Ladies and gentlemen, thank you for standing by, and welcome to Alpha and Omega Semiconductor Fiscal Q1 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.Thank you. I'll now turn the conference over to So-Yeon Jeong. You may begin..

Thank you, good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2020 financial results.I'm So-Yeon Jeong, Investor Relations representative for the company. With me today are Dr.

Mike Chang, our CEO; Yifan Liang, our CFO; and Stephen Chang, our Executive Vice President.This call is being recorded and broadcasted live over the web and can be accessed for seven days following the call via the link in the Investor Relations section of the website at www.aosmd.com.Yifan will begin with a review of financial results for the quarter.

Then Mike will review the business highlights, followed by Stephen, who will provide a detailed segment report. After that, Yifan will conclude with guidance for the next quarter. Then we'll have the question-and-answer session.The earnings release was distributed by Business Wire today, November 4, 2019, after the close of market.

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 we 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 remind you that during the course of this conference call, we'll make certain forward-looking statements, including discussions of the 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 information provided in today's call.Now, I'll turn the call over to our CFO, Yifan, to provide an overview of the first fiscal quarter financial results.

Yifan?.

Thank you, So-Yeon. Good afternoon, everyone, and thank you for joining us. Revenue for the September quarter was $117.8 million, up 5.3% when compared to the prior quarter and up 2.4% from the same quarter last year.In terms of product mix, MOSFET revenue was $100.6 million, up 4.3% sequentially and up 9% year-over-year.

Power IC revenue was $15.7 million, up 14.1% from the prior quarter and down 19% from a year ago.

Assembly service revenue was $1.5 million as compared to $1.7 million for the prior quarter and $3.4 million for the same quarter last year.Regarding the segment mix, computing represented 39.2% of the total revenue; Consumer, 18.2%; power supply and industrial 23.2%; communications, 18.1%; and service, 1.3%.Non-GAAP gross margin for the September quarter was 28.3% as compared to 27.4% for the prior quarter and 29.7% for the same quarter last year.

The quarter-over-quarter increase in non-GAAP gross margin was mainly driven by the improvement of operation efficiency and product mix, partially offset by price erosion.

Non-GAAP gross margin excluded $0.4 million of share-based compensation charge for the September quarter as compared to $0.4 million for the prior quarter and $0.5 million for the same quarter last year.Non-GAAP gross margin also excluded $6 million of production ramp-up costs related to the Chongqing Joint Venture for the September quarter as compared to $2.6 million for the prior quarter and $1.1 million for the same quarter last year.

As the JV company's 12-inch fabs started production in July 2019, all fab-related costs were moved from G&A to cost of goods sold for the September quarter.Non-GAAP operating expenses for the September quarter were $25.6 million compared to $22.6 million for the prior quarter and $24.5 million for the same quarter last year.

The quarter-over-quarter increase in non-GAAP operating expenses was primarily due to the increase in R&D engineering expenses and our annual merit increase started in the new fiscal year.

Non-GAAP operating expenses excluded $1.9 million of share-based compensation charge as compared to $2.1 million for the prior quarter and $2.6 million for the same quarter last year.

Both GAAP and non-GAAP operating expenses included $2.8 million of digital power controller team expenses for the quarter as compared to $2.3 million for the prior quarter and $2.7 million for the same quarter last year.

Our digital power controller team continues to engage with customers in product designs and is making steady progress toward our product road map.Income tax expense for the quarter was $0.4 million as compared to income tax benefits of $0.6 million for the prior quarter and income tax expense of $0.6 million for the same quarter last year.Non-GAAP EPS attributable to AOS for the quarter was $0.26 per share as compared to $0.35 for the prior quarter and $0.36 for the same quarter last year.Historically, AOS has been generating positive operating cash flow.

However, in the September quarter, net cash used in operating activities by AOS was $4.2 million. This was largely impacted by 2 items totaling $15.1 million. First, $9.2 million one-day delay of receivable payment from one of our major distributors due to the bank shutdown on September 30, 2019, because of Typhoon Mitag in Taiwan.

