8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________

FORM 8-K

_________________________________

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):  February 6, 2019

 _________________________________

Alpha and Omega Semiconductor Limited

(Exact name of registrant as specified in its charter)

Bermuda	001-34717	77-0553536
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

Clarendon House

2 Church Street

Hamilton HM 11

Bermuda

(Address of principal executive offices)

(408) 830-9742

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). Emerging growth company [   ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

Item 2.02.
Results of Operations and Financial Condition

The information in Item 2.02 of this Current Report, including the accompanying exhibits, is being furnished and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of Section 18. The information in Item 2.02 of this Current Report shall not be incorporated by reference into any registration statement or other document filed pursuant to the Securities Act of 1933, as amended, or the Exchange Act, regardless of any general incorporation language contained in such filing.

On February 6, 2019, Alpha and Omega Semiconductor Limited (the “Company”) issued a press release regarding its financial results for the fiscal second quarter of 2019 ended December 31, 2018.  A copy of the press release is furnished herewith as Exhibit 99.1 and is incorporated by reference herein.

Item 9.01
Financial Statements and Exhibits.

(d)   Exhibits.
99.1	Press Release dated February 6, 2019
99.2	Script of Prepared Remark for Earnings Call

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated: February 6, 2019

Alpha and Omega Semiconductor Limited
By:	/s/    Yifan Liang
Name:	Yifan Liang
Title:	Chief Financial Officer and Corporate Secretary

EX-99.1

Exhibit 99.1

Alpha and Omega Semiconductor Reports Financial Results for the Fiscal Second Quarter of 2019 Ended December 31, 2018

SUNNYVALE, Calif.--(BUSINESS WIRE)--February 6, 2019--Alpha and Omega Semiconductor Limited (“AOS”) (NASDAQ: AOSL), today reported financial results for the fiscal second quarter of 2019 ended December 31, 2018.

The results for the fiscal second quarter of 2019 ended December 31, 2018 were as follows:

GAAP Financial Comparison
Quarterly
(in millions, except percentage and per share data)
(unaudited)
	Three Months Ended
	December 31,			September 30,			December 31,
	2018			2018			2017
Revenue	$	114.9		$	115.1		$	103.9
Gross Margin	25.7		%	28.3		%	27.0		%
Operating Income (Loss)	$	(3.2	)	$	0.9		$	3.2
Net Income (Loss) Attributable to AOS	$	(1.5	)	$	2.4		$	6.8
Net Income (Loss) Per Share Attributable to AOS - Diluted	$	(0.06	)	$	0.10		$	0.27

Non-GAAP Financial Comparison
Quarterly
(in millions, except percentage and per share data)
(unaudited)
	Three Months Ended
	December 31,			September 30,			December 31,
	2018			2018			2017
Revenue	$	114.9		$	115.1		$	103.9
Non-GAAP Gross Margin	29.2		%	29.7		%	27.4		%
Non-GAAP Operating Income	$	8.5		$	9.7		$	7.2
Non-GAAP Net Income Attributable to AOS	$	7.2		$	8.8		$	8.1
Non-GAAP Net Income Per Share Attributable to AOS - Diluted	$	0.30		$	0.36		$	0.32

The non-GAAP financial measures in the schedule above and under the section “Financial Results for Fiscal Q2 Ended December 31, 2018” below exclude the effect of share-based compensation expenses in each of the periods presented, pre-production costs relating to the Chongqing Joint Venture and production ramp up costs for the quarter ended December 31, 2018 and September 30, 2018, as well as income tax benefit from tax reform for the quarter ended December 31, 2017. A detailed reconciliation of GAAP and non-GAAP financial measures is included at the end of this press release.

Financial Results for Fiscal Q2 Ended December 31, 2018

• Revenue was $114.9 million, an increase of 10.6% from the same quarter last year driven by continuous gains in market share of our products.
• Gross margin stayed healthy. GAAP gross margin was 25.7%, as compared to 27.0% from the same quarter last year, as we were ramping up production at Chongqing Joint Venture. Non-GAAP gross margin was 29.2%, an increase of 180 basis point year-over-year as we continued to migrate to higher margin products.
• Operating expenses increase reflected costs relating to the build-up of our digital power controller team and higher level of its R&D activities. GAAP operating expenses were $32.7 million. Non-GAAP operating expenses were $25.1 million, up 18% year-over-year.
• GAAP operating loss was $3.2 million. Non-GAAP operating income was $8.5 million, a 17.0% growth year-over-year led by higher revenue and better gross margin.
• GAAP loss per share attributable to AOS was $0.06. Non-GAAP earnings per share attributable to AOS was $0.30 compared to $0.32 in the same quarter a year ago.
• Consolidated operating cash flow was $13.1 million, compared to $9.6 million in the same quarter a year ago. Operating cash flow generated by AOS alone was $22.1 million, compared to $12.2 million in the same quarter a year ago.
• The Company closed the quarter with $146.6 million of cash and cash equivalents, including $53.0 million cash balance at the Chongqing Joint Venture.

