Alpha and Omega reported Q4 revenue in line with guidance, while margins rebounded at the high end of management’s guided range. Each of Alpha and Omega’s four key segments recorded sequential growth in the quarter, with management saying this “broad-based” rebound “confirmed the inventory correction is largely complete.”
However, management noted that PCs are “taking longer to recover than originally expected,” though sequential growth is still expected in the September quarter due to seasonal strength. Intel’s report last week showed that the challenged chipmaker is going all-in on AI PCs, making the decision to “more quickly ramp” its Core Ultra AI PC chips at the expense of margins and profitability.
Intel also said that its “Core Ultra volume more than doubled sequentially in Q2,” with shipments surpassing 15 million and remaining on track for more than 40 million by year end, and over 100 million cumulatively by the end of 2025. With Intel aggressively pursuing AI PCs, it’ll likely spark fierce competition in the space against Qualcomm and AMD, a positive for Alpha and Omega given its tie-ins and content on Intel and AMD’s AI CPUs.
Quite a few questions on the earnings call were about a graphics card customer that is using AOSL for accelerator cards, which increases the number of MOSFETs from 9 to 16 per driver up to 50 MOSFETs per driver. Given the customer has used AOSL for graphics cards in the past, and will now use AOSL for the upcoming GPU architecture, it’s likely the customer is Nvidia. There was also this announcement in June indicating Nvidia.
Notably, the company’s “midterm target model” is $1 billion in revenue with adjusted gross margin of 30%.
Revenue
Alpha and Omega’s Q4 revenue was largely in line with both management’s guide and analyst estimates. Notably, every key segment grew QoQ.
Q1’s forecast was above estimates and points to YoY revenue growth returning as early as next quarter. Management said that in Q4, they “saw relative strength coming from gaming, tablets, e-mobility, A.I., and home appliances, while the PC segment is taking longer to recover.”
- Q4 revenue was $161.3 million, down (0.1%) YoY but up 7.5% QoQ as all four key segments rebounded sequentially. Management had guided to ~$160 million in revenue for the quarter, with analysts expecting the same.
- FY 2024 revenue was $657.3 million, a decrease of (4.9%) YoY.
- Q1 revenue was guided to $180 million, +/- $10 million, for flat YoY growth and QoQ growth of 11.6%. This came in above the consensus estimate for $174.4 million.
Alpha and Omega is now expected to potentially return to top-line growth in Q1, and accelerate through Q3 FY2025 to the low double digit range. Exiting the prolonged inventory correction, which dented growth significantly in FY 2023, clears up one major hurdle to revenue growth, though the extended PC recovery timeline is something to pay closer attention to through the September quarter.
Margins
Margins came in at the high end of management’s guided range, with CFO Lifan Yiang saying the QoQ expansion in adjusted gross margins, which flowed down the line, “was mainly driven by the improved factory utilization.”
- GAAP gross margin in Q4 was 25.7%, up 200 bp QoQ from 23.7%, but down 190 bp YoY from 28.2%. Adjusted gross margin was 26.4%, up 120 bp QoQ but down 210 bp YoY.
- For Q1, management guided GAAP gross margin at 25.0%, and adjusted gross margin at 26.4%, signaling that margins are likely to have found a bottom in Q3.
- FY24’s GAAP gross margin was 26.2%, down 270 bp YoY. Adjusted gross margin was 27.2%, down 300 bp YoY. Management has remained positive about reaching a long-term target of >30% for gross margins.
- GAAP operating margin was (0.9%) in Q4, well ahead of the implied (5.2%) margin based on management’s expenses guide, and increasing from (7.0%) last quarter. Adjusted operating margin was 2.0%, up from (0.7%) last quarter but down from 4.3% in the year ago quarter.
- For Q1, GAAP operating margin is implied to be (1.1%), due to the guide for a slight QoQ decline in GAAP gross margin. Adjusted operating margin is implied to be 4.2%, a solid QoQ increase of 220 bp.
- GAAP net margin was (1.7%), improving from (7.5%) last quarter. Adjusted net margin was 1.6%, improving from (0.8%) last quarter. GAAP EPS in Q4 was ($0.09), ahead of estimates for ($0.31), while adjusted EPS of $0.09 was ahead of estimates for $0.04.
Cash and Debt
Cash flow on this company (and most small caps) needs to be watched closely. FY2023 ended with cash flow margin of (-13%).
- Operating cash flow was $7.1 million in Q4, for a 4.4% margin. This included $4.5 million in repayments of customer deposits. Management expects to refund ~$8.4 million in customer deposits in Q1.
- For FY24, operating cash flow was $25.7 million, increasing 25.6% YoY.
- Q4 free cash outflow was (-$0.21 million) with Capex at $7.2 million
- Cash and equivalents totaled $175.1 million.
- Debt totaled $38.4 million.
Key Segments
Computing
Computing revenue decelerated to 37.6% growth in Q4. The segment rebounded 4.4% QoQ to approximately $71.6 million in revenue. Management said that this was “slightly below our original expectation for mid-to-upper single digit growth,” primarily impacted by PCs.
