Ladies and gentlemen, thank you for standing by, and welcome to the Alpha and Omega Semiconductor Reports Financial Results for the Fiscal Third Quarter of 2020. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today’s conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, So-Yeon Jeong. Thank you. Please go ahead, madam.

Good afternoon, everyone and welcome to Alpha and Omega Semiconductor’s conference call to discuss fiscal 2020 third quarter financial results. I’m So-Yeon Jeong, Investor Relations representative for the company.With me today are Dr. Mike Chang, our CEO; Yifan Liang, 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 business overview for the quarter, and Stephen will provide a detailed segment report. After that, Yifan will continue with a review of financial results for the quarter and guidance for the next quarter. Then we’ll have the question-and-answer session.The earnings release was distributed by Business Wire today, May 5th, 2020, after the close of the market. The release is also posted on the company’s website. Our earnings release and this presentation includes 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 remind you that during the conference call, we’ll 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 call over to our CEO, Mike, to provide an overview of our business and the impact of COVID-19 pandemic. Mike?

Thank you, So-Yeon. Welcome everyone, and thank you for joining us for our March quarter earnings call. I hope that all of you and your families are safe and healthy. As we navigate the unprecedented challenges of this COVID-19 pandemic, we think it is important to update you on our business operations and how we are staying resilient.Before we begin the usual review of quarterly results, I will take a few minutes to talk about the challenges and the risks we face and our actions to mitigate them. As I said on our last earnings call, our top priority is health and well-being of our employees and their families. In addition to the mandatory measures enacted by federal, state and regional agencies, we proactively implemented precautionary measures and established operating guidelines to safeguard our employees and their families.As part of our business continuity plan, we instituted a work-from-home policy before it was mandatory. This helped us mitigate the impact of sudden disruptions to our operations and ensured that our employees had full access to the connectivity infrastructure required to work remotely. We are thankful that all 4,000 of our employees are currently safe and well, and our global operations are running.In addition to safeguarding our employees, we are committed to fully supporting our customers during these trying times. When we discussed our outlook for March quarter back in early February, our guidance factored in an estimate of our lost production in China. As it turned out, production in China was severely disrupted during February.However, we were fortunate that we maintained partial production throughout the Lunar New Year holiday, during which we ran 24/7. When more people returned to work after the holiday, our employees went above and beyond their typical roles to ensure delivery of our products while complying with…

Thank you, Mike, and good afternoon. Let me start with Computing. It represented 44.2% of our total revenue in the March quarter. Revenue was down 2.9% sequentially and down 8.8% year-over-year.Starting in the second half of March, we saw a rise in demand for our Computing products, especially for notebook PCs. As a result of various stay-at-home orders by governments in response to the COVID-19 pandemic, PCs have become indispensable worldwide as more people are working from home and transitioning to distance learning. We don’t know how this demand picture will play out in the second half of this year, but at the moment, we are optimizing our production mix to satisfy this surge in demand for the next quarter.Our graphics card business has also been strong with both our high performance DrMOS and MOSFET Vcore solutions. Graphics cards have been selling well as demand in both PC and Gaming is up. We expect Computing to be strong in the June quarter, with mid-single-digit sequential growth.Now turning to the Consumer segment, it represented 18.7% of total revenue in the March quarter. Revenue decreased 5.3% sequentially and was down 2.9% year-over-year. Our TV business was seasonally down in the March quarter, but we now expect it to grow in the June quarter.We are very excited to share with you that AOS has achieved a strong design into an upcoming gaming system platform that is expected to launch later this year. Our content in this gaming system has multiple sockets, including DrMOS and MOSFETs to power processors as well as Type C smart load switches and TVS surge protection devices to protect the controller ports.Gaming systems feature higher resolutions and faster graphics, along with plenty of software features, while still needing to meet energy efficiency, temperature and safety requirements. AOS won this…

