So-Yeon Jeong - IR Mike Chang - CEO and Chairman Yifan Liang - Interim CFO.

Craig Ellis - B. Riley Ross Seymore - Deutsche Bank Evan Wang - Stifel.

Good day, ladies and gentlemen, and thank you for your patience. You've joined the Alpha and Omega Semiconductor Fiscal Second Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions) As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Ms. So-Yeon Jeong. Ma'am you may begin..

Thank you. Good afternoon, everyone and welcome to the Alpha and Omega Semiconductor's second fiscal quarter of 2014 conference call. This is So-Yeon Jeong, Investor Relations Representative for the company. I'm joined by Dr. Mike Chang, the Chairman and Chief Executive Officer; and Yifan Liang, Interim Chief Financial Officer of the company.

This call is being recorded and broadcasted live over the web, and can be accessed for seven days following the call via a link in the Investor Relations section of our website at www.aosmd.com. The earnings release was distributed by GlobeNewswire today, February 5, 2014 after the market close. The release is also posted on our company's website.

Our earnings release and this presentation include certain 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 that we provide.

A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. We would like to remind you that during the course of this conference call, we'll make forward-looking statements, including discussions of 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 from such expectations. 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. AOS 2014 fiscal year ends on June 30, 2014. Now, let's hear from Yifan, who will provide an overview of the second fiscal quarter 2014 financial results.

Yifan?.

Thank you, So-Yeon. Good afternoon and thank you for joining us. Today on our call, I will discuss the key financial results for the quarter. Then I will turn it over to Mike our CEO who will review the company's business highlights and then I will follow-up with our guidance for the next quarter.

Revenue for the December 2013 quarter was $76.3 million, a decrease of 9.3% from the prior quarter, and a decrease of 14.7% from the same quarter last year. MOSFET revenue was $58.9 million, down 9.5% sequentially. Power IC revenue was $13.2 million, down 2.9% from the prior quarter.

And our service revenue was $4.1 million, as compared to $5.4 million from the prior quarter. The decrease in product revenue quarter-over-quarter largely reflected seasonality of the markets that we are in. Gross margin was 17.9% for the December quarter as compared to 20.4% in the prior quarter, and 23% for the same quarter last year.

The decrease in gross margin was primarily due to low factory utilization which was partially offset by shutdowns and temporary pay cuts. Operating expenses for the quarter were $12.3 million, as compared to $15.8 million for the prior quarter and $15.7 million for the December quarter last year.

The lower operating expenses reflected $1.7 million temporary cost savings measures that we took in the quarter, such as office shutdowns, along with the holiday season and temporary pay cuts which have been restored in January 2014.

In addition, share-based compensation charge was reduced by $1 million due to the reversal of previous amortization expenses as a result of departure of certain employee stock option holders. Such reversal is required by GAAP. We have also taken some cost saving measures by prioritizing our R&D efforts to further strengthen our financial performance.

Income tax expense was $1.1 million in the quarter, as compared to $1 million for the prior quarter, reflecting the impact of our relatively fixed tax structure. Net income for the quarter was approximately $0.2 million or $0.01 per share, remained flat as compared to the prior quarter.

Net income in the December quarter included $142,000 stock-based compensation expense in cost of goods sold, a negative $32,000 in R&D, and a negative $5,000 in SG&A. Depreciation and amortization expenses were $6.9 million for the quarter. The non-GAAP net income for the December quarter was $0.01 as compared to $0.06 for the prior quarter.

Now moving on to our balance sheet. We completed the December quarter with cash and cash equivalents balance of approximately $103 million, as compared to $96 million at September 30, 2013 and $92 million at December 31, 2012. Net trade receivables were $39 million compared to $41 million last quarter and $43 million last year.

Day sales outstanding for the quarter was approximately 46 days compared to 44 days last quarter. Net inventory was $62.8 million at the quarter end, down from $68.4 million for the last quarter and down from $71.5 million for the prior year. Average days in inventory were 94 days for the quarter compared to 92 days in the prior quarter.

The channel inventory remained flattish quarter-over-quarter. Net property plant and equipment was $127.5 million, a decrease of $5.5 million quarter-over-quarter. Capital expenditures were $1.7 million for the quarter. We are reducing our CapEx estimate for the fiscal 2014 from $15 million to $10 million.

