Q2 2024 Alpha and Omega Semiconductor Ltd Earnings Call

Operator: www. EllisMedia.com Good afternoon, ladies and gentlemen. Thank you for joining today's Alpha and Omega Semiconductor Fiscal Q2 2024 Earnings Call. My name is Tia, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone. I would now like to pass the call over to your host, Stephen Pellow.

Okay.

Okay.

Okay.

Good afternoon, ladies and gentlemen, thank you for joining today's alpha and Omega semiconductor fiscal Q2, 'twenty 'twenty four earnings call.

My name is Tia and I'll be your moderator for today's call.

All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.

I would like to ask a question. Please press star one on your telephone keypad.

I would now like to pass the call over to your host EBIT Palo. Please proceed.

Stephen Chunping Chang: Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2024 second quarter financial results. I'm Stephen Palaio, Investor Relations Representative for AOS. With me today are Stephen Chang, our CEO, and Yifan Liang, our CFO. This call is being recorded and broadcast live over the web.

Good afternoon, everyone and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2024 second quarter financial results I'm, Steven Pelayo Investor Relations representative for AOS with me today are Steven Chang, our CEO and <unk> Liang our CFO. This call is being recorded and broadcast.

First live over the web.

Stephen Chunping Chang: A replay will be available for seven days following the call via a link in the Investor Relations section of our website. Our call today will proceed as follows. Stephen will begin business updates, including strategic highlights and a detailed segment report. After that, Yifan will review the financial results and provide guidance for the March quarter. Finally, we will have the Q&A session. The earnings release was distributed over the wire today, February 6, 2024, after the market closed. The release is also posted on the company's website. Our earnings release and this presentation include 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 GAAP measures.

Replay will be available for seven days following the call via the link in the Investor Relations section of our website.

Our call will proceed as follows today, Steven will begin business updates, including strategic highlights and a detailed segment report after that Yvonne will review the financial results and provide guidance for the March quarter. Finally, we will have the Q&A session.

The earnings release was distributed over the wire today February six 2024 after the market close. The release is also posted on the company's website. Our earnings release and this presentation include 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. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release, we remind you that during this conference call. We will make certain forward looking statements, including discussions of the business outlook and financial projections.

Stephen Chunping Chang: A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of the business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligation to update the information provided in today's call. Now, I will turn the call over to our CEO, Stephen Chang. Stephen?

Forward looking statements are based on management's current expectations involve risks and uncertainties that could cause our actual results to differ materially.

More detailed description of these risks and uncertainties. Please refer to our recent and subsequent filings with the SEC, we assume no obligation to update the information provided in today's call now I will turn the call over to our CEO Steven Chang Steven.

Thank you Steve welcome to Alpha and Omega fiscal Q2 earnings call I will begin with a high level overview of our results and then jump into the segment details.

Stephen Chunping Chang: Thank you, Steve. Welcome to Alpha and Omega's fiscal Q2 earnings call. I will begin with a high-level overview of our results and then jump into the segments. We delivered fiscal Q2 results in line with our guidance. Revenue was $165.3 million, non-GAF gross margin was 28%, and non-GAF EPS was $24.7 million.

We delivered fiscal Q2 results in line with our guidance.

<unk> was $165 3 million.

non-GAAP gross margin was 28% and non-GAAP EPS was <unk> 24 cents.

Stephen Chunping Chang: The bottom line finished at the high end of our guidance, primarily driven by overall operational control. These results were driven by continued recovery across notebooks, desktop computing, and smart phones, offset by ongoing inventory correction in gaming, and weak demand for quick chargers and solar. Looking back on the full calendar year 2023, it was undeniably a challenging period for our entire industry. AOS revenue experienced a significant decline of 19% following a record-breaking 2022.

The bottom line finish at the high end of our guidance, primarily driven by overall operational control.

These results were driven by continued recovery across notebooks desktop computing and smartphones offset by ongoing inventory correction in gaming and weak demand for quick Chargers and solar.

Looking back on a full calendar year 2023, it was undeniably a challenging period for our entire industry.

POS revenue experienced a significant decline of 19% following a record breaking 2022.

Stephen Chunping Chang: This drop was primarily due to the inventory correction in PCs and smartphones that commenced in late 2022 and broader macro headwinds. In the second half of calendar 2023, our performance was further hampered by inventory corrections and slowdowns in demand across other segments. While revenue declined in calendar 2023, I think it's important to recognize that the challenges resulting from the post-COVID semiconductor cycle are nearing completion, and we are approaching the recovery phase of the next cycle. Over our 23-year history, we have navigated many boom and bust cycles in this industry, emerging each time stronger and more resilient on the other side. Looking forward, we expect stabilization across most of our business lines, notwithstanding normal seasonality. While near-term visibility is limited, we remain cautiously optimistic about a broader market rebound in the second half of calendar 2024.