Second, $5.9 million net intercompany receivable impact from the JV company.For the prior quarter, AOS generated $15.2 million operating cash flow and $18.4 million for the September quarter last year.

The JV company generated $1.6 million operating cash flow in the September quarter compared to $6.9 million used in operating activities for the prior quarter and $0.4 million for the same quarter last year.

The $1.6 million operating cash flow was largely attributable to the $5.9 million intercompany payable to AOS and a $2.7 million interest refund received from the local government under the joint venture agreement.

This refund program will continue for the next two years at the same amount each year.Consolidated EBITDAS for the September quarter was $14.3 million compared to $14.2 million for the prior quarter and $15.4 million for the same quarter last year.

EBITDAS attributable to AOS for the quarter was $13.8 million as compared to $15.1 million for the prior quarter and $16.7 million for the same quarter last year.Now let's look at the balance sheet. We completed the September quarter with cash and cash equivalents of $103.1 million, including $88 million at AOS and $15.1 million at the joint venture.

This compares to $121.9 million at the end of last quarter, which included $100.7 million at AOS and $21.2 million at the JV company.

Our cash balance a year ago was $113.2 million, including $81.2 million at AOS and $32 million at the JV company.Bank borrowing balance at the end of the September quarter was $136.4 million, including $41 million at AOS and $95.4 million at the JV company.

In the September quarter, AOS borrowed $2 million from a new line and paid back $2.1 million of the existing loans.

The JV company borrowed $0.8 million from a new working capital line and paid back $1.7 million of the existing loans.Net trade receivables were $39.3 million as compared to $24.3 million at the end of last quarter and $37.1 million for the same quarter last year.

Day sales outstanding for the quarter was 25 days compared to 24 days in the prior quarter.Net inventory was $118.6 million at the quarter-end, up from $111.6 million last quarter and from $98 million in the prior year.

Average days in inventory came down to 114 days for the quarter as compared to 117 days in the prior quarter.Net property, plant and equipment was $400.3 million as compared to $409.7 million last quarter and $368.5 million last year.

Capital expenditures were $14.4 million for the quarter, including $8.3 million at AOS and $6.1 million at the JV company.Before I turn the call over to Mike, I would like to share the progress at our JV company.

During the September quarter, assembly and test production continued to ramp up and the 12-inch fab started small mass production in July 2019.

We expect to continue to ramp up Phase 1 of the 12-inch fab in accordance with our plan to approach the target run rate by the September quarter of calendar year 2020.With that, 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. Good afternoon. We are pleased with our performance and financial results in the September quarter. AOS achieved a record quarterly revenue of $117.8 million, marking the 15th consecutive quarter of year-over-year revenue growth.

The strong top line performance was driven in part by the additional supply contribution from the 12-inch fab at the JV company.

Gross margin came in higher than midpoint of our guidance, which was more than enough to offset the investment in R&D and delivered healthy earnings for the quarter.One of the major growth drivers for us is mobile applications, such as smartphone, battery protection and quick chargers.

I will take a few minutes to share with you the exciting progress we are seeing in this business.It always starts with strategy. As a relatively young company, we identify applications that give us a headstart with our core technology as well as the volume to scale.

Once we land, we expand our footprint with multidimensional initiatives, including share gain, content increase and customer expansion to become a market leader. We then use this success as a springboard to leap to the next market and replicate the success.

We have demonstrated our ability to execute this strategy in the computing market, where we grew from zero dollars to about $200 million in annual revenue.

We plan to do the same in the mobile market, where the served available market opportunity is more than double that of the computing market.We have successfully landed at each of the 7 largest smartphone OEMs worldwide as one of their key suppliers. Our mobile business combining battery protection and quick charger products is growing significantly.

In the September quarter, we doubled mobile business revenue from the same quarter last year.

Now that we are aligned with top-tier global brand OEMs and ODMs, we will continue to focus on expanding our presence to multiple generations smartphone models and the peripheral devices.As a case in point, last year, we initially penetrated into a global brand OEM with a one-year model as a new supplier.