“We are pleased with our strong execution on business results as well as our customer expansion. We achieved a year-over-year revenue increase of 10.6% representing the twelfth consecutive quarter of growth. Furthermore, we continued to generate healthy operating cash flow, which is funding our key growth initiatives,” stated Dr. Mike Chang, chairman and CEO of the company.

“Despite current uncertainty in the overall semiconductor market, we are very encouraged by our solid business pipeline driven by continuous design wins with new and existing customers. We remain committed to our near-term growth initiatives while relentlessly pushing ahead with our long-term business plans.”

Business Outlook for Fiscal Q3 Ending March 31, 2019

The following statements are based on management's current expectations. These statements are forward-looking, and actual results may differ materially. AOS undertakes no obligation to update these statements.

• Revenue is expected to be in the range of $109 million to $113 million.
• Gross margin is expected to be approximately 25.2% plus or minus 1%. Non-GAAP gross margin is expected to be approximately 28.5% plus or minus 1%. Non-GAAP gross margin excludes $0.5 million of estimated share-based compensation charge and $3.2 million of estimated production ramp-up costs relating to the Chongqing Joint Venture.
• Operating expenses are expected to be in the range of $32.3 million plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $25.2 million plus or minus $1 million. Both GAAP and non-GAAP operating expenses include $3.1 million to $3.3 million of estimated expenses relating to the development of our digital power controller business. Non-GAAP operating expenses exclude $2.7 million of estimated share-based compensation charge and $4.4 million of estimated pre-production expenses relating to the Chongqing Joint Venture.
• Tax expenses are expected to be in the range of $0.5 million to $0.7 million.
• Chongqing Joint Venture’s loss attributable to noncontrolling interest is expected to be around $4.8 million. On a non-GAAP basis, excluding estimated production ramp-up costs and pre-production expenses, this item is expected to be approximately $0.6 million.

Conference Call and Webcast

AOS plans to hold an investor teleconference and live webcast to discuss the financial results for the fiscal second quarter of 2019 ended December 31, 2018 today, February 6, 2019 at 2:00 p.m. PT / 5:00 p.m. ET. To participate in the live call, analysts and investors should dial 866-393-4306 (or 734-385-2616 if outside the U.S.). To access the live webcast and the subsequent replay of the conference call, which will be available for seven days after the live call, go to the "Events & Presentations" section of the company's investor relations website, http://investor.aosmd.com. In addition, a copy of the script of prepared remarks by CEO and CFO at the investor teleconference and webcast is available prior to the call at the Company’s investor relations website.

Forward-Looking Statements

This press release contains forward-looking statements that are based on current expectations, estimates, forecasts and projections of future performance based on management's judgment, beliefs, current trends, and anticipated product performance. These forward-looking statements include, without limitation, statements relating to expected growth rate, our product portfolios, projected amount of revenue, gross margin, operating income (loss), income tax expenses, net income (loss), noncontrolling interest, and share-based compensation expenses, non-GAAP gross margin, non-GAAP operating expenses, tax expenses, and non-GAAP loss attributable to noncontrolling interest, our ability and strategy to develop new products, including digital power controller products, the ability to expand our sales and market share, increase our capacity and achieve sustained growth and profitability, the pre-production and production phases of our Chongqing Joint Venture, the development of digital power business, partnership with global brands, the relationship with key customers, business pipeline from design wins, and other information under the section entitled “Business Outlook for Fiscal Q3 Ending March 31, 2019”. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. These factors include, but are not limited to, our ability to successfully operate our joint venture in China; our ability to develop and succeed in the digital power business; difficulties and challenges in executing our diversification strategy into different market segments; new tariffs on goods from China; ordering pattern from distributors and seasonality; our ability to introduce or develop new and enhanced products that achieve market acceptance; decline of PC markets; the actual product performance in volume production; the quality and reliability of our product, our ability to achieve design wins; the general business and economic conditions; the state of semiconductor industry and seasonality of our markets; our ability to maintain factory utilization at a desirable level, and other risks as described in our SEC filings, including our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 filed on August 23, 2018. Other unknown or unpredictable factors or underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in the forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. You should not place undue reliance on these forward-looking statements. All information provided in this press release is as of today's date, unless otherwise stated, and AOS undertakes no duty to update such information, except as required under applicable law.