This drop was primarily due to the inventory correction in Pcs and smartphones that commenced in late 2022 and broader macro headwinds.

In the second half of calendar 2023, our performance was further hampered by inventory corrections and slowdowns in demand across other segments.

While revenue declined in calendar 2023, I think it's important to recognize the challenges, resulting from the post COVID-19 semiconductor cycle are nearing completion, and we are approaching the recovery phase of the next cycle.

Over our 23 Years' history, we have navigated many boom and bust cycles in this industry emerging east higher stronger and more resilient on the other side.

Looking forward, we expect stabilization across most of our business lines notwithstanding normal seasonality.

While near term visibility is limited we remain cautiously optimistic about a broader market rebound in the second half of calendar 2024.

Stephen Chunping Chang: Fundamentally, we are extremely well positioned for future growth as the market recovers. Today, our market position is stronger than ever, supported by our leading technology, diversified product portfolio, and Tier 1 customer base in all of our business segments. More importantly, whether it's AI accelerators, digitalization, advanced connectivity, electrification, or the transition to a low-carbon society, power management lies at the core of these trends.

Fundamentally we are extremely well positioned for future growth as the market recovers.

Today, our market position is stronger than ever supported by our leading technology more diversified product portfolio and tier one customer base in all of our business segments.

More importantly, whether it's AI solid liters digitalization advanced connectivity electrification or the transition to a low carbon society power management lies at the core of these trends.

We remain committed to executing our technology roadmap, introducing innovative new products and solutions to our customers and focusing on long term growth drivers that will allow us to surpass industry growth rates and establish ourselves as a sustained outperformer in the long run.

Stephen Chunping Chang: We remain committed to executing our technology roadmap, introducing innovative new products and solutions to our customers, and focusing on long-term growth drivers that will allow us to surpass industry growth rates and establish ourselves as a sustained outperformer in the long run. With that, let me now cover our segment results and provide some guidance by segment for the next quarter, starting with computing. December quarter revenue was up 12.3% year-over-year and up 2% sequentially and represented 43.4% of total revenue. These results were ahead of our original expectation for a low single-digit decline sequentially and were driven by a continued recovery and stabilization in shipments across notebook and desktop computing applications. The recovery has been driven by high-end driver ICs and MOSFETs for powering CPUs.

With that let me now cover our segment results and provide some guidance by segment for the next quarter.

Starting with computing.

Second quarter revenue was up 12, 3% year over year and up 2% sequentially and represented 43, 4% of total revenue.

These results were ahead of our original expectation for a low single digit decline sequentially and were driven by a continued recovery and stabilization in shipments across notebook and desktop computing applications.

The recovery has been driven by high end driver Ics and MOSFET for powering Cpus.

Stephen Chunping Chang: Looking forward into the March quarter, we expect this segment to be down mid-single digits on normal seasonality and the impact of the Chinese New Year. Notably, the inventory correction in graphics cards is coming to an end, and tangential markets such as AI accelerators are becoming a meaningful portion of our data center-related business. In summary, we are not immune to seasonality and broader market conditions.

Looking forward into the March quarter, we expect this segment to be down mid single digits, our normal seasonality and the impact of Chinese new year.

Notably the inventory correction and graphics cards is coming to an end and tangential markets such as AI accelerators are becoming a meaningful portion of our datacenter related business.

In summary, we are not immune to seasonality and broader market conditions, but solid rebound as expected and graphics cards and continued contributions from AI related products demonstrates the diversity of our computing segment.

Stephen Chunping Chang: But solid rebounds expected in graphics cards and continuous contributions from AI-related products demonstrate the diversity of our computing. Turning to the consumer segment, December quarter revenue was down 50.2% year over year and down 24.4% sequentially and represented 14.2% of total revenue. As we indicated last quarter, gaming is undergoing an inventory correction after extremely strong shipments to the number one console manufacturer between mid-calendar 2022 and mid-calendar 2021. Similar to what we saw in PCs and smartphones in early calendar 2023, given the speed of the current correction, we believe demand will revert back to a new normal in a couple of quarters, factoring in that the console is now in its midlife phase of the platform. Furthermore, we see opportunities to increase BOM content within the current console platform as part of its refresh this year.

Turning to the consumer segment December quarter revenue was down 52% year over year and down 24, 4% sequentially and represented 14, 2% of total revenue.

As we indicated last quarter gaming is undergoing an inventory correction after extremely strong shipments into the number one console manufacturer between mid calendar 2022, and mid calendar 2023.