This year, we won new models on top of the last year's model and further penetrated into several adjacent sockets. We plan to grow our share by adding additional days of business year-after-year at the multiple global OEMs and ODMs. The JV company is expected to play a vital role as a reliable and scalable supply chain for many years to come.

In the meantime, to support the current demand for our mobile products for this year's models, we are diligently working to make room at the Oregon fab by transferring production of some of our products to the JV company.Typically, transfer activity takes approximately 6 to 9 months depending upon the complexity of applications as well as the number of OEMs and ODMs involved.

Generally speaking, transferring products for applications with short cycles such as PC is relatively faster with a simpler requalification process. We have already started the requalification process for some computing products and are making steady progress.

Given that the market is less tight and the macro environment is uncertain, the requalification process is returning to a normalized pace rather than the accelerated pace we experienced last year.

Nonetheless, we expect this transfer activity to still help us buck the seasonality with slight growth in the December quarter following the record-high September quarter.The products manufactured at the JV company are already in customers' hands for qualification, and design-in momentum for these products is building.

We are confident in our ability to reach the Phase 1 target run rate by the September quarter next year, as we discussed on our last earnings call.In addition to the mobile business, we are also encouraged by healthy demand across our product lines.

As the computing industry expands to include artificial intelligence, big data and Internet of Things, our customers increasingly value our highly efficient and high-performance products, especially for the Vcore and system power.

Our IGBT solutions also contribute -- also continue to establish strong footing at a broad base of home appliance customers. We also see solid demand for our products for AC/DC power supplies.

Notably, the Oregon fab has been running at its full capacity and some products built there are still on allocation.Despite macro headwinds and growing market uncertainty, we are generating positive results by executing our prudent business strategy. Our diversified products are well positioned with strategic players in multiple key market segments.

We are committed to even better serving those customers through increasingly sophisticated total solutions and a reliable supply chain.

We are encouraged by the tremendous growth opportunities ahead of us, which give us confidence in achieving our calendar year 2021 target of $600 million of annual revenue.With this solid start in the first quarter, we will continue to execute on our growth strategy and build strong momentum in our business in fiscal year 2020 and onward.Now I will turn the call over to Stephen for a detailed segment report.

Stephen?.

Thank you, Mike, and good afternoon.Let me start with computing. It represented 39.2% of our total revenue in the September quarter. Revenue was down 6.1% sequentially and down 8.3% year-over-year. As planned, we served our computing customers in the peak season utilizing channel inventories on hand.

Computing sell-through grew by double digits sequentially to reach a record high. Our Vcore business is strong, and we see some early adopters of the system power products built at the Chongqing JV. While the CPU supply constraint is easing, it is expected to remain challenging in the December quarter.

Based on that, we are estimating conservatively a modest increase for the December quarter.Now let's discuss the Consumer segment, which represented 18.2% of total revenue in the September quarter. Revenue increased 2.5% sequentially and was up 0.6% year-over-year.

The sequential growth was driven mainly by IGBT products in home appliances in China and Korea. We continue to grow our business in refrigerators and air conditioning systems as our IGBT products provide our customers with the performance and reliability demanded by these applications.

We are on track to achieve another 40% growth with our IGBT product line this calendar year, the second year in a row at that level. Going into the low season, although home appliances will grow slightly, it is not expected to be sufficient to offset a seasonal decline in TVs.

We expect a double-digit decline in the Consumer segment for the December quarter.Now let's turn to the power supply and industrial segment. This segment accounted for 23.2% of total revenue, up 19.1% sequentially and up 25.4% year-over-year. Our quick charger momentum accelerated during the September quarter.

We again achieved a double-digit growth from the strong June quarter because of our strategic position at global smartphone OEMs in their peak season. We also saw a rebound in our AC-DC power supply business during the September quarter. Looking into the December quarter, the quick charger business was slow as we exit the smartphone season.

However, we expect to maintain overall segment revenue at the September quarter level due to growth from other applications.Finally, let's discuss the communications segment, which was 18.1% of revenue in the quarter, up 24.6% sequentially and up 19.2% year-over-year.

Rising demand for our battery protection products resulted in substantial growth in this segment in the peak smartphone season. Our products are based on our leading low voltage MOSFET technology, which enables higher efficiency and cooler operation during battery charging and discharging.