Thank you, Stephen. Good afternoon, everyone and thank you for joining us. Revenue for the March quarter was $106.9 million, down 9.3% from the prior quarter and down 2% from the same quarter last year. In terms of product mix, MOSFET revenue was $89.9 million, down 11.4% sequentially and flat year-over-year.Power IC revenue was $15.7 million, up 7.1% from the prior quarter and down 11% from a year ago. Assembly service revenue was $1.3 million as compared to $1.7 million last quarter and $1.5 million for the same quarter last year.Non-GAAP gross margin for the March quarter was $27.5 million – 27.5%, down from 28.3% for the prior quarter and up from 27% for the same quarter last year. Non-GAAP gross margin excluded $0.4 million of share-based compensation charge for the March quarter as compared to $0.4 million for the prior quarter and $0.5 million for the prior year period.Non-GAAP gross margin also excluded $6.6 million of production ramp-up costs relating to the Chongqing joint venture for the March quarter as compared to $8.5 million for the prior quarter and $3.4 million for the same quarter last year.Non-GAAP operating expenses for the March quarter were $25.9 million compared to $25.7 million for the prior quarter and $23.2 million for the same quarter last year. Non-GAAP operating expenses for the quarter excluded $2.5 million of share-based compensation charge, $2.1 million of legal costs related to the government investigation.And $0.6 million impairment charge related to an investment in a privately held start-up company as compared to $2.1 million of share-based compensation charge for the prior quarter and $2.6 million of share-based compensation charge and $3.6 million of pre-production expenses related to the joint venture company for the same quarter last year.Both GAAP and non-GAAP operating expenses included $3.1 million of digital power…

[Operator Instructions] Your first question comes from David Williams from Loop Capital. Please go ahead.

Hey. Good evening. Thanks for taking my question and congratulations on the guidance. That’s a very strong revenue. And if I kind of look back over the last couple of quarters or couple of years, that looks to be a fairly high level of revenue. Can you kind of talk a little bit about where the greatest level of demand is and maybe what’s your confidence level is in the guidance range?

Sure, David. This guidance for the June quarter primarily reflected the demand surge in the Computing and Gaming area that we are seeing right now. As you know some other areas that are not performing to the level that last year we saw. For example, in the smartphone area, some industrial areas, those areas are definitely down.For us, and you know with our long-term commitment in the Computing area, you know, this time, we saw a pretty strong surge in the month of March I would say started, we saw demand for our products, so that’s why we adjusted our production. And this time, our joint venture, secured joint venture actually provided us with flexibility of production and a much needed capacity to support this sudden surge in Computing demand. So I mean, we are managing this surge, and going after those business opportunities.But on the other hand, I want to be cautious about the outlook for the second half of the year. I mean, we don’t know whether or not this surge of demand will be short-term or can extend it for a while. So at this point, we’re very happy in the Chongqing Joint Venture and support us for much needed supply. I mean this – Mike, do you have anything you want to add?

Well, thank you Yifan and thank you, David for the question. Actually, we’re very thankful. You know thank god that in such a difficult time, we have the PC business surging. And maybe let me speak a little bit about the Chongqing JV, as Yifan mentioned about it.And also this time, we really got a benefit from this joint venture. As you know, our core business model is technology and volume all along. The technology will enable us to create new demand and also of course extend benefit more to newer customers. However, this new business will need capacity to support.And our Oregon fab, from very beginning, we knew – we know that it’s – the capacity is very limited. And indeed, since last year, it started to be full capacity. And this JV of course is coming in right time. Of course, it takes some time to bring up there and right now, we are very thankful that it’s coming to serve this surge and start to produce a good result to us. And we are very, very thankful.

Fantastic and thanks for the comment too. It’s very helpful. If we kind of think about how much flexibility, how much capacity came out of the JV this quarter, can you give us anything that maybe quantifies that or maybe to what level of revenue was provided by the JV?

Sure. I mean, at this point, I mean the – because of the uncertainties about the overall market demand, and then you know right now, it’s hard to say about the second half of the year right now. So now we are unable to determine when we can ramp up this Phase 1 to the target rate. Given that, but you know you can tell from our June quarter’s guidance, I mean these incremental revenues are all supported by our Chongqing Joint Venture.Over there, we still have capacity to support that you know even higher demand if this market that play out well you know in the second half of the year. Right now, there’s so much uncertainty and that you know our visibility beyond the June quarter is very limited. So that’s – we’ll closely monitor the market and then react accordingly. So that we’ll see.