Use of Non-GAAP Financial Measures

To supplement our unaudited consolidated financial statements presented on a basis consistent with U.S. GAAP, we disclose certain non-GAAP financial measures for our historical performance, including non-GAAP gross profit, gross margin, operating income (loss), net loss attributable to noncontrolling interest, net income (loss) and diluted earnings per share ("EPS"). These supplemental measures exclude share-based compensation expenses for all periods presented, pre-production expenses related to Chongqing Joint Venture and production ramp up costs for the quarter of December 31, 2018 and September 30, 2018, as well as income tax benefit from tax reform for the quarter ended December 31, 2017 in this press release. We also disclose certain non-GAAP financial measures in our guidance for the next quarter, including non-GAAP gross margin, operating expenses and loss attributable to noncontrolling interest. These forecast supplemental measures exclude estimated pre-production expenses and production ramp-up costs relating to our Chongqing Joint Venture and estimated share-based compensation expenses. We believe that these historical and forecast non-GAAP financial measures can provide useful information to both management and investors by excluding certain items and expenses that are not indicative of our core operating results or do not reflect our normal business operations, such as the joint venture pre-production expenses. In addition, our management uses non-GAAP measures to compare our performance relative to forecasts and to benchmark our performance externally against competitors. Our use of non-GAAP financial measures has certain limitations in that the non-GAAP financial measures we use may not be directly comparable to those reported by other companies. For example, the terms used in this press release, such as non-GAAP net income (loss) or non-GAAP operating expenses, do not have a standardized meaning. Other companies may use the same or similarly named measures, but exclude different items, which may not provide investors with a comparable view of our performance in relation to other companies. We seek to compensate for the limitation of our non-GAAP presentation by providing a detailed reconciliation of the non-GAAP financial measures to the most directly comparable U.S. GAAP measures both in the text in this press release and in the tables attached hereto. Investors are encouraged to review the related U.S. GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures.

About Alpha and Omega Semiconductor

Alpha and Omega Semiconductor Limited, or AOS, is a designer, developer and global supplier of a broad range of power semiconductors, including a wide portfolio of Power MOSFET, IGBT, IPM, Power IC products and Digital Power. AOS has developed extensive intellectual property and technical knowledge that encompasses the latest advancements in the power semiconductor industry, which enables us to introduce innovative products to address the increasingly complex power requirements of advanced electronics. AOS differentiates itself by integrating its Discrete and IC semiconductor process technology, product design, and advanced packaging know-how to develop high performance power management solutions. AOS's portfolio of products targets high-volume applications, including portable computers, flat panel TVs, LED lighting, smart phones, battery packs, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment. For more information, please visit www.aosmd.com.

The following unaudited consolidated financial statements are prepared in accordance with U.S. GAAP.

Alpha and Omega Semiconductor Limited
Condensed Consolidated Statements of Operations
(in thousands, except percentages and per share amounts)
(unaudited)
	Three Months Ended									Six Months Ended
	December 31,			September 30,			December 31,			December 31,			December 31,
	2018			2018			2017			2018			2017
Revenue	$	114,925		$	115,072		$	103,896		$	229,997		$	208,754
Cost of goods sold	85,423			82,461			75,814			167,884			153,142
Gross profit	29,502			32,611			28,082			62,113			55,612
Gross margin	25.7		%	28.3		%	27.0		%	27.0		%	26.6		%
Operating expenses:
Research and development	12,600			11,384			9,102			23,984			17,427
Selling, general and administrative	20,104			20,352			15,756			40,456			30,371
Total operating expenses	32,704			31,736			24,858			64,440			47,798
Operating income (loss)	(3,202		)	875			3,224			(2,327		)	7,814
Interest income and other income (loss), net	74			262			(160		)	336			(120		)
Interest expense	(1,706		)	(1,490		)	(14		)	(3,196		)	(31		)
Income (loss) before income taxes	(4,834		)	(353		)	3,050			(5,187		)	7,663
Income tax expense (benefit)	701			560			(2,072		)	1,261			(798		)
Net income (loss) including noncontrolling interest	(5,535		)	(913		)	5,122			(6,448		)	8,461
Net loss attributable to noncontrolling interest	(3,990		)	(3,329		)	(1,669		)	(7,319		)	(3,130		)
Net income (loss) attributable to Alpha and Omega Semiconductor Limited	$	(1,545	)	$	2,416		$	6,791		$	871		$	11,591
Net income (loss) per common share attributable to Alpha and Omega Semiconductor Limited
Basic	$	(0.06	)	$	0.10		$	0.28		$	0.04		$	0.48
Diluted	$	(0.06	)	$	0.10		$	0.27		$	0.04		$	0.46
Weighted average number of common shares attributable to Alpha and Omega Semiconductor Limited used to compute net income (loss) per share
Basic	23,887			23,844			23,925			23,865			23,973
Diluted	23,887			24,594			25,033			24,513			24,997