We have spent about $3.3 million for the fiscal year-to-date. Cash flow from operations were $8.3 million for the December quarter. We generated about $6.6 million free cash flow in this quarter. Now, I would like to turn the call over to our CEO, Dr. Mike Chang, who will provide the business highlights for the quarter.

Mike?.

Thank you, Yifan. And welcome, everyone, to the AOS fiscal Q2 earnings call today. We finished our December quarters with revenue slightly below the midpoint of our guidance due primarily to the lower service revenue.

Our bottom line was better than expected due to tightening expense control with certain, temporary cost saving measures implemented during the December quarter. The December quarter was a stabilizing finish to a very challenging year to both PC industry and for AOS.

During the past year, our amidst strong headwinds with satisfactory focus on accelerating our expansion into the new growth markets with our competitive new products derived from the technology platform that we have released from our Oregon fab in 2012.

For example when you look at our focus segment such as industrial power supply and communication, they are growing into a meaningful revenue stream. The aggregate revenue from this two focused segments has reached $79.2 million in calendar year 2013 from $69 million in 2012 while the total revenue declined by 14.7%.

We expect that the momentum in our focus segment will continue to grow in calendar year 2014. Building on this momentum, we have released and now set up a new technology platform during year 2013, which will be the significant source of growth beyond 2015.

Proliferation of the new product from this platform will position us to effectively compete in areas we are focusing on. With that let me move on to our market segment overview. The computing business represented 46% of revenue in fiscal Q2.

I am happy to report that we have received and upgraded new vendor position that is AVL from their OEM customer in last December. The AVL acquisition will allow us to compete in many desirable product lines including servers and open the door for future business expansion.

Looking ahead what PC market is getting less volatile compared to 2013, it is still projected to decline by single digit point in 2014. Now that the OEM issue is behind us and it was our recent penetration into new accounts we are confident to maintain our revenue level from PC segment in 2014. The consumer segment represented 19% of revenue.

Going forward, we expect the overall TV market to remain flat for 2014 and our position to remain stable within our customer base. Also in this segment, we expect more contribution from news, gaming, new gaming consoles in this year.

Industrial and Power Supply represented 18% of the revenue as our high-voltage and medium-voltage products started to gain good traction.

The ever increasing efficiency requirement of power supplies are, driving demand for our high performance, high-voltage and the medium-voltage products, also with the segment -- within segments we are seeing growing opportunity in applications such as power meters, voting machines and LED General lighting, Based on the momentum we see today, we expect a noticeable expansion in this segment in 2014.

The Communication segment was 8.4% of our total revenue in December quarter. We are seeing growing design wins in smartphones and battery packs with our EST protection products and most of MOSFET. In telecom power area, we are steadily increasing our customer base and growing our mid voltage MOSFET business, with DC-DC converter applications.

We will continue to execute our design and sales initiatives to drive in a larger percentage of our revenue from the communication segment. As you know a typical product formation cycle in our focus segment that is industrial power supply and communication is two to three years.

We have consistently communicated that -- communicating initial design success in our focus market segment in the past. We are seeing the sign of green [fuse] and are committed to convert these initial achievements to a concrete revenue stream.

Although, the full potential of the design-ins and the design wins won't be fully realized until calendar year 2015, we believe that a sales conversion in next 12 months will support our healthy recovery in 2014. I am confident about our growth and the profitability prospects in year 2014 and beyond.

We are reclaiming our position in PC segment and we are seeing solid signs of expansion in our focus segments. With our competitive product portfolio we are accelerating our new account penetration with added strength and renewed focus in sales and marketing.

Even though we start 2014 with seasonal low March quarter, we are determined to maintain the operational and financial discipline to achieve operating profitability for the calendar year 2014. Now, I will turn the call over to Yifan, our Interim CFO for guidance..

Thank you, Mike. Now let's discuss the guidance for the March quarter. As we've all seen the continuing weakness in the PC market and we are entering into our typical seasonally low quarter, our business environment remains very challenging. Given that, we expect our March quarter revenue to be in the range of $73 million to $77 million.

GAAP gross margin is expected to be approximately 17%, plus or minus 1%. GAAP operating expenses are expected to be around $14.5 million to $16.5 million. Tax expenses are expected to be about $1 million to $1.2 million. Our share-based compensation should range from $1 million to $1.2 million.

As usual, we're not assuming any obligations to update this information. With that, we're opening the floor for questioning.

Operator?.