We saw some softness in the 5G telecom business during the September quarter in the midst of trade tensions. Looking to the December quarter, we expect the battery protection business to decline slightly. This will be offset by some recovery of our 5G telecom business.

Therefore, we expect to maintain this segment's revenue in the December quarter.With that, I will turn the call over to Yifan for the guidance..

As we look forward to the second quarter of fiscal year 2020, we expect revenue to be between $117 million and $121 million, GAAP gross margin to be 22.3% plus or minus 1%. Non-GAAP gross margin is expected to be 27.3% plus or minus 1%.

Note that non-GAAP gross margin excludes $0.4 million of estimated share-based compensation and $5.8 million of estimated production ramp-up costs relating to the JV company.GAAP operating expenses to be in the range of $27.4 million plus or minus $1 million.

Non-GAAP operating expenses are expected to be in the range of $25.4 million plus or minus $1 million. Both GAAP and non-GAAP operating expenses include $3.1 million to $3.3 million of estimated expenses relating to the development of our digital power controller business.

Non-GAAP operating expenses exclude an estimated share-based compensation charge of approximately $2 million.Tax expense to be approximately $0.5 million or $0.7 million.Loss attributable to noncontrolling interest to be around $3.6 million. On a non-GAAP basis, excluding estimated production ramp-up costs relating to the JV company.

This item is expected to be approximately $0.9 million.As part of our normal practice, we're not assuming any obligations to update this information.With that, we'll open up the floor to four questions.

Operator?.

[Operator Instructions] And our first question comes from David Williams with Loop Capital..

Congrats on the quarter and the progress being made.

First, from a design win perspective, just kind of getting -- trying to gauge the customer level and interest, what are you seeing in terms of design activity and in terms of projects kicking off? Are you seeing any delays there or maybe some acceleration? I know in the past, you talked about some delays and push out of certain projects.

Are you still seeing that? Or are you seeing customers maybe a little more willing to go and step in and kick these projects off?.

Sure. This is Stephen. Good question. So our design win is very healthy. Right now, it's in the - we're following normal seasonal patterns. And several of our peak segments are computing and smartphone related, and those tend to be heavy peaking in the Q3 time frame.

So our design wins are going well in terms of tracking into those new projects going into next year. So we are happy with the progress that we see there..

Great. And then secondly, in terms of the demand trend and what you're seeing in terms of channel inventory or distributor inventory. I guess, more broad-based, you're looking across all geographies and all end markets.

Are you seeing the demand level -- or excuse me, the inventory levels have come down, are they lean? Are they still a little heavy? And what do you expect in terms of maybe a possible replenishment of the supply chain?.

Sure, David. This is Yifan. Right now, our channel inventory remains at a healthy level. Right now, it is at the -- toward the low end of our target range of two to three months. So right now, we don't see much channel inventory stuffing at this point..

Okay.

Do you expect to see some replenishment? Are you at levels that you would expect to see some pull-in from that as we head into the December and maybe the first calendar quarter?.

Well, as we stated in our prepared remarks, in different sectors, we may see different -- a little bit different scenarios there. Overall, we see our production is catching up and -- so that it can allow us to buck the seasonality. I mean, that's the overall picture over there.

So in terms of segment, in the computing area we would be expecting some strong segment sell-in over there..

Okay, fantastic. And then just kind of thinking about it, and you talked a little bit about this earlier.

But can you talk a little bit about the design wins and the, I guess, the additional sockets that you're picking up and the share gains you're making at some of the major OEMs and what your expectation is there? I know there's some periphery-type sockets that we've talked about in the past.

But what kind of headway are you making in terms of -- if we think about the next generation? Do you think that you are - you'll pick up share? And what is the opportunity, I guess, to move into a first or maybe in a second source position at those handset OEMs where you may be serving may be a third-source position?.

Sure. I'll take that question. So in our smartphone business, there's 2 main applications we get into. One is the battery protection and the second is the quick charger, which is sold in the box with many of these handsets. So right now, our position is growing stronger. We are, as Mike mentioned, in each of the 7 leading smartphone makers.