Alpha and Omega Semiconductor Limited
Condensed Consolidated Balance Sheets
(in thousands, except par value per share)
(unaudited)
	December 31, 2018			June 30, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	146,632		$	131,535
Restricted cash	255			189
Accounts receivable, net	33,858			33,755
Inventories	102,962			90,182
Other current assets	34,271			29,551
Total current assets	317,978			285,212
Property, plant and equipment, net	380,783			331,656
Intangible assets, net	16,939			16,591
Deferred income tax assets	4,944			4,892
Other long-term assets	13,544			28,698
Total assets	$	734,188		$	667,049
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	102,617		$	92,661
Accrued liabilities	59,013			49,841
Income taxes payable	1,769			2,211
Short-term debt	22,797			3,811
Deferred margin	—			1,665
Capital leases	7,429			4,491
Total current liabilities	193,625			154,680
Long-term debt	36,729			26,786
Income taxes payable - long-term	951			924
Deferred income tax liabilities	1,134			713
Capital leases - long-term	51,185			56,791
Other long-term liabilities	6,036			993
Total liabilities	289,660			240,887
Equity:
Preferred shares, par value $0.002 per share:
Authorized: 10,000 shares, issued and outstanding: none at December 31, 2018 and June 30, 2018	—			—
Common shares, par value $0.002 per share:
Authorized: 100,000 shares, issued and outstanding: 30,590 shares and 23,939 shares, respectively at December 31, 2018 and 30,400 shares and 23,860 shares, respectively at June 30, 2018	61			61
Treasury shares at cost, 6,651 shares at December 31, 2018 and 6,540 shares at June 30, 2018	(66,283		)	(64,790		)
Additional paid-in capital	227,818			220,244
Accumulated other comprehensive income (loss)	(2,842		)	440
Retained earnings	124,538			122,639
Total Alpha and Omega Semiconductor Limited shareholder's equity	283,292			278,594
Noncontrolling interest	161,236			147,568
Total equity	444,528			426,162
Total liabilities and equity	$	734,188		$	667,049

Supplemental disclosures of financial information:
(in thousands)
	As of December 31, 2018						As of June 30, 2018
	AOS		CQJV		Consolidated		AOS		CQJV		Consolidated
Cash and cash equivalents	$	93,623	$	53,009	$	146,632	$	88,269	$	43,266	$	131,535
Bank borrowings liabilities	$	45,218	$	72,706	$	117,924	$	30,876	$	60,416	$	91,292
Property, plant and equipment, net	$	149,245	$	231,538	$	380,783	$	141,575	$	190,081	$	331,656
Total assets	$	394,352	$	339,836	$	734,188	$	384,380	$	282,669	$	667,049
Total equity	$	306,739	$	137,789	$	444,528	$	293,609	$	132,553	$	426,162

	Three Months Ended December 31, 2018							Three Months Ended September 30, 2018							Three Months Ended December 31, 2017
	AOS		CQJV			Consolidated		AOS		CQJV			Consolidated		AOS		CQJV			Consolidated
Net cash provided by (used in) operating activities	$	22,149	$	(9,055	)	$	13,094	$	18,403	$	(416	)	$	17,987	$	12,161	$	(2,557	)	$	9,604
Purchase of property and equipment	$	8,002	$	8,451		$	16,453	$	15,216	$	34,272		$	49,488	$	16,074	$	20,405		$	36,479