Similar to what we saw in Pcs and smartphones in early calendar 2023, given the speed of the current correction. We believe demand will revert back to a new normal and a couple of quarters factoring in console and now it's mid life part of the platform cycle.

Further we see opportunities to increase Bom content within the current console platform as part of its refreshed this year.

Stephen Chunping Chang: Longer term, we believe our relationship with this customer is very strong, and we are already engaged in discussions for the next model design. For the March quarter, we anticipate stabilization in this segment and are forecasting a low single-digit sequential decline. Next, let's discuss communication.

Longer term, we believe our relationship with this customer is very strong and are already engaged in discussions for the next model design.

For the March quarter, we anticipate stabilization in this segment and are forecasting a low single digit sequential decline.

Next let's discuss the communications segment.

Stephen Chunping Chang: Revenue in the December quarter was down 18% year over year and down 6.6% sequentially and represented 17.5% of total revenue. Shipments to the Korea and China-based smartphone OEMs were strong. However, this was more than offset by a pullback in shipments to the Tier 1 U.S. smartphone customers. Note that customer has strong shipments in the September quarter in 2023 ahead of their fall device launch. Looking ahead, due to strong shipments from Chinese OEMs, we anticipate this segment to remain flat sequentially, outperforming seasonality. Now, let's talk about our last segment, Power Supply and Industrial, which accounted for 21.1% of total revenue. December quarter revenue was down 15.4% year over year and down 16.6% sequentially. These results were driven by reduced quick chargers following our peak season shipments to our Tier 1 U.S. smartphone customer in the September quarter and continued weakness in solar. Power Tools was a notable standout in the December quarter, further solidifying their strong growth and contribution throughout calendar 2023.

Revenue in the December quarter was down 18% year over year and down six 6% sequentially and represented 17, 5% of total revenue.

Shipments to the Korea, and China based smartphone Oems were strong however.

However, this was more than offset by a pullback in shipments to the tier one U S smartphone customer.

Note that customer had strong shipments in the September quarter in 2023 ahead of their fall device launch.

Looking ahead due to strong shipments from Chinese Oems, we anticipate this segment to remain flat sequentially outperforming seasonality.

Now, let's talk about our last segment power supply and industrial which accounted for 21, 1% of total revenue.

December quarter revenue was down 15, 4% year over year and down 16, 6% sequentially.

These results were driven by reduced quick Chargers following our peak season shipments to our tier one U S smartphone customer in the September quarter and continued weakness in solar.

Power towards where a notable standout in the December quarter.

Further solidifying their strong growth and contribution throughout calendar 2023.

Stephen Chunping Chang: For the March quarter, we expect this segment to further decline in the mid-teens sequentially, mainly due to reduced quick chargers following the peak season and lower solar demand. While power tools will also see a seasonal decline, we expect strong sequential growth in our e-mobility segment driven by deepening customer relationships for e-bikes and e-commerce. In closing, we delivered Fiscal Q2 in line with our expectations. While we are not immune to the macroeconomic headwinds, there are indications that the cycle has bottomed, and we are looking forward to the recovery. Therefore, it is important to emphasize that our core fundamentals remain strong, a testament to the strategic investments we have made over the past years.

For the March quarter, we expect this segment to further decline in the mid teens sequentially, mainly due to reduced quick Chargers following the peak season and lower solar demand.

Power tools will also see a seasonal decline we expect strong sequential growth in our E mobility segment, driven by deepening customer relationships for E bikes and scooters.

In closing we delivered fiscal Q2 in line with our expectations. While we are not immune to the macroeconomic headwinds there are indications that the cycle has bottomed and we are looking forward to the recovery phase.

Therefore, it is important to emphasize that our core fundamentals remained strong.

Testament to the strategic investments, we have made over the past years. These.

These investments have positioned us well for growth and we continue to focus on driving the company towards growth beyond our $1 billion revenue target on the other side of the cycle supported by our leading technology more diversified product portfolio share of our customer base in all of our business segments.

Yifan Liang: These investments have positioned us well for growth, and we continue to focus on driving the company towards growth beyond our $1 billion revenue target on the other side of the spectrum. Supported by our leading technology, a more diversified product portfolio, tier 1 customer base in all of our business segments, and expanding manufacturing capability and supply. With that, I will now turn the call over to Yifan for a discussion of our fiscal second quarter financial results and our outlook for the next quarter. Yifan Liang. Thank you, Stephen. Good afternoon, everyone, and thank you for joining us.

And expanding manufacturing capability and supply chain.

With that I will now turn the call over to <unk> for a discussion of our fiscal second quarter financial results and our outlook for the next quarter.

Thank you Steven.

Good afternoon, everyone and thank you for joining us.

