Alpha and Omega Semiconductor Limited — Form 10-Q
Reporting period: Fiscal second quarter and six months ended December 31, 2019. The filing describes fiscal Q2 2020; the request metadata’s “2019 Q2” refers to the calendar quarter ending in December. Amounts are U.S. dollars unless stated otherwise.
Business context and results
AOS designs and supplies power semiconductors for computing, consumer electronics, communications and industrial markets. It operates as one reportable segment and owns 51% of its Chongqing joint venture (JV). The JV began limited mass production at its 12-inch wafer fab in July 2019 and continued ramping production.
| Metric | Three months ended Dec. 31, 2019 | Six months ended Dec. 31, 2019 |
|---|---|---|
| Revenue | $117.9 million, up 2.6% year over year | $235.7 million, up 2.5% |
| Gross profit / margin | $24.4 million / 20.7%; prior-year margin 25.7% | $51.3 million / 21.8%; prior-year margin 27.0% |
| Operating loss | $3.4 million; prior-year loss $3.2 million | $4.0 million; prior-year loss $2.3 million |
| Net result attributable to AOS | Loss of $1.0 million, or $0.04 per share | Income of $4,000, effectively $0.00 per share; prior-year income $871,000 |
Financial position, cash flow and material changes
- Revenue mix: Quarterly power discrete revenue rose 8.8% to $101.5 million; power IC revenue fell 24.4% to $14.7 million. For the six-month period, discrete revenue rose 8.9% while power IC revenue fell 21.7%. Management attributed growth in product revenue mainly to higher average selling prices from mix, despite lower unit shipments.
- Margins and expenses: Gross margin fell 5.0 percentage points in the quarter and 5.2 points for the half year, mainly due to low capacity utilization as the Chongqing JV ramped production. Six-month SG&A declined 23.8% to $30.8 million, mainly on lower JV pre-production costs and share-based compensation; R&D increased 2.2% to $24.5 million.
- Cash flow: Six-month operating cash flow was $7.7 million, down from $31.1 million. Investing used $31.2 million, including $32.4 million of property and equipment purchases, partly offset by a $1.3 million JV equipment grant. Financing provided $11.0 million. Cash, cash equivalents and restricted cash decreased $12.8 million to $111.5 million.
- Liquidity: At December 31, cash and cash equivalents were $107.2 million; restricted cash was $4.2 million. Current assets were $295.3 million and current liabilities $184.2 million. Management said available cash and operating cash flows should cover anticipated needs, including working capital and capital spending, for at least 12 months.
- Debt and leases: Reported short- and long-term debt, net of issuance costs, totaled $97.3 million ($21.0 million current and $76.3 million long-term). Finance lease liabilities totaled $50.3 million; operating lease liabilities totaled $18.8 million. The company reported compliance with applicable financial covenants.
- Other balance-sheet movements: Inventories increased to $117.6 million from $111.6 million at June 30, 2019; accounts receivable, net, rose to $33.9 million from $24.3 million. Property, plant and equipment, net, was $416.1 million.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. AOS expected lower JV production in the quarter ending March 31, 2020 because of the coronavirus outbreak in China and an extended Chinese New Year holiday.
- The Department of Justice opened an investigation into export-control compliance relating to Huawei. At the Department of Commerce’s request, AOS suspended shipments to Huawei and was working to resolve the matter. The company could not estimate potential losses, timing or outcome, and warned that lost sales, legal costs, penalties or further restrictions could materially affect results. Estimated revenue from indirect Huawei shipments from May through December 2019 was $11–$13 million.
- Customer concentration is significant: two customers represented 31.3% and 37.0% of quarterly revenue, respectively. AOS also cited PC-market exposure, distributor ordering variability, selling-price erosion, capacity utilization, customer demand, China/U.S. trade measures and supply-chain disruption as risks.
- Outstanding purchase commitments were approximately $52.0 million and capital commitments approximately $24.3 million at December 31, 2019. The company also disclosed $7.3 million of gross unrecognized tax benefits; it did not anticipate material changes in uncertain tax positions over the next 12 months.
- AOS adopted the new lease accounting standard on July 1, 2019, recognizing approximately $21 million each of operating lease right-of-use assets and liabilities. The company also corrected a prior-year supplemental disclosure of unpaid property and equipment purchases; it said the correction did not affect prior-year operating results or cash flows.
Important facts for investors to verify
- Progress and utilization of the Chongqing JV, and whether production ramp-up improves gross margin without further material cost burdens.
- Any updates on the DOJ/export-control investigation, the Huawei shipment suspension, and potential financial or regulatory consequences.
- Cash conversion and working-capital trends, especially receivables and inventory, alongside planned capital spending and debt service.
- Customer concentration and exposure to PC demand, China operations, trade restrictions and coronavirus-related disruption.