And some of these are relatively newer. Some have been long, longer-term customers of AOS. So we'll continue to layer on top of our business with -- as additional models continue to roll out. The same thing goes also with our quick charger business..

Okay, great. And then one last one for me, if you don't mind. Just kind of thinking about the margin profile with -- as a new JV comes online, and I understand the benefits and cost savings of the 12-inch fab will take some time to really work through given the yield efficiencies and the likes.

But given the size of the revenue potential, what could the incremental margin contribution look like once that fab hits its stride?.

Sure, David. Right now, we expect and we can ramp up to the targeted run rate of Phase 1 12-inch fab in the September quarter next year time frame. So at that time, we're currently estimating our 12-inch wafer cost on a per-die basis will be on par with our current 8-inch wafer. This is only Phase 1 on its own.

Right now, for the additional phase, I would expect some cost benefit generating from there..

And your next question comes from Craig Ellis with B. Riley..

Congratulations on your first full quarter of 300-millimeter fab output on. Yifan, I'll start with some clarifications for you. So first, you mentioned 2 items that hit at the end of the quarter that were in total $15 million.

So is it fair to say that if not for those, operating cash flow and end of quarter cash would have been $11.8 million and $103 million, respectively? And I assume that those collections came in right at the start of fiscal Q2, is that fair?.

Yes. Yes. Exactly. The $9.2 million came in on October 1., so that was the way it is..

Okay. Secondly, I think we had been looking for an increase in operating expense in the quarter, but it came in about $1 million above what I was expecting. I anticipated that digital power would be ramping up.

But were there any onetime items in the quarter? Or was the increase really all about fringe and performance accruals, et cetera?.

Yes. OpEx in the last quarter was relatively low, was fluctuating to a low point. This quarter, it fluctuated back. And also, we also increased some investment, so to beef up our R&D activities. So we would expect that all those R&Ds will support us for the next year and the future's growth..

So is it fair to say you'd expect a flatter OpEx trajectory from here? Or is there something that would cause OpEx to move higher as you go through the second half of fiscal '20?.

For '20, I would expect, yes, in the March quarter, probably in line with the current level in the June quarter, I would expect an increase. At that time, we'll have more activities for the R&D design-ins or wins for the following year..

Okay. My last clarification, and it's a follow-up to the earlier question. I know three months ago, we were worried about distributor channel inventory, particularly in the PC space, and distributor intent to get inventory levels down.

I know you talked about inventory levels overall, but are you also saying that within that, you're happy that -- with PC inventories -- the PC inventories are at normal levels?.

Yes. And last couple of quarters, actually, we managed that dynamic between our internal inventory, external inventory and our own productions. So we knew in the September quarter we would have computing and mobile businesses will be in the peak season. So with our limited -- constrained capacity.

We're managing those dynamics so that we use our channel inventory to support our September quarter's PC peak season. So that's why from the real business perspective, our sell-through PC revenue actually reached a record high in the September quarter. So just we spare more capacity to support the mobile side of the business growth..

Okay. And congratulations on the record sell-throughs with compute.

I'll use that as a segue to ask Stephen in a few questions, Stephen, just on the Communications business, can you help us understand, one, the degree to which the wins that the company is getting is for 4G phones versus 5G? And given the very significant increase in expectations for 5G phones next year, which I think consensus is probably around 250 million units, how does the company feel about its ability to get designed-in into those phones since that's where a lot of the interesting growth is going to be coming from in calendar '20?.

Sure, Craig. So in general, the higher the power, the higher the battery that's needed, the more power content is and there is for AOS. With the advent of 5G, and we're anticipating that the usage will go up as more video streaming and there's more demands on the battery, whether you're charging or discharging.

So for us, we're happy to see a push for greater performance out of the power products. So for us, we believe that this could be -- continue to be a growth area for us as battery capacities are increasing and as the MOS that's basically have to be more efficient..

Does that mean you think that a majority of your design wins are 5G? Or just that a majority of your design wins are at the very high end of the performance continuum for the 7 smartphone OEMs that you and Mike had mentioned?.