Revenue for the quarter was $165 3 million.

Eight 5% sequentially and down.

12, 4% year over year.

Yifan Liang: Revenue for the quarter was $165.3 million, down 8.5% sequentially and down 12.4% year-over-year. In terms of product mix, DMOS revenue was $108.8 million, down 10.5% sequentially and down 20.9% over last year. Power IT revenue was $50.3 million, down 4.6% from the prior quarter and up 0.6% from a year ago. Assembly service revenue was $0.7 million as compared to $0.7 million for the previous quarter and $1.2 million for the same quarter last year.

In terms of product mix demos revenue was $108 8 million.

10, 5% sequentially and down 29% over last year.

<unk> revenue was.

$53 million.

<unk>, 6% from the prior quarter and up 6% from a year ago.

Assembly service revenue was.

$7 million.

As compared to $7 million from last quarter, and $1 2 million for the same quarter last year.

License and engineering service revenue was $5 5 million for the quarter versus $5 $6 million in the prior quarter.

non-GAAP gross margin was 28% compared to 28, 8% in the prior quarter and 29, 5% a year ago.

Quarter over quarter decrease in non-GAAP gross margin was mainly impacted by ASC erosion and increased inventory reserves, partially offset by the improved product mix.

Yifan Liang: Licensed and engineering service revenue was $5.5 million for the quarter versus $5.6 million in the prior quarter. Non-gap gross margin was 28% compared to 28.8% in the prior quarter and 29.5% a year ago. A quarter of a quarter decrease in non-gap gross margin was mainly impacted by ASB erosion and increased inventory reserve, partially offset by the improved product mix. Non-GAP operating expenses were $37.9 million compared to $40.8 million for the prior quarter and $32.8 million for last year. The quarter-over-quarter decrease was primarily due to lower R&D engineering expenses and more vacation taken during the holidays.

non-GAAP operating expenses were $37 $9 million.

Third to $40 8 million for the prior quarter at.

$32 8 million last year.

The quarter over quarter decrease was primarily due to lower R&D engineering expenses.

More vacation taken during the holidays.

non-GAAP quarterly EPS was <unk> 24, compared to <unk> 33 last quarter.

$6 seven a year ago.

Moving onto cash flow.

Operating cash flow was negative $23 $5 million.

<unk> $11 million of repayment of customer deposit.

$11 3 million deposit that we made to secure.

Carbide wafer supply.

By comparison.

Operating cash flow was $13 $8 million in the prior quarter.

$3 million a year ago.

Yifan Liang: Non-GAAP quarterly EPS was 24 cents compared to 33 cents last quarter and 67 cents a year ago. Moving on to cash flow, operating cash flow was negative $23.5 million, including $11 million of retirement of customer deposits and $11.3 million deposit that we made to secure the carbon wafer supply. By comparison, operating cash flow was $13.8 million in the prior quarter and $0.3 million a year ago.

Ebitdas for the quarter was $20 7 million.

Compared to $23 3 million last quarter and $31 million for the same quarter last year.

Now, let me turn to our balance sheet.

When we completed these.

Remember a quarter with a cash balance of $162 3 million compared to $193 $6 million at the end of last quarter.

Net trade receivables decreased by $2 $5 million sequentially.

Days sales outstanding remained at 18 days for the quarter.

Net inventory increased by $4 million quarter over quarter.

Average days in inventory were 141 days compared to 129 days in the prior quarter.

Yifan Liang: EBITDA for the quarter was $20.7 million compared to $23.3 million the previous quarter and $31.8 million for the same quarter last year. Now, let me turn to our panelists. We completed the December quarter with a cash balance of $162.3 million compared to $193.6 million at the end of last quarter. Nitrate receivables decreased by 2.5 million dollars sequentially. These sales outstanding remained at 18 days for the quarter.

Capex for the quarter was nine.

$9 1 million.

Compared to $12 5 million for the prior quarter.

We expect Capex for the March quarter to range from 8 million to $12 million.

Now I would like to discuss our March quarter guidance.

We expect revenue to be approximately $150 million plus or minus $10 million.

GAAP gross margin to be 23, 5% plus or minus 1%.

We anticipate non-GAAP gross margin to be 25% plus or minus 1%.

Quarter over quarter decrease in gross margin, let me reflects the lower factory utilization due to the seasonality and the lunar new year holiday.

