder returns or anything else? .

Sure. We do have about $200 million cash balance. But keep in mind, AOS and joint ventures are 2 separate entities. So AOS, the cash balance, it's in the $160-some million level. For us, our first priority of our capital allocation is to support our business. And at this point, we see plenty of opportunities in front of us. We -- last quarter, we just announced that we are expanding our Oregon fab with $100 million investment budget. So not only this expansion will give us additional capacity around -- about $70 million or so in annual revenue. But more importantly, it also enhance the capability for our next generation of new products. So this expansion is important for us. So in addition, we also invest in our R&D and sales and marketing effort structures. And so that's our first priority, to keep the business growing. Yes, we still have some stock repurchase money left in our plan. So our Board has been evaluating from time to time. Also, to me, I mean, I want to leave some cash and dry powders on our balance sheet. And then that's for any potential M&A. So that's our overall capital allocation strategy.

Fantastic. We do have a couple of minutes here. So I guess, just going down the P&L a little bit. We talked top line, a couple of the key initiatives there. Why don't we talk a little bit about the margin expansion opportunity, right? It looks like you've already had a fiscal quarter for '21. Your margin was about 30%, just the smidgen of 35%, up 740 basis points for the year. What are the margin opportunities going forward for you guys, margin expansion opportunities? And could Alpha and Omega ever become a, call it, 40% gross margin company?

Sure. We have been growing our gross margin in the last year or 2 tremendously. I mean, probably over 1,000 basis points. But if you compare to the year -- a couple of years ago. Yes, the -- in the early stage, the margin improvement was -- contributed mainly from the factory utilization perspective. So recently, in the last few quarters, mainly driven by the product mix, basically, we're selling more high-margin product because of the tight supply situation. We have way more backlog than we can ship. So we manage it in our product mix and also our new products, I mean, continue to roll out. Our new products carry at a higher margin. So I would expect that we can continue to gradually grow our gross margin. And I mean that's -- we want to continue to expand our new products and our application areas and even customer mix. We are more focusing on the key large and Tier 1 customers. So -- and I mean, I would expect that, yes, we'll have a continued margin expansion.

Terrific. All right. Gentlemen, with that, we are at time. So thank you both very much for participating and for Alpha and Omega being a part of our conference. We appreciate your time, and thanks to everybody online for paying attention. All right. Take care. Thanks, everybody.

Thank you.

Thank you.