We don't really split it out that way. In general, we -- the high-performance ones are the higher-end smartphones. And if 5G is one of the trends that's pushing for the higher battery, it's not the only trend that's pushing for the bigger capacities and the higher power consumption.

To us, it's a bit of a spectrum in terms of the demand on the phones themselves..

Okay. And then lastly, in the communications space, before I flip it over to Mike.

I think, right now, just given the significant baseband release activity out of Asian players, there's a forming view that the first calendar quarter or your fiscal 3Q and potentially even fiscal 4Q could be above seasonal as a lot of the 5G OEMs -- 5G smartphone models launch from China OEMs and others.

What's your sense for the strength in the Communications business beyond the current quarter? Is there a potential for the business to be flat in the first quarter, potentially even grow given what we're seeing with new model launch activity around the corner?.

Generally, smartphone, again, the peak is in this September quarter. Definitely, I think we're seeing more models of kind of filling in the gap between the peaks. But in general, I don't think that will be big enough to offset the normal seasonal pattern for phones. The major vendors still tend to be releasing around that September time frame..

Okay, got it. One for Mike, and then I'll ask my final. Mike, it's helpful to get your perspective on land-and-expand in the strategy the company is deploying, and certainly, there are some encouraging signs of success in communications.

My question is this, as you look at the penetration rate and adoption capacity of the 7 different OEMs, in a better case environment, if all OEMs were to march at the pace of some of your best adopters within that group, how big can communications be in a year or 2 years from now? If it's 18% of sales now, does it have the opportunity to get into the mid-20s in 12 months and maybe even towards 30%, longer term? Or what are we looking at if things really hit with land-and-expand?.

For the mobile business there, definitely, we're looking for above 20%. That's for sure, okay? So they'll call the healthy one would be 25% to 30%. And we look into the momentum, we think, which is pretty practical. And probably in the Q3, we'll probably reach 25%..

That's great. And that helps answer my last question. I'm not sure if this is for you or Yifan or even, Steve.

But one, Yifan, can you clarify what the 300-millimeter revenue contribution is within the fiscal second quarter guide?And from the first fiscal quarter, if we got the $7 million we were looking for, then there's about $30 million of revenue to get to that run rate level in the September quarter of next year.

If we were to break that down, $10 million in 3 buckets, how do we bridge the gap between where we are now and where we need to be late next year so that we're at that $37.5 million run rate? How much of that sort of differently comes from Comms, from compute, from IPC, et cetera?.

I'll start with this question. Yes, we said we're confident to reach the target run rate in the September quarter next year. This is -- right now is that we're gradually ramping up the 12-inch fab. It may not be linear.

Right now, there's - we're doing the design-ins and wins using the products produced from the joint venture and also we're transferring some productions of our products to the joint ventures so that you can spare some room for our Oregon fab. So that transferring production requires a requalification with our customers.

So those two things, depends on how it played out. And so I would expect and we need some time. Like -- as Mike and Stephen mentioned, some -- it takes some time to design-in and requalifications. So I would expect in the June quarter, you probably will see some, and in the September quarter, you will see most..

And so I'll chime in. This is Stephen. The move to Chongqing actually helps not only the products that are moving to Chongqing, but also the products that stay behind in our 8-inch fab. So it actually helps with the total loading.

So basically, I think every segment can benefit from the additional total capacity after we open up Chongqing to that level..

But Stephen, in terms of getting from here to the target run rate with the new fab, is it fair to say that a majority of that is going to be communications? Or is it really going to be broader-based participation with the other segments?.

We're starting right now with initial segments that are -- we're ramping with, including computing as well as various consumer applications.

But like we said, we're trying to make room, especially going into Q3, which is a peak season for both computing as well as communications, to make room for both of those applications when we're hitting that crunch of time like we did this year.

So next year, with the more balanced opened-up capacity, we expect to more naturally, more comfortably address that demand..

Your next question comes from Tore Svanberg with Stifel..

This is Jeremy calling for Tore. Let me add my congratulations on the cash flow profitability for the JV. I do know that some of that came from that intercompany payment.