Alpha and Omega Semiconductor Limited
Reconciliation of Condensed Consolidated GAAP Financial Measures to Non-GAAP Financial Measures
(in thousands, except percentages and per share data)
(unaudited)
	Three Months Ended									Six Months Ended
	December 31, 2018			September 30, 2018			December 31, 2017			December 31, 2018			December 31, 2017
GAAP gross profit	$	29,502		$	32,611		$	28,082		$	62,113		$	55,612
Share-based compensation	541			497			415			1,038			731
Production ramp up costs related to joint venture	3,516			1,117			—			4,633			—
Non-GAAP gross profit	$	33,559		$	34,225		$	28,497		$	67,784		$	56,343
Non-GAAP gross margin as a % of revenue	29.2		%	29.7		%	27.4		%	29.5		%	27.0		%
GAAP operating income (loss)	$	(3,202	)	$	875		$	3,224		$	(2,327	)	$	7,814
Share-based compensation	4,418			3,129			4,009			7,547			6,017
Pre-production expenses related to joint venture	3,734			4,627			—			8,361			—
Production ramp up costs related to joint venture	3,516			1,117			—			4,633			—
Non-GAAP operating income	$	8,466		$	9,748		$	7,233		$	18,214		$	13,831
Non-GAAP operating margin as a % of revenue	7.4		%	8.5		%	7.0		%	7.9		%	6.6		%
GAAP net income (loss) attributable to AOS	$	(1,545	)	$	2,416		$	6,791		$	871		$	11,591
Share-based compensation	4,418			3,129			4,009			7,547			6,017
Pre-production expenses related to joint venture	2,458			2,662			—			5,120			—
Production ramp up costs related to joint venture	1,912			582			—			2,494			—
Income tax benefit from tax reform	—			—			(2,690		)	—			(2,690		)
Non-GAAP net income attributable to AOS	$	7,243		$	8,789		$	8,110		$	16,032		$	14,918
Non-GAAP net margin attributable to AOS as a % of revenue	6.3		%	7.6		%	7.8		%	7.0		%	7.1		%
GAAP net income (loss) attributable to AOS	$	(1,545	)	$	2,416		$	6,791		$	871		$	11,591
Share-based compensation	4,418			3,129			4,009			7,547			6,017
Amortization and depreciation	8,279			7,870			7,408			16,149			14,386
Interest expense (income), net	1,664			1,424			(174		)	3,088			(215		)
Income tax expense (benefit)	701			560			(2,072		)	1,261			(798		)
EBITDAS	$	13,517		$	15,399		$	15,962		$	28,916		$	30,981
GAAP diluted net income (loss) per share attributable to AOS	$	(0.06	)	$	0.10		$	0.27		$	0.04		$	0.46
Share-based compensation	0.18			0.13			0.16			0.31			0.25
Pre-production expenses related to joint venture	0.10			0.11			—			0.21			—
Production ramp up costs related to joint venture	0.08			0.02			—			0.09			—
Income tax benefit from tax reform	—			—			(0.11		)	—			(0.11		)
Non-GAAP diluted net income per share attributable to AOS	$	0.30		$	0.36		$	0.32		$	0.65		$	0.60
Shares used to compute GAAP diluted net income (loss) per share	23,887			24,594			25,033			24,513			24,997
Shares used to compute Non-GAAP diluted net income per share	24,432			24,594			25,033			24,513			24,997

CONTACT:
Alpha and Omega Semiconductor Limited
Investor Relations
So-Yeon Jeong
408-789-3172
investors@aosmd.com

EX-99.2

Exhibit 99.2

Alpha and Omega Semiconductor Limited

Prepared Remarks of Investor Conference Call

for the Quarter Ended December 31, 2018

February 6, 2019

So-Yeon Jeong (Moderator)

Good afternoon, everyone, and welcome to the Alpha and Omega Semiconductor’s conference call for fiscal 2019 second quarter results.  This is So-Yeon Jeong, Investor Relations representative for the company.  With me today are Dr. Mike Chang, our CEO, and Yifan Liang, our CFO.  I would like to take this time to welcome Stephen Chang who is joining us on today’s call as a speaker. Stephen is the senior VP of Marketing, and he has been with the Company since 2004.

Yifan will begin the call with the review of financial results for the quarter.  Then, Mike will review the business highlights, followed by Stephen who will provide a detailed segment report. After that, Yifan will follow up with the guidance for the next quarter. Finally, we’ll reserve time for questions-and-answers.

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.

The earnings release was distributed by business wire today, February 6, 2019, after the market closed. The release is also posted on the company's website. Our earnings release and this presentation include certain non-GAAP financial measures.  We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release.

Page 1

We would like to remind you that during the course of this conference call, we will make certain forward-looking statements, including discussions of business outlook and financial projections.  These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations.  For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC.  We assume no obligations to update the information provided in today's call.

Now, I’ll turn the discussion over to Yifan, our CFO, to provide an overview of the second fiscal quarter financial results.

Yifan Liang (Chief Financial Officer)

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

Revenue for the December quarter was $114.9 million, essentially flat when compared to the prior quarter and up 10.6% from the same quarter last year.  We performed well on the top line and overcame market challenges as a result of growing momentum in our higher-value new products.

In terms of product mix, MOSFET revenue was $93.3 million, up 1.1% sequentially and up 9.6% year-over-year.  Power IC revenue was $19.4 million, flat from the prior quarter and up 23.0% from a year ago.  Assembly service revenue was $2.2 million as compared to $3.4 million for the prior quarter and $3.0 million for the same quarter last year.

Regarding the segment mix, Computing segment represented 48.5% of the total revenue, Consumer 16.2%, Power Supply and Industrial 19.4%, Communications 13.8%, Service 2.0%, and others 0.1%.