Okay, fantastic.

Might I add a little bit more? Okay. Yes, indeed, we still have some capacity in the Chongqing JV to – for more business. However, our first phase plan is really is to reach the breakeven in the cash flow. So we do have the capacity, but not overly – not too much, in other words. And so not to support its near-term. Okay that’s the fact. Yeah, thank you.

Okay. So you feel comfortable that you can say a solid demand coming in the June quarter through the additional capacity in the JV?

Yes, yes.

Got it. And maybe if you have a sense of the channel inventory health, are you seeing any maybe pull-in orders or anything that would give you any concern in terms of inventory overstocking or just generally the health of the channel?

Okay, sure. Channel inventory right now, you know, we are at – in the mid-range of our target, like in two months to three months. And you know, last couple of quarters we’re at the low end of the channel inventory. This quarter, because of the better-than-expected production recovery, we actually benefited from this production recovery you know so that we can serve better on this demand surge. So right now, the channel – the incremental channel inventory was pretty much in the Computing area, so that – which is much-needed inventory for – provided to our customers for this June quarter.

Okay, fantastic. And just one more, if I can here and I’ll jump back in the queue. But you talked a little bit about the controller and the progress there. How helpful – sorry, I know you said in the past about the year end. Do you think there’s an opportunity to accelerate that and maybe drive that controller revenue up before the year end?

Hi. David, this is Stephen. Yeah. Let me comment on that. So actually, our digital power has been addressing two markets. One has been advanced computing, and the second one is telecom. And we’re actually pretty close to getting a design win actually on the advanced computing side at a graphics card maker.And that’s – it’s kind of going into more of a consumer side of that, but we’re pretty excited about this one. We’re hoping and expecting this to generate revenue closer to the end of the year once the project ramps up. So we expect that to come as near-term revenue.The other portions, I think we’re still in the development phase in terms of development, working with the customers. So we’re anticipating – it will still take some time to develop the revenue for the other portion of the business. So we expect – in a nutshell, we do expect some business in the short-term, but it will be kind of small, just to start out with, and with some more mild growth going into 2021.

Okay, great. Well, thanks again and best of luck on the quarter. Stay healthy, please.

Thank you.

Thank you.

Your next question comes from Tore Svanberg from Stifel.

Yes, thank you. A question on gross margin. So I do recognize the Oregon fab is full, but I was expecting a little bit more fall through from the $10 million to $15 million higher revenue in the June quarter. So is the lower gross margin just a pure function of the revenue mix?

Hi, Tore. This – you know, the higher revenue guidance for the June quarter, the margin, you know, we did not increase much over there. A couple of things. So one is, you know that we baked in some ASP erosion, and you know, we would expect at the economic recession time, you know there’s you know some other areas that you know we would expect some price erosion.Another thing is, you know this incremental revenue is pretty much supported by our joint venture. So joint venture by providing pro forma, the production ramp-up cost, and actually, you know, you can tell that the margin benefit will be reflected in the production ramp-up cost reduction. So then you know in the March quarter, with pro forma of the out $6.5 million or so. For the June quarter, we’re expecting you know there about a $5 million production ramp-up cost from the joint venture. So that will be the agenda of it.

That’s very helpful. And you mentioned a $50 million loan. Could you elaborate a little bit on the terms of that loan? And as far as the usage of that money, is that going to go down to pay down some of the JV debt or is that going to be spent more on CapEx as you continue to ramp up Phase 1 and eventually Phase 2?

This $50 million of loans are for CapEx and for working capital. So the terms are pretty much similar to our – to their previous loans, is in the five years in a range and similar interest rate and a little bit down, actually, better rate than before. This will be used for remaining payment for the CapEx and for the Phase 1 and for some working capital for the company.

Great and do you have a CapEx number for the JV for this year?

CapEx, you mean for this fiscal year, that will be the June quarter, I would think then a little bit higher than this March quarter’s $3 million or $4 million CapEx payment. That just depends on the timing of the payment. So there are some remaining payment then they need to make after the equipment got installed and then the dry run and then for a period of time and then everything checked out and then you know they wouldn’t make the last payment for those equipment.