Yifan Liang: That inventory increased by $4 million quarter over quarter, and average days in inventory were 141 days compared to 129 days in the prior quarter. CapEx for the quarter was $9.1 million compared to $12.5 million for the prior quarter. We expect CAPEX for the March quarter to range from $8 million to $12 million. Now I would like to discuss March quarter guidance. We expect revenue to be approximately $150 million plus or minus $10 million, and gap gross margin to be 23.5% plus or minus 1%. We anticipate a non-gap growth margin to be 25% plus or minus 1%. A quarter of a quarter decrease in gross margin mainly reflects the lower factory utilization due to seasonality and the Lunar New Year holiday. We expect operating expenses to be in the range of $46.7 million plus or minus $1 million. Non-GAP operating expenses are expected to be in the range of $39.5 million plus or minus $1 million, interest expense to be approximately $1 million, and income tax expense to be approximately $1.1 million.

GAAP operating expenses to be in the range of $46 $7 million, plus or minus $1 billion.

non-GAAP operating expenses are expected to be in the range of $39 $5 million plus or minus $1 million.

Interest expense to be approximately $1 million.

Income tax expense to be approximately $1 1 million.

With that we'll open the call for questions.

Later.

To start the Q&A session.

Yeah.

Absolutely we would.

Now begin the Q&A session.

If you would like to ask a question. Please press star followed by one of your Touchtone keypad.

If for any reason you would like to remove that question. Please press star followed by two.

Again to ask a question press star one.

As a reminder, if you are using a speakerphone. Please pick up your handset before asking your question.

We will pause briefly to allow questions to generate in Q.

The first question comes from the line of Craig Ellis with B Riley Securities. Please proceed.

Yes, thanks for taking the question and I had one.

For Steve and one for <unk>, So Stephen starting with you.

Like the color on how youre looking at the year and the fact that you see a.

The cyclical recovery coming in a much stronger second half can you just provide some further color on how that could play out on the top line I'm not looking for specific guidance, but any sense on how the linearity plays out or or what can happen as we look out.

Operator: With that, we will open the call for questions. Operator, please start the Q&A session. Absolutely. We will now begin the QA session. If you would like to ask a question, please press star followed by 1 on your touchtone keypad.

Each quarter, the third and fourth calendar quarter of the year. If you expect both of those to be up materially versus first half would help us see a little bit of the things that you're seeing.

Sure. Thank you Craig.

Certainly we are looking forward to the normal seasonality that will come in the September quarter, which is the peak season, both for Pcs as well as for smartphones and in both of those markets that we are continuing to continue to be well positioned to add our customers. So comparing first half to second half I think it's a general.

Operator: If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to generate and... The first question comes from the line of Craig Ellis with B Raleigh Securities. Please proceed. Yeah, thanks for taking the question. I had one for Stephen and one for Yifan.

Generally we do expect the second half to be stronger compared against the first half and the question more of is whether the macro economic conditions overall recovery right now we are still relatively still.

Stephen Chunping Chang: So Stephen, starting with you, I like the color on how you're looking at the year and the fact that you see a cyclical recovery coming and a much stronger second half. Can you just provide some further color on how that could play out on the top line? I'm not looking for specific guidance, but any sense of how the linearity plays out or what can happen as we look out in each quarter, the third and fourth calendar quarters of the year, if you expect both of those to be up materially versus the first half would help us understand a little bit of the things that you're seeing. Sure. Thank you, Craig.

What we're hoping to be at the tail end of the the overall broader correction and.

Pending on the macroeconomic conditions, if the if the market conditions are back to neutral or favorable then we can expect to see also that the December quarter will also fall along with September, but but right now we're looking we're looking at our visibility isn't as clear that far down and we are preparing mainly put in September.

At September a seasonal peak for us.

Got it thanks, and I'll direct the next round of <unk>.

Stephen Chunping Chang: Certainly, we are looking forward to the normal seasonality that will come in the September quarter, which is the peak season both for PCs as well as for smartphones. And in both of those markets, we continue to be well positioned at our customers. So comparing the first half to the second half, I think it's a general, generally, you know, we do expect the second half to be stronger compared against the first half.

Ivan I wonder follow up on the gross margin for the first quarter. So the lunar new year impact is something that impacts the business separately, but I thought the impact was closer to.

150 to 200 basis points or 100 200, rather than the 300. So can you just detail.

Stephen Chunping Chang: And the question more is whether macroeconomic conditions overall are recovering. Right now, we are still relatively still in the world where we're hoping to be at the tail end of the overall broader correction. And depending on the macroeconomic conditions, if the market conditions are back to neutral or favorable, then we can expect to see that the December quarter will also fall along with September. But right now, we're just looking. We're looking, our visibility isn't as clear that far down.

The factors that are causing gross margin to decrease by 300 basis points sequentially quarter on quarter, how much is the lower utilization for lunar new year and what are the other factors in and then beyond that how would you expect gross margin to recover off the <unk>.

5%, Paul if we have that type of environment, it's even worth talking about which is much better calendar second half demand. Thank you.