Thank you, sir. (Operator Instructions) Our first question comes from Craig Ellis of B. Riley. Your line is open..

Thanks for taking the question. Mike and Yifan. My first question is related to your revenue outlook. It's fairly flat sequentially which compares favorably to the March quarter in years in the past.

But if you look at the either product trends or the end market trends, can you help us with some of the gives and takes that are underneath that top-line number?.

Well, Craig, thank you for the question. So, the first question is about the accelerated growth in our second half and what we're seeing and I think Mike can summarize it by highlighting the applications, the growing applications in our conventional business and also the growing momentum in our focus area too. So with that Mike..

Thank you, So-Yeon. To start into an easier answer probably, actually, okay you talk about year 2014, this year, calendar year, okay. So even though we start with a traditionally low quarter in March, however, you have to look into other momentum which I faired into what I'm talking about okay. There is two actually two momentum.

One is the -- is our traditional factor, which means the PC area or the consumer area, okay. Last year we hit in the PC area by two headwinds, one is the PC market itself crashed, okay, we're down by about 10%, 14%. Another one is the OEM issue, okay.

The PC market, okay, right now it's kind of an investment volatile okay, which is maybe okay, but however, in the OEM area okay we actually on the positive weak trend are lost territory. Let me give you a little bit more flavor, okay. When that happened here we actually get two suffering. One is the -- we were not able to ship product immediately.

We got cut off right. Another one is -- we also cut off from the design in the new product into the customers, okay. Those processes are totally lit up, okay in early December. So now only that we can lit up from what I already said that well we elevated that. So right now, okay. Since the meeting last year, we started design in, okay.

So these design in will become a revenue gradually into this year, okay. So most likely from the Q2, Q3. Also we claimed back our lost revenue which also hasn't been accessed. So over there, you can see there is a recovering of growing momentum here, this one area.

Now another area is our emerging or our focused segment, the Industrial Power Supply and the Communication. As I reported to you, our design wins in the last -- in past right now start to transform into revenue -- I will call because these are still young so we call reissue, okay.

So those will have started pickup there -- that's where we are more confident about it going forward the momentum. I don't know if this answers your question..

Thanks for that color Mike. But I was really asking about something near term but let me check your remarks with a full year number.

So are you saying that – that you think calendar 2014 revenues for AOSL will be flat to up or are you saying that they would be down for a particular reason?.

No. For the year 2014 calendar year issued okay -- otherwise we would not to be able to report..

Okay. And then….

Yeah, I'm sorry -- we should not talk too much – we're not supposed to guide too far, I'm sorry..

And then secondly it seems like from the commentary around the current quarter's gross margin which came in little bit lower than I expected that its being significantly impacted by manufacturing utilization.

What can the company do to increase gross margin above current levels if there isn't an appreciable rise in revenues over the next four to eight quarters?.

Craig, Yes. At this point since our revenue is at a seasonally low level and utilization is definitely an overriding factor in our margin profile. So we're actively diversifying into other segments and then focus on growing business, open new accounts and then open into the new areas.

So, as our revenue resumes growth, I would expect our margin will improve along the way and mainly -- benefiting from two areas, one is in utilization, the other one is when we get into new areas and so the mix would definitely help.

So but, same time when watching our gross margin line, we want to try to control our cost and expenses aligned with our revenue level. So, we are taking some steps and actions to rightsizing our cost of goods sold..

And when would we be able to see the benefit of the actions that you're taking, Yifan? Is that something that would -- that would appear in the first half of calendar '14 or are those longer term initiatives that wouldn't be more visible until the back half of the year? And can you comment on how significant they are?.

Well, I would expect for any actions that we've taken in the last quarter and this quarter and then benefit would be gradual -- we probably will see it from the second half of the year, but I would expect improvement and that it's gradual and not like a hockey stick..

Yes. Also I would like to make a point that at this low level of revenue the loading is really the dominant factor. So like Mike said in his prepared remarks, our singular focus is to execute our recovery plan and we want to reach the historical high business level first and then we should be ready to talk about the future business model..

Fair enough, So-Yeon. And then lastly and I will get back in the queue.

On operating expense there was impressive control in the December quarter, given where gross margin dollars are with the calendar first quarters outlook, why not retain the initiatives that you had in the quarter for at least another quarter, if not longer until overall profitability is higher?.