Non-GAAP gross margin for the December quarter was 29.2%, as compared to 29.7% in the prior quarter and 27.4% for the same quarter last year.  The sequential decrease of 50 basis points in non-GAAP gross margin was primarily impacted by the fluctuation of production and operation expenses.  Non-GAAP gross margin excluded $0.5 million of share-based compensation charge for the December quarter, as compared to $0.5 million for the prior quarter and $0.4 million for the same quarter last year.  Non-GAAP gross margin also excluded $3.5 million of production ramp-up costs related to the Chongqing Joint Venture for the December quarter, as compared to $1.1 million for the prior quarter.

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Non-GAAP operating expenses were $25.1 million, compared to $24.5 million for the prior quarter and $21.3 million for the same quarter last year.  Non-GAAP operating expenses excluded $3.9 million of share-based compensation charge, as compared to $2.6 million in the prior quarter and $3.6 million for the same quarter last year.   Non-GAAP operating expenses also excluded $3.7 million of pre-production expenses related to our Chongqing Joint Venture, as compared to $4.6 million in the prior quarter and $0 for the same quarter last year.  Both GAAP and Non-GAAP operating expenses included $3.1 million of digital power controller team expenses for the quarter, as compared to $2.7 million for the prior quarter and $0.4 million for the same quarter last year.  Our digital power controller team continues to work with customers in product designs and is making steady progress toward our product roadmap.

Income tax expense was $0.7 million for the quarter as compared to $0.6 million for the prior quarter, and a tax benefit of $2.1 million for the same quarter last year due to a one-time tax benefit of $2.7 million as a result of the U.S. tax reform.

Non-GAAP EPS attributable to AOS for the quarter was 30 cents per share as compared to 36 cents per share for the prior quarter and 32 cents per share for the same quarter last year.

AOS continued to generate positive operating cash flow. In the December quarter, we generated $22.1 million operating cash flow attributable to AOS, as compared to $18.4 million for the prior quarter, and $12.2 million for the same quarter last year.  The $22.1 million operating cash flow included $5.0 million customer deposit for securing more future shipment from us. Cash flow used in operations attributable to our Chongqing Joint Venture was $9.1 million for the December quarter, compared to $0.4 million for the prior quarter and $2.6 million for the same quarter last year.

EBITDAS for the December quarter was $13.5 million compared to $15.4 million for the prior quarter and $16.0 million for the same quarter last year.

Moving on to the balance sheet.

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We completed the December quarter with cash and cash equivalent balance of $146.6 million, including $53.0 million cash balance at our Chongqing Joint Venture (“JV Company”), as compared to $113.2 million at the end of last quarter, which included $32.0 million cash balance at the JV Company.  Our cash balance a year ago was $146.2 million, including $57.1 million at the JV Company.

During the quarter, our JV Company borrowed a working capital loan of approximately $14.5 million against future value-added tax refunds.  In addition, our joint venture partners contributed additional $24.0 million cash to the JV Company at the end of December 2018, which changed AOS ownership back to 51% and the joint venture partners’ ownership to 49%.

Net trade receivables were $33.9 million, as compared to $37.1 million at the end of last quarter and $24.3 million for the same quarter last year.  Day Sales Outstanding for the quarter was 23 days, compared to 27 days in the prior quarter.

Net inventory was $103.0 million at the quarter-end, up from $98.0 million last quarter and from $85.7 million in the prior year.  The inventory increase was primarily occurred at the JV Company as we are ramping up mass production of assembly and test and preparing inventories for the 12” fab.  Average days in inventory were 106 days for the quarter as compared to 103 days in the prior quarter.

Net Property, Plant and Equipment balance was $380.8 million, as compared to $368.5 million last quarter and $193.3 million last year.  Capital expenditures were $16.5 million for the quarter, including $8.5 million from the JV Company and $8.0 million from AOS.

Before I turn the call over to Mike, I’d like to say a few words on the update of our Chongqing Joint Venture.  We are pleased that both the assembly and test production ramp and 12” fab trial production were on track during the December quarter. We will continue to ramp up our assembly and test production during the March quarter to reach our targeted production level in the June quarter.  We expect to start the product sampling and customer qualification process with our 12” fab in the March 2019 quarter.

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

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Mike Chang (Chief Executive Officer)

Our solid December quarter results demonstrate the business momentum we continue to build.  The year-over-year revenue increase of 10.6% represents the twelfth consecutive quarter of growth.  Furthermore, we generated healthy operating cash flow, which is funding our key growth initiatives.

The soft markets that we had discussed last quarter, namely home appliances and smartphone applications in China, further weakened during the December quarter.  The weakness deteriorated in the March quarter as the high-end smartphone business conditions have changed recently. Our smartphone customers are reducing their inventories, which has led us to adjust our production plan accordingly. In addition, trade tensions are adding more headwind in the near term.