That’s very helpful. Thank you.

Thank you.

[Operator Instructions] Your next question comes from Craig Ellis from B. Riley FBR.

Yeah. Thanks for taking the question, team and congratulations on doing such a good job in the March quarter, navigating a real volatile environment. I wanted to start just with a couple of clarifications. The first one with respect to the prior target for the JV ramp, we had been looking for a revenue ramp to $37.5 million in the September quarter and I understand we’ve got a much different environment.But what I wanted to dig into is, is the reason that the company is uncomfortable sticking with that guidance, because the design wins aren’t there to get to the $37.5 million or the design wins are there, but maybe the unit volumes on those wins is now different than you thought or is it that those two things are fine and maybe you’re just concerned about parts from other suppliers that would go in kits that are related to the design wins that you have?Maybe it’s other things, but I’m just trying to understand what the specific factors are and where you are overall relative to the design wins that are needed to get to a $37.5 million run rate for that facility?

Okay. Sure, Craig. This is primarily because of the overall market demand. And I mean, at this point, it’s so volatile. I mean this is kind of you know in the March quarter, we saw this market, the shift, I mean, like a roller coaster and then you know with the mobile market demand down so dramatically. And then later on you know of the quarter, you know, we saw a surge in demand for Computing. I mean all those things in the end and also there’s a lot of you know uncertainties related to the pandemic, and we don’t know how long it will last.And then, I mean, those recessions and the – for sure, we’re in recession right now. But then how long and how severe, we don’t know. And then even after this reopening of you know, cities and economy, I mean, how people are going to behave and react, and then you know that also another things to be seen, whether or not and then there’s a second wave of COVID-19 down the road in winter time or you know when does vaccine will be out. And then, I mean, a lot of unknowns are going to impact on the overall global demand for our products.So at this point, I mean, I’m just unable to give you that guidance you know when we can ramp up to the target run rate of Phase 1. We’ll closely monitor it, and then we will provide further guidance when we gain more visibility.

Okay. Going back to a clarification on gross margin. Tore fleshed out the fiscal fourth quarter. But on the third quarter, it was about 150 basis points better than I expected. So what allowed the company to perform so well? And obviously, we had reduced estimates inter quarter, just given the choppy environment. But were there any incremental positives in the quarter that allowed you to offset some of what was likely incremental COGS costs in a COVID environment?

Sure. In the March quarter, yes, our gross margin came in higher than our guidance. It was primarily because of our production recovery was better than we expected. And I mean, we expected more decline you know in the production level. So I got to give credit to our employees. And then I mean, especially in China, you know, they fought through this lockdowns and then the shortage of labor for pretty much most of the time, February and March.So with the limited workforce over there, and then they produced a much higher output for us through overtime, through commitment and you know really demonstrated an ownership over there. And you know given the situations – not only the shortage of labor, but also you know the disruption of logistics, you know some – a lot of shortage on some materials or even clean room masks. I mean, this you know for a while, they were down to a pretty low level. I mean they fought through it. So that contributed to our overall gross margin and then, I mean, performed better than we expected for the March.

Okay, got it. And then moving to the consumer –

Let me take you back to the – this is Mike Chang, if you don’t mind. Yeah. Let me maybe add a few words about the Chongqing JV of the forecast. Yes, facing this recession and the unknown in the COVID-19 impact, we – I think we should be more conservative. But however, I’d like to point out the progress in the loading – in the Chongqing JV is progressively accordingly and improving. So beyond June, really, we cannot comment anything. We cannot forecast anything. But at this moment, I’m very much pleased by the performance. Thank you.

Okay, got it. Thanks for that Mike. Moving on to consumers’ gaming ramps. So it looks like gaming is accounting for about half of the sequential growth, if I’ve got the bottoms-up modeling right in the June quarter. So twofold question. When you – you know once we exit the June quarter, where will we be with respect to that ramp? Is there further growth coming in September? Or will you really realize all the benefits of the gaming design win in the June quarter?And then maybe going back and connecting in with Tore’s question, since this is half the sequential growth and given the decline in gross margins, would it be fair to assume that this design win, is a high volume design win, it’s coming in below corporate average?