Craig. We took some temporary cost savings measures in the December quarter, basically shut downs along with the holiday seasons and we took some temporary pay cut. The holidays are over and [recovery] pay cuts, I mean that also impact on our morale.

So right now we're just focused on -- the whole company is focusing on growing business and opening up new accounts and expanding into diversified areas to mitigate this fluctuation and we will go from there..

Yes. I think Yifan made a good point that December was actually the abnormal, because of the temporary cost cutting measures. Our guidance is a good base for you going forward, so when our business grows some of the variable expenses and compensation will come to play as well.

But the bottom line is Craig that we will continue to align our resources with our growth drivers while maintaining tight control on our financial disciplines..

All right. Thanks So-Yeon. Thanks Yifan..

Thank you. [Operator Instructions] Our next question comes from Ross Seymore of Deutsche Bank. Your question please..

Hi, guys. So A bit of a longer term question. Just kind of the structural improvements that you're trying to put into place with this target of hitting operating profitability this year.

If you were to get back to about the $350 million a year in revenue level, in that $350, million, $360 million range in past years you've been kind of in the 25% to 27% gross margin, what would be the puts and takes that would make it better or worse at that revenue level whenever we thought it would happen within the next year or two.

Do you think your gross margin will be higher or lower now, and why?.

Well, Ross, right now as I said to Craig, right now [nation] is an overwriting factor in our margin profile right now. So, and then -- we don't give guide out that much far out and so, but we do expect to recover from the – in the computing segment and then we have got some grossing from our diversified area.

So, I would think at this point our history would be one of the good indicators to think about our revenue level and gross margin level..

Then the other question, different item to repeat Ross your question of position; I think you are on the right track okay. So we are looking for those big recovery, but once we got the number there, the margin should match with the historical number, yeah..

Okay..

So this is on track, yeah..

Got it. Okay. That's helpful.

As far as the near term it was helpful that you put everything into context of end markets, but if we put it into the MOSFET and Power ICICs and services for the first quarter or the calendar first quarter guidance, do you expect much difference in the sequential change between your three primary segments?.

No significant changes..

Yeah. Well, I want to point out to Craig as well Ross that March being our seasonally low quarter post Christmas and post Chinese New Year that it's a slow quarter, low key and lack of excitement and murky visibility for us too. So having said that, the product mix, we won't see any dramatic change in there during the March quarter..

Okay. And then the last question I had just to make sure I got it right, a bit of a housekeeping one.

When you did list off the end market exposures in the quarter, I just wanted to make sure that I got those correct, I don't know So-Yeon, you could just rattle them off again with I think computing, I think you said 46% of sales is where you started, if you could just give me those five numbers really quick, that will be helpful?.

Sure. The commodity segment was 46%, consumer was 19% and power supply and industrial was 18% and the communication was 8%..

Great. That's what I needed. Thank you..

All right..

Thank you..

Thank you. Our next question comes from Tore Svanberg of Stifel. Your line is open..

Evan Wang calling in for Tore.

Hi, I'd like to just start with something that Mike mentioned earlier in the call that you were talking about your sales and marketing that will be your focus and I was wondering if you could give some idea what your plan is in that area given your current cost constraints how would you be able to say shift resources to that?.

Okay. That's a very good question. We are more focused on this new emerging market which is our goal there. So the resource that it need to support will be more keen on that one right. So basically we are plus repositioning ourselves to taking care of that, make it more effective to be in line with our growth or our recovery..

Okay. Okay. Great. Thank you. And then just to get back then on the topic of the near term trends or so forth.

Have you had any talk with customers and what do you think that the post Chinese New Year booking, the momentum might be like? Do you have any indications that it could be -- could it downsize pretty quickly to say, January month strong kind of numbers or any kind of indications where the quarter might be headed after Chinese New Year?.

Actually I'll take the first cut. We always get this question around this time Evan and I think our answer has been kind of consistent. So with those holidays and Chinese New Year, our visibility is relatively low at this point and we don't usually comment on further..

Actually people were just start to getting back or so..

But, if would ask, Yifan, You can comment on how our backlog is kind of something our guidance..

Well, I'm not sure. Evan as we stand today I feel comfortable that they're in the rage of low end of our March quarter's guidance. I'm hoping to get to that $75 million range.

So at this point and yes, but further out it has been little bit murky at this point?.

Yes, we don't guide out that far but however, like Mike mentioned based on our customer's forecast, our June quarter is shaping up well with growth driven by our previous and emerging design wins we have disclosed..

