Alpha and Omega Semiconductor Limited — Fiscal Q1 2018 Form 10-Q
Reporting period: Three months ended September 30, 2017. The filing compares results with the three months ended September 30, 2016 unless otherwise noted. Amounts below are in U.S. dollars.
Business context
AOS designs and supplies power semiconductors for computing, consumer electronics, communications and industrial applications. It reports one operating segment. Its products are sold primarily through distributors in Asia Pacific. The filing is for fiscal first-quarter 2018, despite the 2017 calendar-year period end.
Financial results
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $104.9 million | $97.4 million | +7.7% |
| Gross profit / margin | $27.5 million / 26.3% | $21.9 million / 22.5% | Margin +3.8 percentage points |
| Operating income / margin | $4.6 million / 4.5% | $3.7 million / 3.8% | Operating income +22.7% |
| Net income attributable to AOS | $4.8 million | $3.3 million | +45.2% |
| Diluted EPS | $0.19 | $0.14 | +$0.05 |
| Operating cash flow | $12.3 million | $9.3 million | +$3.0 million |
Revenue growth reflected higher power discrete sales (+17.2%) and a modest increase in packaging and testing services, partly offset by lower power IC sales (-21.3%). Management attributed improved gross margin to product mix and higher factory utilization. R&D expense rose 18.6% to $8.3 million, and SG&A rose 30.7% to $14.6 million, primarily reflecting higher compensation, headcount and share-based compensation.
Cash and cash equivalents were $180.2 million at September 30, 2017, up from $115.7 million at June 30, 2017; $141.9 million was held outside the United States. Current assets were $292.2 million and current liabilities $101.6 million. Total liabilities were $106.4 million. A new equipment credit facility provides up to $30.0 million, but no amount had been drawn at quarter-end. The filing reports no material off-balance-sheet arrangements.
Investing cash outflow was $34.8 million, including $28.3 million of property and equipment purchases and $5.7 million for intangible assets. Financing cash inflow was $86.8 million, principally from $87.0 million contributed by the joint venture’s noncontrolling investors. Thus, the quarter’s $64.5 million increase in cash was substantially supported by joint-venture funding, not operating cash generation alone.
Material changes and notable items
- Power discretes increased $12.3 million; power IC revenue decreased $4.9 million. Unit shipments rose 5.0%, and average selling price increased 2.6%, mainly due to product mix.
- Two customers accounted for 27.5% and 33.9% of revenue, respectively, or 61.4% combined. PC-related revenue was 38.8% of total revenue, up from 35.9% a year earlier.
- In September 2017, AOS licensed STMicroelectronics technology for digital multi-phase controller products, targeting new markets including computer servers. The cash consideration is $17.0 million; $12.7 million was recorded as an intangible asset by quarter-end, of which $5.6 million had been paid.
- The Chongqing joint venture received $87.0 million of investor contributions during the quarter. AOS owns 51% and consolidates the venture; $1.5 million of its net loss was attributable to noncontrolling interests. The joint venture’s initial production is expected in mid-calendar 2018, subject to construction and execution risks.
- AOS adopted ASU 2016-16 on July 1, 2017, derecognizing a $5.5 million prepaid tax asset with an offsetting reduction to retained earnings. The quarter also included $0.4 million of discrete tax expense related to an intercompany asset transfer. Excluding that item, the estimated effective tax rate was 19.1%, versus 32.9% a year earlier.
- The board authorized a new share repurchase program of up to $30.0 million; no shares were repurchased during the quarter.
Outlook, risks and contingencies
Management said existing cash and operating cash flows should cover anticipated working capital and capital expenditure needs for at least the next 12 months. It expects capital expenditures to continue increasing to support the Chongqing joint venture and development of products for new markets. The filing provides no quantitative revenue or earnings guidance.
Key risks include dependence on the PC market and a small number of customers, distributor ordering and inventory fluctuations, typical selling-price erosion, manufacturing utilization and third-party foundry capacity, timely product introductions, and potential delays or underperformance of the Chongqing facility. EPC payments are exposed to RMB exchange-rate fluctuations. The venture’s termination provisions give the Chongqing Funds priority for return of paid-in capital plus 10% simple annual interest before residual assets are distributed to AOS. Outstanding purchase commitments were $38.7 million and capital commitments for property and equipment were $65.5 million at quarter-end. AOS reported no material pending legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the strong gross-margin improvement is sustainable as product mix, utilization and semiconductor pricing change.
- Customer concentration, PC exposure and the continued decline in power IC revenue.
- Chongqing construction progress, remaining funding and capital needs, timing of initial production, and the venture’s losses and contractual investor priority.
- Cash requirements for the $17.0 million STMicro license, capital commitments and repurchase authorization; note that quarter-end cash growth was driven mainly by joint-venture contributions.
- Potential tax examination outcomes, including $6.7 million of gross unrecognized tax benefits; management did not anticipate material changes to uncertain tax positions in the next 12 months.