Can you tell us a little bit more about what that is and also what the $2.7 million interest refund is?.

Sure. I mean, the $5.9 million impact was an intercompany receivable payables and balance. So right now, the joint venture is in the final stage of processing this loan paper work. So the loan itself has been approved, and right now, it's going through the final stage of the paper work.

There are quite a bit bureaucracies over there so we have to be patient. In terms of the $2.7 million interest expense refund, that was a part of the joint venture agreement.

So finally, we got approval from the local government, so the refund that came in, in the September quarter and then for the next 2 years, each September quarter for the next 2 years we will -- the joint venture is expected to receive that same amount of refund for the next 2 years..

So that refund, it's basically interest that the JV paid to the finance company and that's being returned back to you?.

No. Those are the ones that are refunded on the interest expense they paid on the lease financing and loans..

So the JV, they paid the interest on the lease finance loans and they get some of that back at the end of each year?.

Yes, yes, from the local government..

From the local government. Got it. I see, okay. And then in terms of that intercompany receivable, you said that's related to a loan that's been approved, so that's....

No. No. No. That's not related to loan. That's a normal business -- company balance..

Okay, and that's basically for -- I guess, is that for -- is that based on expenses that AOS incurred on behalf of the JV?.

Well, they purchased some materials -- we first -- from us. And then they sell finished goods to us. I mean, those ins and outs..

Got it, okay. And then the loan that you mentioned, that's still in the works.

Do you have a quantification of how much that's going to be?.

We'll disclose it when we sign an agreement..

Okay. Great. And then I guess, if we can move on to the JV.

Can you give us an idea of how much business is currently running through that -- through the JV?.

For the September quarter, yes, they supported us for the incremental revenues. I mean right now, it is for the December guidance, we also factored in the ramp-up..

Got it. Okay. And maybe just kind of getting at some of the earlier questions, but maybe looking at it a different way.

If you look at that -- again, that incremental $37.5 million that you expect from the JV, can you -- do you have an idea of how much is based on products -- new products that you've introduced over the last maybe year or so or how much of it is related to maybe expanding opportunities from existing products?.

Well, those are relatively -- as Stephen mentioned, we're getting some existing products right now, qualified with PC customers initially when transferring some production to the joint venture. Relatively speaking, for the PC requalification process, normally is shorter than other products. So we've started from there.

Later on, yes, we'll add-in other products that we'll produce from the 12-inch fab in the consumer area, in the power supply area as well..

Very good. And I guess, also, you had mentioned price erosion earlier. Can you help us -- or at least pricing pressure impacting gross margin.

Can you quantify that for us, and maybe what the expectations are for the next year or 12 to 18 months?.

Okay, sure. In the last two years also, I would say, the MOSFET industry was relatively tight and supply was tight and us, so the ASP environment was relatively favorable to us. This year, the market has been loosening up, and so after a couple of quarters. And now, it's getting to the point back to the normal, I would say.

So right now, it's in the normal ASP erosion situation. What we want to do is to overcome those ASP erosion is to rolling out our new products. And so you provide better performance and you have commanding the better margins, so that offsetting those ASP erosion.

Of course, that depends on the timing and the dynamics of those existing products versus new products. So from time to time, you may see new products overcome to the old products, and sometimes you may see some erosion temporarily..

And in terms of the normal erosion, is that on the order of 3% to 5% annually? Is that kind of what you're looking at?.

It's more like mid-single digit to high single digit. Depends on the years and on the market situation, I would say..

And that's compared to maybe flat to slightly down in the past years?.

Yes..

Okay.

And then if we look at the -- on the communications side, with the smartphone exposure, would you say the ASP dynamics there are similar to the rest of your products? Or is it a different dynamic, and also, in terms of the gross margin relative to corporate?.

In terms of ASP environment, I would say similar, than -- or maybe slightly better. In terms of margin profile in that segment, it is above our corporate average..

At this time, there are no further questions. I'll now turn the conference back over to your host for closing remarks..

This concludes our earnings call today. Thank you for your interest in AOS, and we look forward to talking to you again next quarter. Thank you..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..