Yeah. This is Stephen. Let me comment on the Gaming thing. We’re pretty excited to be able to share this, because we are winning on multiple sockets in this Gaming system. And as Gaming systems go, definitely, they’re preparing for a pre-production at this point. The system is not released yet. It’s going to release in the second half of this year. Hopefully, you know there’s no delays or anything, but we don’t see anything as of yet.We do expect our business with this to continue to grow, but it all definitely depends on the customer’s own ramp-up rate. I think you know whenever these things launch, there’s usually a big push, especially they’re trying to do it for Christmas. And then after that, they see how acceptance is, and then they push further. But you know, we believe that this would be a pretty good growth area for us. So we’re excited about it, but we’re also cautious, especially given this coronavirus time.

And do you have any sense for what your share is with that sockets fee?

The share, I mean, our share in there or is that what you’re asking?

Yeah. Are you self-sourcing to the sockets that you’re in or do you think you have the majority share?

I think it depends on what socket it is. Some things we have a better share. Others, we don’t. The good thing is we actually have quite a few number of sockets inside, so it depends which one here you’re talking about. But none of them are sole-sourced, and they always want multiple sources for these systems.

Okay, great. And then just connecting to the end markets. So, some fancy footwork to realize the strength in PCs. The question as we look ahead, can PCs get back to some of the highs that we had seen last year, with the strength that you’re seeing near-term team? And then secondly, you know, we went into this year thinking that comms was going to be the sequential or the year-on-year growth driver, and we were allocating capacity toward comms.Clearly, you’ve got some unit headwinds. But as you look to the back half of the calendar year, in the design win funnel that you have, do you feel like from stable revenues in June, do you have the opportunity to really grow that business in the back half or would we really look to calendar ‘21 before we’re able to see significant growth of current revenue levels?

Yeah and let me answer that one too. So regarding PCs, definitely we’re very excited about the growth in PCs. Normally in a regular year, Q1 typically is a down season. So actually to – where we’re at, only dropping you know, just a few percentage points in the first quarter is a pretty big unusual type of thing for us.So we do expect computing to continue to be strong. We’ve – all along we’ve always stuck to PCs as one of our core areas of business, and we’ll continue to do that. And we continue to also grow there into higher content with power ICs and DrMOS. So we do expect to continue to maintain and grow our foothold in PC. Of course, this is all pending the overall market. We don’t know how long you know this current surge is going to last for, but we believe our position at least in what’s there is good.Regarding communications, what remains to be seen is how the peak smartphone season is going to be in this coming September quarter and December quarter. And we know that in – at least in the March quarter, overall phone shipments were actually you know, we’re actually down quite sharply.But actually, you know our battery protection business was also down, but actually it wasn’t as down as compared to the overall market. You know we’re still in some pretty good positions at the global phone makers. But of course, we’re you know dependent upon their own shipments to see how they’ll be doing in this upcoming peak season. So yes, I think there is possibility for growth, but there’s also a lot of dynamics that we have to account for as well. So we hesitate to just put a firm number into the second half. But yes, potentially, we could be growing and going into the second half even further.

And just to further clarify that last point, Stephen. Can you see the interface of the design wins that you have? For example, is it visible to you whether you’re designed into a 5G or a 4G phone in the back half of the year, because obviously the unit dynamics are going to be dramatically different? Half-on-half, 5G phones are likely to be up 2 to 2.5x in the first half, but 4G phones will be nowhere near, that is good. So, any visibility on whether you’re in 4G or 5G?

We don’t necessarily always know which model were design-ins until the things get finally released, but you know, we feel pretty confident about where we’re at position-wise, at least each of the phone makers that we’ve been in. So design-in-wise, I think we’re in a good position in terms of you know what the actual volumes would be of course, we don’t know what that’s – what’s going to happen there until it happens. But right now we are preparing you know preparing for a ramp we don’t know how strong of a ramp it would be.

Okay, great. Thanks for all the help. Good luck, team.

Thanks.

Thank you.

There are no further questions. At this time, I would turn the call back over to the presenters.

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

Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.