Good day, ladies and gentlemen, and welcome to the Alpha and Omega Semiconductor Fiscal Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today's conference, Ms. So-Yeon Jeong. You may begin.

Thank you. Good afternoon, everyone, and welcome to the Alpha and Omega Semiconductor's conference call for fiscal 2018 third quarter financial 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. 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 Web-site at www.aosmd.com. The earnings release was distributed by business wire today, May 2, 2018, after the market closed. The release is also posted on the Company's Web-site. Our earnings release and this presentation include certain non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. We would like to remind you that during the course of this conference call, we will make forward-looking statements, including discussions of business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligations to update the information provided in today's call. Now, I'll turn the discussion over to our CFO to provide an overview of the third fiscal quarter financial results. Yifan?

Thank you, So-Yeon. Good afternoon and thank you for joining us. To begin, I will discuss financial results for the quarter. Then I'll turn it over to Mike, our CEO, who will review the Company's business highlights and I will follow up with our guidance for the next quarter. Finally, we will reserve time for questions and answers. Revenue for the March quarter was $102.9 million, down 1% sequentially and up 10.3% year-over-year. Our new products continued to show strong momentum during our typically lowest season. In terms of product mix, MOSFET revenue was $84 million, down 1.3% from the prior quarter and up 18.6% from the same quarter last year. Power IC revenue was $15.7 million, down 0.5% from the prior quarter and down 18.8% from the same quarter last year. Service revenue was $3.2 million, as compared to $3 million for the prior quarter and $3.2 million from the same quarter last year. In terms of segment mix, this quarter's Computing segment represented 41.3% of the total revenue, Consumer 20.7%, Power Supply and Industrial 21.2%, Communications 13.5%, Service 3.1%, and others 0.2%. Non-GAAP gross margin was 26.8% for the March quarter, as compared to 27.4% in the prior quarter and 24.6% for the same quarter last year. The decrease in non-GAAP gross margin quarter-over-quarter was mainly driven by the lower factory utilization due to the Chinese New Year holiday. Non-GAAP gross margin excluded $0.4 million of share-based compensation charge for the March quarter, as compared to $0.4 million in the prior quarter and $0.2 million for the same quarter last year. Non-GAAP operating expenses for the quarter were $21.7 million, compared to $21.3 million for the prior quarter and $18.2 million for the same quarter last year. Non-GAAP operating expenses excluded $2.1 million of share-based compensation charge, as…

Thank you, Yifan. I am delighted to report solid performance for the March 2018 quarter. All of the key financial metrics exceeded the mid points of our guidance range, reflecting year-over-year growth of 10.3% in revenue, 220 basis points in non-GAAP gross margin, and 9.5% in non-GAAP earnings per share. We are consistently delivering the results that underscore our fine execution on our strategy in both long-term initiatives as well as the core business plans. Our core business momentum continues to gain robust traction. I will elaborate on two factors that contribute to our strength. First, specific to AOS, we are now clearly seeing the benefits of the market-driven R&D investments that we started several years ago. Our design pipeline that represents future revenue potential for multiple years has been growing steadfastly, as demonstrated by the healthy revenue growth in the recent years. We are pleased that our design ins and design wins are now at the highest level in the Company's history and continue to scale. Perhaps more exciting, some of the earlier investments we made are scheduled to ramp up in the second half of this calendar year. The scaling of new products demonstrated the competitiveness of our technology and we believe that it will bring in meaningful revenue contribution and profitability to AOS. We are also strategically executing our capacity schedule to accommodate the planned shipments. Second, from the market standpoint, we are increasingly encouraged about developing trends that are driving sustainable growth in our markets. The computing industry has expanded to applications beyond personal computing to include artificial intelligence, big data, and Internet of Things. We have seen generation after generation of new mobile devices with increased functionalities and power requirements. The next level of networking offers a new world of connectivity to drive the digital…