Yifan Liang: We are preparing mainly for the September seasonal peak first. Got it. Thanks. And I'll direct the next one to Yifan.

Yifan Liang: Yifan, I wanted to follow up on the gross margin for the first quarter. The Lunar New Year impact is something that impacts the business every year, but I thought the impact was closer to 150 to 200 basis points or 100 to 200 rather than 300. So can you just detail the factors that are causing gross margin to decrease by 300 basis points sequentially quarter on quarter? How much is the floor utilization for the Lunar New Year, and what are the other factors?

Sure.

The March quarter gross margin guidance.

We factor in a couple of things primarily the UK.

Utilization portion because.

March quarter tips.

Typically is our lowest.

Quarter seasonality.

Seasonality wise.

And.

And then also I mean.

We also see some.

Price erosion there.

Lesser extent.

Yifan Liang: And then beyond that, how would you expect gross margin to recover off of the 25% level if we have the type of environment that Stephen was talking about, which is much better calendar second half demand? Thank you. Sure, the March quarter gross margin guidance, we factor in a couple of things. Primarily the utilization portion, because March quarter typically is our lowest quarter seasonality-wise. And then also, I mean, we also see some price erosion there to a lesser extent, and it is offset by some better product mix. So you are probably right. And then, I mean, 200 basis points for the utilization portion and then 50 to 100 basis points for the net of ASP erosion and the better product mix. So that's the combination of those factors.

Offset by some.

Better product mix of Sone.

Youre, probably right and then 200 and some basis points.

For the utilization portion.

The.

50 to 100 basis points for the net.

ASP erosion.

The better part of the mix so that's the combination.

Of those facts.

<unk>.

Okay.

Yeah.

Thank you.

The next question comes from the line of David Williams with benchmark. Please proceed.

Yeah.

Hey, good afternoon. Thanks for taking my question you certainly appreciate it.

A lot of great color there, but just just wondering if maybe you can give us a little color on some of the areas.

The weakness that Youre seeing I know you expanded some during the call, but just anything I guess I'm trying to square that.

Recovery in the second half and is that is it really philosophy of orders or maybe just any color there to help us get more comfortable that the second half recovery does materialize.

Operator: Thank you. The next question comes from the line of David Williams. Thank you. Thank you. Thank you. Hey, good afternoon.

Stephen Chunping Chang: Thanks for taking my question; I certainly appreciate it. A lot of great color there, but just wondering if maybe you could give us a little color on some of the areas of weakness that you're seeing. I know you expanded on that during the call, but just anything, I guess, trying to square the recovery in the second half. And is that really the velocity of orders, or maybe just any color there to help us get more comfortable that the second half recovery does materialize. Thanks. Sure. And David, yes, for a stronger second half, we're counting not only on the seasonal factors, but also on the macro picture. And the macro picture that we're looking at is end markets, and many of our end markets have been going through inventory correction. You know, PCs and smartphones started earlier.

Sure David Yes.

A stronger second half, we're counting them not only on the seasonal factors, but also on the macro picture and the picture.

Looking at our end markets and many of our end markets have been going through.

Inventory correction does PC smartphones started earlier.

And.

Alright, well recently.

Graphics also gaming went through that as well too we believe that now actually we're at the tail end of that you know Pcs.

Inventory can control I think is tapering down it's more of a factor of end demand that needs to come back on this what we need.

The PC refresh cycles to be healthier and the overall macroeconomic to help raise the consumer spending.

And we also mentioned on the call that the inventory control for graphics also is starting to come to an end as well and we're starting.

Stephen Chunping Chang: And sorry, but recently, graphics also and gaming went through that as well, too. We believe that now, actually, we're at the tail end of that. You know, PCs, inventory control, I think, is tapering down. It's more of a factor of, you know, end demand that needs to come back. And this is where we need the PC refresh cycles to be healthier and the overall macroeconomic to help and raise consumer spending.

We anticipate a comeback.

Of that together also with the gaming, which is August entered into inventory control about two or two quarters ago and so those are nearing the end of an inventory control and we're looking now more mainly to the end demand and once that can pick up back to at least neutral and now are back to growth there and that that can.

Point us to a stronger second half.

Great, Thanks, and maybe even back to the gross margin maybe.

Stephen Chunping Chang: And we also mentioned on the call that the inventory control for graphics is also starting to come to an end as well. And we're starting, you know, we anticipate a comeback of that together with the gaming, which entered into inventory control about two or two quarters ago. And so those are nearing the end of inventory control, and we're looking now more mainly to end demand. And once that can pick up back to at least neutral and or back to growth, then that can point us to a stronger second half. Great, thanks. And maybe Yifan, back to the gross margin, maybe trying to get a little more color; maybe we'll crank it up there.

