Alpha and Omega Semiconductor Limited — Fiscal Q2 2019 Form 10-Q
Business and period: The company designs and supplies power semiconductors for computing, consumer, communications and industrial applications. This quarterly report covers the three and six months ended December 31, 2018; the filing’s “2018 Q2” metadata refers to fiscal Q2 2019. Financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2018 | Prior-year quarter | Six months ended Dec. 31, 2018 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $114.9 million | $103.9 million | $230.0 million | $208.8 million |
| Gross profit / margin | $29.5 million / 25.7% | $28.1 million / 27.0% | $62.1 million / 27.0% | $55.6 million / 26.6% |
| Operating income (loss) | $(3.2) million | $3.2 million | $(2.3) million | $7.8 million |
| Net income (loss) attributable to AOS | $(1.5) million | $6.8 million | $0.9 million | $11.6 million |
| Diluted earnings (loss) per share | $(0.06) | $0.27 | $0.04 | $0.46 |
- Quarterly revenue rose 10.6%; management attributed product-sales growth mainly to a favorable mix that lifted average selling prices, partly offset by unit shipments falling 5.3%. Six-month revenue increased 10.2%, with average selling prices up 17.0% and unit shipments down 5.4%.
- Power discrete and power IC revenue increased; packaging and testing services revenue declined 26.2% in the quarter. Quarterly gross margin fell 1.3 percentage points, while the six-month margin improved 0.4 points.
- Operating expenses increased 31.6% in the quarter to $32.7 million, driven by higher R&D and selling, general and administrative costs. Interest expense rose to $1.7 million for the quarter and $3.2 million for six months, primarily due to increased borrowing.
- Six-month operating cash flow was $31.1 million, versus $21.9 million a year earlier. Investing cash outflow was $66.3 million, including $65.9 million of property and equipment purchases. Financing cash inflow was $52.0 million. Cash, cash equivalents and restricted cash ended at $146.9 million.
- At December 31, cash and cash equivalents were $146.6 million. Short- and long-term debt totaled $59.5 million; capital lease liabilities totaled $58.6 million. Current assets were $318.0 million and current liabilities $193.6 million. Management said available cash and operating cash flows should cover anticipated needs for at least 12 months.
Material developments, outlook and risks
- Chongqing joint venture: The company held 50.9% of the JV at quarter-end after the Chongqing Funds contributed $24.0 million. Assembly and testing production was ramping, and the 12-inch wafer fab began trial production. Management expected assembly and testing to ramp over the next two quarters and customer samples from the fab in the quarter ending March 31, 2019. The JV generated $7.3 million of net loss attributable to noncontrolling interest for the six months.
- The JV had $14.5 million of short-term bank loans and $58.2 million outstanding under lease financing. Management said the JV may need additional financing for equipment and that AOS might need to contribute more cash if financing is unavailable. AOS also reported $78.9 million of capital commitments, including EPC construction, and $48.9 million of purchase commitments.
- Management expects JV ramp costs and investment in the digital power business to weigh on near-term profitability; these costs include pre-production expenses that cannot be capitalized. Longer term, management expects the JV to reduce manufacturing costs. Capital expenditures are expected to continue increasing to support the JV and digital power development.
- Key business risks include dependence on PC demand, customer and distributor ordering patterns, average selling-price erosion, manufacturing utilization and supply constraints, and execution and financing risks for the JV. PC-related revenue was 48.5% of quarterly revenue, up from 42.6%. Two customers together represented 68.2% of quarterly revenue. The filing reports no material change to previously disclosed risk factors and no pending material legal proceedings.
- ASC 606 adoption on July 1, 2018 changed revenue timing for two U.S. distributors. It increased opening retained earnings by $1.0 million; the company reported that adoption increased quarterly revenue by $0.349 million versus the prior accounting method. Prior-year periods were not restated, limiting direct comparability.
Important facts for investors to verify
- Whether the JV meets production, customer-sample and ramp-up milestones, and whether it secures financing without further material AOS contributions.
- Whether revenue growth persists despite lower unit shipments, PC-market exposure and high customer concentration.
- Whether elevated R&D, SG&A, interest and JV start-up costs improve as production scales, and how gross margin develops.
- Debt and lease obligations, covenant compliance, capital and purchase commitments, and the amount of cash available outside the United States.
- The effects of distributor price adjustments and returns under ASC 606, and the sensitivity of results to estimates and geographic tax mix.