Thank you, Mike. As we look forward to the fourth quarter of fiscal year 2018, revenue is expected to be in the range of $106 million to $110 million. Gross margin is expected to be approximately 26.5%, plus or minus 1%. Non-GAAP gross margin is expected to be approximately 26.8%, plus or minus 1%. Non-GAAP gross margin excludes $0.3 million of estimated share-based compensation charge. Operating expenses are expected to be in the range of $29.3 million, plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $23 million, plus or minus $1 million. Both GAAP and non-GAAP operating expenses include $1.6 million to $1.8 million of estimated expenses relating to the development of our digital power team. Non-GAAP operating expenses exclude an estimated share-based compensation charge of approximately $2.3 million and estimated pre-production expenses relating to the Chongqing joint venture of $4 million. Tax expenses are expected to be in the range of $1 million to $1.2 million. Loss attributable to noncontrolling interest is expected to be around $2.6 million. On a non-GAAP basis, excluding the pre-production expenses of the joint venture, this item is expected to be approximately $0.5 million. The $2.1 million difference is due to the exclusion of estimated pre-production expenses in non-GAAP operating expenses. As per our regular practice, we are not assuming any obligations to update this information. With that, we will open up the floor for questioning. Operator?

[Operator Instructions] Our first question comes from the line of Jeremy Kwan from Stifel. Your line is now open.

Congrats on a solid quarter. A couple of questions, I guess first, if we can take a look at the capacity increase that you have for your Oregon fab, can you give us a sense of how much headroom you currently have and how much you expect to have by the second half of calendar 2018, maybe in terms of either utilization or in terms of like quarterly run rate?

Okay, sure. Utilization is up to the highest level for sure now because [indiscernible] short of supply. In terms of the CapEx expansion, the June quarter we see a little bit [indiscernible] that which is reflected in our guidance, so from our March quarter's revenue to our guidance range. So, you can see that's pretty much the contribution from the addition on CapEx expansion. In terms of second half of the year, we would expect a similar scale of the increase in the September quarter and onward.

And just to follow up on that, so does that mean the CapEx spending, you are planning to spend for the remaining of the year, is that to keep pace with the [indiscernible] growth?

The CapEx expenses [indiscernible] right now the machines are coming in. So, some of them installed already, so we can benefit some in the June quarter, and during the June quarter we are expecting additional machines continue to come in and then it will see some additional benefit in the September quarter. So, in terms of CapEx payment, I mean March quarter, yes, we paid, and the June quarter we need to pay similar level as March quarter. And then I would expect the cash payment starting from the September may start decreasing. I mean, that's just toward the tail-end of this expansion.

Great. And I guess in terms of the impact to gross margin, at least from the Chongqing fab, as you ramp the 12-inch capacity there, how do you see that impacting your current gross margins?

Right now it's too early to give guidance on the Chongqing fab ramp. We will provide more guidance in the later quarters when we are close to the trial production and ramp-up timeframe. But overall [indiscernible], we are going to at initial ramp-up periods we will carve out some production ramp cost. I mean, if I turn on the whole 12-inch fab and if I only produce a couple of hundred wafers, I still have the full depreciation charge. But now we are going to a pro forma out of some production ramp cost until I won't say for too long time but first few quarters in that, we may do it.

Very good. Thank you very much.

Our next question comes from the line of Edgar Roesch from Sidoti. Your line is now open.

Nice quarter. I did want to ask you about transferring existing packaging and test equipment to the joint venture. Is it safe to say that that was sort of a one-for-one transition and that you didn't have any change in capacity for those operations when you made that switchover or was there some sort of pickup that I'm not understanding?

Overall for the assembly test piece, actually we started transferring a little bit machines in the March quarter already for them to set up a production line to do the internal qualification. In the June quarter and September quarter, even the December quarter, throughout this year we are going to transfer whatever on machines. So, we contributed to the joint venture. Right now initially it isn't one to one on movement from our Shanghai facility to the joint venture. During this process, I guess we are not going to move out equipment at the same time, so that would impact on our delivery. So, we're going to carefully plan and map it out and then we would move them batch by batch.

Okay. So, on the initial transfer, no change in capacity for those operations. And then one question on your operating expenses, you are trending towards around maybe $87 million non-GAAP operating expenses this year, which if that occurred it would be up about 20%. Do you think the fiscal 2019 number might be something below 5% increase because you have absorbed a lot of increases even on a non-GAAP basis, would you expect the next fiscal year it starts to flatten a little bit or there is still so much investment to come?