To get a little more color on maybe what crazy that's there but.

Can you.

I guess, just how much of the impact are you seeing from utilization relative to just the leverage loss on the revenue side and maybe what are the puts and takes there as we think about that gross margin longer term its certainly.

We expect that bottom out a little higher than this so.

Any help there thank you.

Okay shortened.

If you'll recall in the March quarter ton train three.

Gross margin was around 25% range.

Yifan Liang: But can you, I guess just how much of the impact are you seeing from utilization relative to just the leverage loss on the revenue side? And maybe what are the puts and takes there as we think about that gross margin longer term? It's certainly, you know, we expect that to bottom out a little higher than this. So just anything helps there.

As of March 24th quarter, even though the top line.

Quite a bit higher than that.

Our 2023 March quarter.

Using ablation right now is about.

Similar to the March quarter of 2023.

Yifan Liang: Thanks. Okay, sure. I mean, if you recall, in March quarter 2023, our gross margin was around the 25% range, so now it is March 2024 quarter, even though the top line is a little bit higher than, uh, 2023 March quarter, but uh, the utilization right now is about..., similar to the March-Quality 2023 at our factory. Overall, I would expect that when our top line recovers, and then I would expect our utilization And also, product mix. I would expect to come back and, you know, add a better product name, as well. Thanks so much. I appreciate the color.

At our factory.

Overall, I would expect and when when our top line.

Yeah.

It recovers.

Then I would expect on our utilization.

To help them.

Yes.

Also product mix.

I would expect too.

Come back.

Better product mix as well.

Yeah.

Okay.

Thanks, so much I appreciate the color.

Thank you.

The next question comes from the line of Jeremy Jeremy Kwan with Stifel.

Please proceed.

Yes.

Good afternoon.

I could just touch on a different aspect of the.

The gross margin question.

It looks like inventories were up.

This quarter and it looks like it's going to be up again.

Yifan Liang: Thank you. The next question comes from the line of Jeremy Kwan, with Staples. Yes, good afternoon.

Well at least days of inventory are going to be up can you help us.

Yifan Liang: Maybe I could just touch on a different aspect of the gross margin question. It looks like inventories were up this quarter, and it looks like they're going to be up again. Well, at least days of inventory are going to be up. Can you help us, you know? How should we expect inventories to go, you know, over the next couple of quarters and, you know, how much, where do you see as a good operating level in terms of both days and dollars? Sure. The inventory balance at the end of the December quarter increased by like $3 or $4 million relative to the overall inventory size. www.mmtoolparts.com. For the March quarter, you know, we would expect an inventory level to maintain around a similar level. And we're ready.

No.

How we should expect inventories to go over the next couple of quarters.

And how much where do you see as a good operating level.

In terms of both data and over $1.

Okay.

Sure.

Inventory balance.

At the end of this.

Summer quarter increased by $34 million in that.

Yes.

Relative to the overall inventory size.

Yes.

It's marginal.

Yes.

For the March quarter.

We would expect in <unk>.

Inventory.

Level maintains in Colorado similar.

Level.

No.

We're already.

A slowdown in our own production.

Yifan Liang: Slow down our own production and also some purchases. Going forward, I would expect that the inventory will be adjusted based on our expected business growth, additional production to support, and yeah, that will ramp up production, depending on the bottleneck areas. So that's what we manage on a daily basis. Also, I guess maybe, can you add some more color on the inventory reserve you took? I wasn't sure if I caught how much that was, and without that inventory reserve, where would the inventories have gone? Yeah, the inventory reserve went up by about a couple million dollars and also in the... December quarter, so we took a higher reserve. And is this something that you anticipate needing to do again going forward, or is it kind of one and done, and we kind of reset from here?

And also there's some purchases so hum.

Going forward I would expect that the inventory that were adjusted based on what you expected that business to grow from this.

If we need some.

The additional production to support in that yet.

Ramp up some.

Production.

Depending on the bottleneck areas so.

We manage.

A daily basis.

So I guess, maybe can you add some more color on the inventory reserve any time.

I wasn't sure if I caught how much that was in and.

Without that inventories are where with the inventories have gone.

Okay.

Yes, the inventory reserve went up by the oven.

Couple of million dollars also.

December quarter so.

We took them.

Higher reserve.

And is this something that you anticipate needing to do again going forward or is it kind of one and done and when we kind of reset from here.

Well, that's kind of it depends on the market.

Yifan Liang: Well, that kind of depends on the market conditions and the overall environment, and yet it's hard to say for human-turing reserve. Generally, I would expect, probably, back to the normal, you know; I wouldn't see, you know, additional inventory reserves out there. Got it. And also, I appreciate you providing CAPEX guidance for the quarter. Can you give us, you know, kind of an outlook for the year? Do you expect it to remain in that $10 million range, or, you know, can it be taken down a bit?