However, we are navigating these business environment challenges by our growing momentum in higher-value new products.  During the December quarter, we won key strategic customers in home appliances and smartphone applications, further expanded our market share in Computing, and increased share of BOM in high-end tablets.  Even after the adjustment, our demand is still ahead of capacity.  The Oregon fab ran at full capacity, and we look forward to ramping the Chongqing Joint Venture so we can better fulfill the demand.

Investors often ask us why we are winning and why customers like to work with AOS. Let me take a few minutes to highlight and reiterate our core competencies and the customer support philosophy that are transforming AOS into a preferred supplier in key markets.

Our core differentiator versus larger competitors is our highly effective R&D capability.  True, we have over 1,800 granted and pending worldwide patents, but our ability extends far beyond that.  We now have the critical building blocks of discretes, IC design, advanced packaging and silicon processing technology, enabling us to serve our customers with the best products in a wide range of applications.  We can deliver total solution components in many forms: MOSFETs, IGBTs and Power ICs.  Beyond the components, we are also addressing customers’ challenges through our deep system-level application know-how, thereby improving the efficiency of our customers’ overall systems.

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What sets us further apart is that we are nimble, agile, and eager. We go out of our way to make our customers’ products better.  That can involve working with them in the design process to speed development, creating a spec that’s more efficient, delivering supplies in critical times, or simply being pleasant to work with.  We always try to offer something above and beyond the ordinary, so that our customers see the significant value we bring to their businesses.

The combination of our technology competencies and customer support philosophy is one of the key traits that underpin our growth. I believe that the same trait will help us better endure current headwinds and manage the challenging times. This is a winning strategy across all phases of the cycle.

In summary, sound strategy and solid execution have enabled us to deliver healthy financial results, as well as build the foundation for the future with new customers and design programs.  We are further encouraged by the solid business pipeline driven by our proprietary solutions.  We remain focused on delivering on our multidimensional growth initiatives against the near-term market challenges while relentlessly pushing ahead with our long-term business plans. 

This concludes my prepared remarks.

As our business evolves in line with the fast-changing market, we think it is helpful to share with you first-hand insight from our Marketing department with a more direct and comprehensive segment update.  Stephen has his finger on the pulse of fast paced market dynamics and customer requirements. With that, I will turn the call over to Stephen for the segment report. 

Stephen Chang (Senior VP of Marketing)

Thank you, Mike, and good afternoon!  It's my pleasure to be on the call today to give you an update on our results across the major market segments.

Let me start with Computing. It represented 48.5% of total revenue in the December quarter. We posted a 10.8% sequential increase and a 26.0% growth year-over-year. We continued to grow our Computing business by expanding our BOM content in various computing applications.  Our high-value DrMOS Power IC products continued to gain market share into the Vcore application. We achieved major design wins in the latest graphics card platform and further diversified our business into the Add-In-Card market.  In addition, we expanded our footprint at our new global brand OEM to their tablet application.  We began to ship parts for these high-end tablets during the December quarter. 

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Please note that this particular tablet battery protection business was originally tied to the same customer name in our Communication segment when we gave guidance last quarter.  To better align our product categories with our business segments, we separated this new tablet business and moved it from the Communication segment to the Computing segment.

The CPU shortage in 2018 did not have a major impact on our business because processors were prioritized to support higher value big core systems. The shortage is expected to affect more PC applications in the March quarter, but it is expected to be resolved in the June quarter. Accordingly, we are adjusting our forecast of Computing business marginally down for the March quarter.

Now let’s discuss the Consumer segment, which was 16.2% of total revenue.  As expected, this segment declined 12.7% sequentially and 12.0% year-over-year.  The declines were due to seasonality in TV and weakness in Chinese home appliance markets. Despite the appliance weakness, our IGBT line continued to gain traction in design activities, drawing on the strength of our optimized devices that increase power efficiency in motor applications. IGBT grew more than 40% in calendar year 2018 and is on track for a similar increase in calendar year 2019. During the December quarter, we gained market share in refrigerator applications and won new customers in the Chinese home appliance market.  For TV applications, we secured design wins in premium TVs, which represent significantly higher BOM content for us. We are now ramping these TV products in the March quarter.  In this context, we allocated more capacity and expect healthy growth in the Consumer segment for the March quarter.

Next, let’s turn to the Power Supply and Industrial Segment. This segment was 19.4% of total revenue, up 2.1% sequentially and up 6.7% year-over-year. We see continued favorable momentum in our high-performance medium voltage product line. Quick charger and USB PD charger applications are moving to even higher power levels by increasing voltage and current.  This trend requires more efficient MOSFETs, thereby commanding higher selling prices while leaving fewer players in the market.  We believe we are well positioned to benefit from this trend and encouraged by the ongoing share gains of our medium voltage products.  Even with near-term softening in the smartphone market, we expect our quick charger business to expand in calendar year 2019. In accordance with our product mix management activity, we expect to see a slight decrease in this segment sequentially in the March quarter. 