Right now as Mike mentioned, we are seeing good business opportunities in front of us. I mean we are investing [indiscernible] according with our business growth potential. I mean we're not going to invest in that if we don't see the business opportunities. I would expect that we'll continue to invest some, and then as far as percentage of the increase, it may come down a little bit. That's my current feeling. So, I mean maybe next quarter we'll give more guidance and then when we end the fiscal year 2018.

Okay. So, it seems pretty safe to say that 2x the revenue increase that we are kind of in the midst of this fiscal year would presumably flatten out a little bit even if you continue to see the opportunities that you have?

Revenues and growth right now is more like hinged by the overall capacity. So, in the June quarter we expand some and then we will see additional benefit in the September quarter. And then starting next calendar year, we would expect our joint venture started then taking over to provide capacity supply to our [indiscernible] of growth.

Okay, great. And I know it's a little bit early, but is there any reason to think that your joint venture margin structure wouldn't at least be on par with AOSL ex the joint venture? I mean it seems like you should have at least sort of on par margin structure. If not, maybe a little bit better because of the cost advantages. Is that fair to say?

Yes, I agree. I mean but in the initial ramp-up period, yes, and then we may see some cost increase. But I will say we plan to perform it out before the first and the initial quarters.

Okay. And there is no sort of transfer pricing issues that would materially deviate, you don't foresee that at this point?

Any related party transactions wouldn't subject to a transfer pricing, and that's a given. But overall, no matter which countries and nowadays the overall principle is based on market fair price, so I mean that's the overarching principle.

Okay, that helps a lot. Thanks for the answers. Have a good afternoon.

Our next question comes from the line of Craig Ellis from B. Riley. Your line is now open.

This is actually [indiscernible] calling in for Craig. First, I wanted to dive a little deeper on the end markets. As we look at where you guys participate with respect to PCs [indiscernible] and more specifically Power Supply and Industrial segment, can you reconcile for us where you are seeing growth that is in line or above kind of the high single-digit rates that you have previously stated as far as your targets?

Okay, sure. In terms of segment and I mean the full calendar year 2018, we would expect our Communication segment and the Power Supply segment are in the double digit in the growth range. Particularly for the Power Supply and Industrial segment, we actually saw in the March quarter quick charging area, some high voltage areas, as we rolled out our new platform [indiscernible] recently. So, we would expect some pickup from there providing healthy growth for the calendar year 2018. In the Communications segment, we continue to see strong momentum in our battery pack and management area and also in the telecom, those areas, because of our good, strong mid-voltage product lines. So, those two segments are the major high growth areas. In the Computing area, right now we are seeing strong position from our new product platform. So, in the Skylake and Kabylake in the areas, we have picked up some share gains that in the high value on [indiscernible] such as Vcore and [indiscernible] cars, those areas. So, we continue to believe that we can further gain market share growth this segment. So, I will say probably in the mid to high single-digit in the growth for this calendar year 2018. And then lastly, the consumers, and I mean this segment, as Mike commented on, this segment is subject to more like supply constraints because some of the products are from our outside foundries. So, in this area, they were more like in the allocation mode. Within this segment, we see a bright spot for our IGBT product lines. I mean last calendar year, IGBT product line revenue crossed $10 million mark. Then we would expect this year continue to grow in IGBT product lines as we tend to see a lot of design wins now started until materializing.

Great. That's very helpful. And then going back to your commentary on the digital power team, you said that that OpEx inflection should – there should be an OpEx inflection only for the next quarter or will that continue for the balance of the calendar year?

As of the end of March we hired about a half of the team that we plan to build. In the June quarter we will continue to reporting on [indiscernible]. We estimate that about we can fill up to two-third of the team. So, for the second half of the year, yes, we will continue to hire to build up this digital power team. This is very good opportunity for us and we have been commercially proven in the technologies and we have the broad customer base and then there are some market opportunities pretty sizable. So, we will continue to invest in this product line.

Great. Thank you.

[Operator Instructions] I'm showing no further questions at this time.

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

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.