Market conditions and then.

Overall environment it's.

It's hard to say for your inventory reserve.

Generally I would have expected.

Probably.

Back to the normal.

<unk> done it.

Additional inventory reserves out there.

Got it.

Also and I. Appreciate you provided capex guidance for the quarter can you give us kind of an outlook for the year.

We expect it to remain in that $10 million range or can it be taken down a bit.

Yifan Liang: And also, the customer deposits, both the ones that you're returning, how much is left, and for the silicon wafer deposit, is there, you know, do you see this as a one-time thing, or do you have to secure additional supply down the line? Thank you. Okay, sure. Regarding our own CAPACS, again, I would expect... throughout this calendar year. Our CABEX.

And also.

Customer deposits.

Both the ones that you're returning back how much is left and for the silicon wafer deposit or D. C.

This is a onetime thing or.

To secure additional supply down the line. Thank you.

Okay sure regarding our own Capex, yeah, and I would expect.

Throughout this calendar year, our Capex is.

Right now it is.

Yifan Liang: Right now, it is at what I call maintenance mode, you know; we do our regular upgrade and solve some production bottleneck areas, and so we don't have a major plan to expand. Generally, we target 6% to 8% of our revenue as capex, so I would expect this year to be $10 million per quarter. That's probably in the ballpark, in terms of customers. Deposits and yeah, I would last year as calendar year 2023 we return about 30 million dollars or so. So this calendar year 2024, we expect to return another 30 million dollars also because of deposits. In terms of our own deposits, we made. That's a one-time deposit, so I would not expect further. Well, it depends on the situation, but at this point, that's a one-time deposit. A quick follow-up on the deposit that you're returning: how much is left after you pay $30 million this year? At the end of December last year, we had about $60-some million in deposits on hand.

What I called maintenance.

Good.

We.

Through our regular upgrade and solve some production bottleneck areas since so we don't have.

Major planned to expand.

Generally we target.

Two 8% of our revenue is capex.

Expected this year $10 ish per quarter.

That's probably in that ballpark.

In terms of the customer.

Deposits in.

Last year as calendar year 2023 we returned about $30 million so sold.

So this calendar year 'twenty 'twenty four we.

But to return of another $30 million also a customer.

Deposits in terms of.

Our own deposits were made.

One time deposits, so I would not expect.

Further depends.

It depends on the.

Situation, but at this point.

That's a one time.

Got it.

Quick follow up on the deposit side, you're returning how much is left after the June 30 million this year.

At the end of <unk>.

December last year, we had.

About 60 some million dollars.

Deposits and so kind of a 2024 wall return another $30 million.

Yifan Liang: So Canada Year 2024 will return another $30 million also. Got it. And one last question, if I could. Stephen, I appreciate the guidance that you gave by end market. If I'm doing the math right, it looks like licensing and other that kind of goes down to less than 1%. If that's not the case, can you help me see where I went wrong?

Yes.

Got it.

One last question if I could.

Steven.

I appreciate the guidance you gave.

Or by end market, if im doing the math right. It looks like licensing and other that kind of goes down to less than 1%.

Is that sort of the case can you help me.

See where I went wrong.

There was someone like a assembly services.

Yifan Liang: There was some assembly services on the, you know, a little bit here, so that's... That's probably it. So the expectations are for that to fluctuate and it's not expected to be like a material contributor, is that the way to look at it? No. No, right, correct. I mean, assembly services and we just sit and do work, and some services for some idle capacity, not a major business for us.

A little bit.

Uh huh.

That's probably it.

So that the expectations are for that.

The fluctuate in and it's.

And then expect it to be like a material contributor.

Good way to look at it none of it.

No right correct.

Assembly service and that would just sit there and do that.

<unk> services.

Or will some idle capacity.

Yifan Liang: Okay, thank you. I'll jump back in the queue. Thank you. Again, to ask a question, you please press star 1.

Not a major business for us.

Okay. Thank you I'll jump back in the queue.

Thank you.

Again to ask a question please press star one.

Operator: There are no additional questions left at this time. I will hand it back to the management team for closing remarks. 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. Thank you. That concludes today's call. You may now disconnect your line. Thank you for listening. We will see you next time.

There are no additional questions at this time I will hand, it back to the management team for closing remarks.

This concludes our earnings call today.

You for your interest in AOS, and we look forward to.

Talking to you again next quarter. Thank you.

Thank you.

Yes.

That concludes today's conference call you may now disconnect your lines.

Okay.

Okay.