So Yifan when you said that backlog covers you pretty well now at least to the lower end of your guidance.

Are you factoring some of the turns orders that you may have received up to this point?.

No that's purely been backlog and we normally, we would have some turns business in a sense during this quarter..

Okay.

Can I ask what your lead time is at this point?.

Lead Time is normal at this point and not -- yeah it has been, 7, 10 days, couple of weeks I guess..

Seven weeks or so is that what....

Oh, seven, less than 10 weeks and yes..

Yes, less than 10 weeks, 7 weeks to 10 weeks..

Yes..

Okay. Thank you.

And just a question there, help me understand how you fit into the business cycle little bit, when you look at the end products, do your products get ordered closer to the latter part of the assembly process or the earlier part?.

Well that one, it depends, I mean some like a computing sector and yes all parts are probably in the early stage of that finished product because all the parts are relatively a low dollar amount compared to Intel CPU didn't ship and so I would expect OEM and further more expensive chips at the last minute right before they ship out..

Okay. And some of the industrial might be a little less..

Yes, that depends on generally probably in early stages of the final end product..

Okay.

So when I look at your revenue breakdown by end market and please correct me if I am off here, but it looks like your industrial did it actually grow in dollar amount?.

Yes, you are correct. Even though our overall revenue is down, but power supply and industrial sector did grow in dollar amount and in percentage..

Yes and what about your -- any other end market that was up in dollar amounts?.

No. I think..

Okay. Okay, all right.

So I wanted to ask one more question about your longer-term outlook without of course asking you to give -- guidance but when you look out into 2014 your comment appear to be that computing would be flattish and consumer could also be flattish, is that right?.

Yes..

Okay.

So what we are really looking at is industrial and communications driving growth in 2014?.

In the net, Yes..

Okay.

What about for the March quarter right now in the near-term which of these four end markets would you say have the most momentum for you?.

I am thinking that -- I mean March quarter is seasonally low, so I mean, not a whole lot of excitement there and the mix would probably rather same -- similar to third quarter..

Okay, That's very helpful. All right, thank you very much. That's all the questions I have. Thanks for taking my question. .

Thank you..

Thank you..

And then, as there are no further questions in queue. I'd like to turn the call back over to management for any closing remark. Actually I am sorry, we do have a follow-up question from Craig Ellis of B. Riley. Your line is open..

Thanks for taking the follow-up question, Mike I wanted to go back to some of your prepared comments and some of the Q&A comments and really take a longer term view at things.

When the company did the fab acquisition the basis for that acquisition was to accelerate your new product introduction capability and give you the potential to offer a much wider and more relevant array of platforms that could help diversify your revenue mix.

It seems like you are saying that that's on track and if you are moving in that direction and that we really start to see the revenue payout in calendar '15 from the design wins that should take place this year and from some of the things that we're seeing such as the industrial growth Q on Q in 4Q.

So what can we look at between now and 2015 that will give us further confidence that that longer term transformation for Alpha and Omega is on track?.

That's a very good question. Yeah you are right. Okay. The purpose to purchase the Oregon fab really is for the new technology faculty platform development and maybe little more specifically is a relatively talking about our diversification, but diversification is not just by thought, it's really the substance which you need technology and product mix.

So if look around the right there, it's very unfortunate last year PC market dropped right. So if we don't have the Oregon fab, this year we don't know how to adopt because -- so we got at least -- we see the green shoes from those technologies into product, into revenue or this new focused area is industrial power supply and communications.

So that actually is what we are focused. But I also want to emphasize why are going to set production chart real hard is we are not giving up our power -- the PC segment, nor would we give up the TV. We just want to make our company a bit more balanced company with all four segments, that's what going forward is..

Sure. So, as Mike said, the overall revenue expansion will measure our overall recovery track. The milestones that we would like you to focus is our product mix and the segment mix. That will be our key metrics to look at our diversification..

Thanks So-Yeon, thanks Mike..

Yeah. So we're actually very thankful of this path..

(Operator Instructions) And as there now appears to be no questions in queue, I'd like to turn the call back over to management for any closing remarks..

Okay. This concludes today's call. Thank you for your interest in AOS. We look forward to talking to you again next quarter. Thank you..

Thank you, ladies and gentlemen. That does conclude your program. You may disconnect your lines at this time. Have a great day..