Finally, let’s discuss the Communications segment, which was 13.8% of revenue in the December quarter.   Segment revenue dropped 11.0% sequentially and increased 9.4% year-over-year. Keep in mind that the new tablet battery protection business was moved into Computing segment, which impacted growth rates.  Without it, the December revenue came in line with our expectation. The weakness in global smartphone market is further deteriorating as smartphone makers are adjusting their inventories.During the December quarter, we partially offset the overall slowdown in Chinese smartphone demand with the ramp of production for the new global customer that we added in the September quarter. We also won an additional global smartphone OEM in the December quarter, which will gradually ramp in the March quarter.

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In parallel, we secured multiple design wins in enterprise telecom equipment for 5G. Our medium voltage products are specifically designed to deliver robust performance in telecom base stations.  We did not participate actively in the past 4G deployment, so we are very excited about the new opportunities ahead of us as the industry moves forward with the 5G ramp.

Demand for our telecom equipment products should grow in the March quarter, thus partially offsetting the smartphone headwinds combined with seasonal slowness. While we are confident that our Communication segment will rebound starting from the June quarter, we expect this segment to trough in the March quarter.

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

Yifan Liang: Guidance for the next quarter

As we look forward to the third quarter of fiscal year 2019, we expect:

• Revenue to be between $109 million and $113 million.

• Gross margin to be approximately 25.2% plus or minus 1%.  Non-GAAP gross margin is expected to be approximately 28.5% plus or minus 1%.  Non-GAAP gross margin excludes $0.5 million of estimated share-based compensation charge and $3.2 million of estimated production ramp-up costs relating to the Chongqing Joint Venture.

• Operating expenses to be in the range of $32.3 million plus or minus $1 million.  Non-GAAP operating expenses are expected to be in the range of $25.2 million plus or minus $1 million.  Both GAAP and non-GAAP operating expenses include $3.1 million to $3.3 million of estimated expenses relating to our digital power controller team.  Non-GAAP operating expenses exclude an estimated share-based compensation charge of approximately $2.7 million and estimated pre-production expenses relating to the joint venture of $4.4 million.

• Tax expense to be approximately $0.5 million to $0.7 million.

• Loss attributable to noncontrolling interest to be around $4.8 million.  On a non-GAAP basis, excluding estimated pre-production expenses and production ramp-up costs relating to the joint venture, this item is expected to be approximately $0.6 million.

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As part of our normal practice, we are not assuming any obligations to update this information.

With that, we will open up the floor for questioning.

Closing:

This concludes our earnings call today.  Thank you for your interest in AOS and we look forward to talking to you again next quarter.

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Forward Looking Statements

This script contains forward-looking statements that are based on current expectations, estimates, forecasts and projections of future performance based on management's judgment, beliefs, current trends, and anticipated product performance.  These forward looking statements include, without limitation, statements relating to projected amount of revenues, gross margin, operating expenses, operating income, tax expenses, net income, noncontrolling interest and share-based compensation expenses, pre-production expenses of the Chongqing Joint Venture, production ramp up costs and annual revenue and growth objectives; statements regarding market segments, global brand name customers, diversification of products and new customers; expectation with respect to improvement in profit; the expected trend on revenue and sales for each segment of our serviceable market; the progress of construction of manufacturing facility in our joint venture with Chongqing funds and timeline for production and operation; seasonality of market segments; opportunities in the 5G market; our ability and strategy to develop new products, expand our sales, revenue and profitability, growth in revenue and market share, including adoption of low-voltage and power IC products; expectation with respect to our digital power business; seasonality fluctuation in customer demand; our ability to manage supply constraints and the expectation with respect to capacity limitation; the execution of our business plan; the benefit of our share repurchase program; and other information regarding the future development of our business. Forward looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. These factors include, but are not limited to, our ability to successfully operate our joint venture in China; our ability to develop and succeed in the digital power business; difficulties and challenges in executing our diversification strategy into different market segments; new tariffs on goods from China; ordering pattern and seasonality; our ability to introduce or develop new and enhanced products that achieve market acceptance; decline of the PC industry and our ability to respond to such decline; the actual product performance in volume production, the quality and reliability of our product, our ability to achieve design wins, the general business and economic conditions, the state of semiconductor industry and seasonality of our markets, our ability to maintain factory utilization at a desirable level;  and other risks as described in our SEC filings, including our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 filed by AOS on August 23, 2018. Other unknown or unpredictable factors or underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in the forward-looking statements.  Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements.  You should not place undue reliance on these forward-looking statements.  All information provided in this press release is as of today's date, unless otherwise stated, and AOS undertakes no duty to update such information, except as required under applicable law.

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