Business context and reporting period
Alpha and Omega Semiconductor Limited designs, develops and supplies power semiconductors for computing, consumer electronics, communications and industrial applications. This Form 10-Q covers the fiscal third quarter and nine months ended March 31, 2016; the filing period is not calendar 2015 Q3. Comparisons below are with the corresponding 2015 periods. Financial statements are unaudited.
Financial results and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | 2016: $83.0m; 2015: $76.9m (+7.9%) | 2016: $244.3m; 2015: $246.5m (-0.9%) |
| Gross profit / margin | $16.3m / 19.7%; prior $12.8m / 16.6% | $46.4m / 19.0%; prior $46.2m / 18.7% |
| Operating result | Loss of $0.05m; prior loss of $3.4m | Loss of $1.4m; prior loss of $1.9m |
| Net result | Loss of $1.3m, or $0.06/share; prior loss of $4.1m, or $0.16/share | Loss of $4.8m, or $0.22/share; prior loss of $4.8m, or $0.18/share |
| Operating cash flow | Not provided separately for the quarter | $26.4m; prior $18.2m |
For the nine months, investing cash outflow was $13.8m, mainly capital spending, and financing cash outflow was $39.7m, primarily share repurchases. Cash and cash equivalents fell to $78.9m at March 31, 2016 from $106.1m at June 30, 2015. Current assets were $187.9m and current liabilities $71.8m. Total liabilities were $78.2m; the balance sheet reported $0.3m of current and long-term capital leases and no borrowings. Capital expenditures were $13.8m for the nine months.
Material changes versus prior periods
- Quarterly revenue rose as power discrete and power IC sales increased. Management attributed product revenue growth chiefly to a 15.8% rise in average selling price from product mix, partly offset by 5.6% lower unit shipments. Nine-month product shipments fell 8.8%, partly offset by a 9.3% increase in average selling price.
- Quarterly gross margin improved 3.1 percentage points, attributed to product mix and higher factory utilization. Nine-month gross margin was broadly stable.
- Power IC revenue grew 18.5% for the quarter and 2.4% for the nine months; power discrete revenue rose 7.2% for the quarter but declined 1.4% year to date. Packaging and testing revenue declined in both periods.
- Cash declined substantially, principally reflecting $41.8m of share repurchases during the nine months. Approximately $6.4m remained under the repurchase program at March 31.
Outlook, commentary, risks and unusual items
- Management said existing cash and operating cash flows should cover anticipated working capital and capital expenditure needs for at least the next 12 months. No specific revenue or earnings guidance was provided.
- The company entered a joint venture agreement with Chongqing investment funds for a semiconductor packaging, testing and wafer-fabrication project. Planned initial capitalization is $330m: $162m cash from the funds, company assets valued at $74m and $84m, and $10m company cash. AOS expects to own 51% and consolidate the venture. Initial packaging production is expected in 2017; a 12-inch wafer fab is a longer-term plan. The company says it expects long-term cost and working-capital benefits, but warns of execution, transition, capacity, regulatory, partner, customer, IP and China-related risks. It expects to contribute $10m cash, equipment and intangible assets within one year.
- PC-related revenue represented 36.4% of quarterly and 42.2% of nine-month revenue, down from 47.3% and 47.1%, respectively, in the comparable periods. Management cited ongoing PC-market weakness, average selling-price erosion, utilization, distributor ordering and seasonality as factors affecting results.
- Three customers together accounted for 73.7% of quarterly revenue and 73.9% of nine-month revenue; customer identities are not disclosed. These customers also represented 73.7% of receivables at March 31.
- Income tax expense was $1.2m for the quarter and $3.4m for the nine months despite pre-tax losses. Management attributed changes in tax expense and effective tax rates primarily to geographic earnings mix. Unrecognized tax benefits were approximately $6.6m; tax years 2001–2015 remained open to U.S. examination and 2009–2015 to foreign examination.
- A $0.4m impairment was recorded in the December 2015 quarter for manufacturing equipment tied to canceled projects with no alternative use. The filing also corrected immaterial prior-year tax errors, reducing previously reported deferred tax liabilities and losses; prior filings were not amended.
- Purchase commitments were $39.4m and capital commitments $8.9m at March 31, up from $29.2m and $3.7m at June 30, 2015. The company reported no pending material legal proceedings or material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the Chongqing venture meets its funding, construction and 2017 start-up expectations, and how the company’s asset contributions and future obligations will affect cash flow and capacity.
- Whether improved quarterly margins can persist amid lower unit shipments, PC-market exposure, price erosion and possible manufacturing-transition costs.
- The sustainability of operating cash generation and liquidity after substantial repurchases, capital spending and rising purchase and capital commitments.
- Customer concentration, distributor inventory and demand trends, and the effect of geographic earnings mix and open tax examinations.
- The filing’s reported share count: 22,431,746 common shares outstanding as of April 30, 2016.