Management said they saw “relative strength from tablets, A.I, and graphics cards in the quarter, offset by a slower PC market recovery. Notably, tablet revenue was a record high, and the contribution from A.I. and datacenter related applications continued to grow.”
Looking ahead, Alpha and Omega expects Q1 to see mid-single digits QoQ growth on a seasonal PC pickup, combined with strength from tablets, graphics, and AI accelerators. CEO Stephen Change shed more light on some of the opportunities ahead: “We are working on multiple opportunities leveraging our existing relationship with a key graphics card maker, as well as our product portfolio including new multiphase Vcore controllers and power stage solutions for advanced computing. We are also seeing some ramp in September from a leading power supply maker that is a key supplier to the same A.I./graphics customermultiple opportunities leveraging our existing relationship with a key graphics card maker, as well as our product portfolio including new multiphase Vcore controllers and power stage solutions for advanced computing. We are also seeing some ramp in September from a leading power supply maker that is a key supplier to the same A.I./graphics customer.”
Consumer
Consumer revenue declined (35.5%) YoY but rebounded 19.7% QoQ, as the segment looks to have marked a bottom in Q2, with revenue accelerating from ~$23 million quarterly to more than $28 million quarterly. Management said that it “is now clear that the inventory correction in gaming is behind us and a seasonal build is underway.”
Looking ahead to Q1, management expects “low double-digits sequential growth in the consumer segment driven by strong seasonal pick-up from wearables and continued strength in gaming, offset by slower home appliances.”
Communications
Communications revenue rose 59% YoY and 2.1% QoQ, driven by the “seasonal pick-up from a Tier 1 U.S. smartphone customer, offset by sequential declines from Korea and China OEMs.” This was ahead of expectations for flat QoQ growth.
For Q1, management is expecting QoQ growth to accelerate to the double-digits on “seasonal strength ahead of new smartphone launches in the US and increasing demand from China smartphone OEMs.” Management added that they see two tailwinds for growth, one from rising mix of premium phones, and the other from increasing BOM content in smartphones, stemming from increased battery charging currents.
Power Supply and Industrial
Power supply and industrial revenue declined (33.7%) YoY but increased 11.3% QoQ. Management said this was ahead of expectations for mid- to high-single digit QoQ growth due to “strength in the e-mobility segment for e-bikes and e-scooters and DC fans for applications in areas such as datacenters.”
For Q1, QoQ growth is expected to accelerate to 15% to 20%, driven by quick chargers and “strength from AC-DC power supplies tied to the seasonal build in PCs.”
Earnings Call:
AI Accelerator Cards
Per an announcement in June, AOSL is expected to become a new GB200 supplier for Nvidia and to start shipments by the end of this year. Although AOSL does not call out Nvidia specifically on the call, the announcement helps us infer that it’s likely Nvidia being spoken about on the calls. The only other option is that it’s AMD.
AOSL sells MOSFETs that go into bus converters for DC to DC power conversion. AOSL works with a leading power supply company that, in turn, supplies the unnamed AI/graphic customer plus the company supplies the unnamed AI/graphic company directly. AOSL supplies the MOSFETs powering each GPU, and for the upcoming platform of this customer, AOSL will additionally sell the total solution controller and the multiphase controller. The number of MOSFETs is expected to triple from 9 to 16 up to 50 MOSFETs per GPU.
Here was some discussion on the call about this opportunity:
“David Williams
With that, I guess, Stephen, I wanted to ask — yes, I wanted to ask a little bit just on the graphics card and some of the datacenter accelerator and GPUs. We've talked about this before and starting to see those revenues, but I'm trying to understand what is it the magnitude of maybe that could be over time? And maybe is there a way to size, understanding there's different flavors or varieties of those products, but is there a good way to think about what your content can be and maybe where you're at within that maybe qualification process? Any color around that would be, I think, incredibly helpful. Thank you.
Stephen Chang
Sure. Yes. So an entry into artificial intelligence programs, a lot of it actually is built upon where we have already been with our graphics cards. And accelerator cards actually aren't that different from a graphics card in the sense that you are basically powering a high-performance GPU in both cases. And — but with datacenter, that performance requirements are being driven even higher.
[…] . So to quantify some of that, so for example, in graphics card, you can have anywhere from 9 to 16, something in that range of number of driver [MOSFETs] per GPU. But when you move to an A.I. accelerator card, that number actually jumps up to even up to 50 power stages to power that GPU.
And those are the solutions that we are shipping today in our graphics card/AI customer in their existing platforms. And we are working with them on being — on transitioning over to the new platform that they will be launching soon.”
-End Quote
There was also discussion on the call that AOSL’s opportunity is expanding with the new platform as the company will be integrated from the ground-up. The CEO stated they are engaged at the manufacturing process and engaged with the power supplier for the OEM.
Conclusion:
It was interesting the PC opportunity was not discussed in the call today, rather the call was almost entirely about the unnamed AI/graphics company. Perhaps this is because the June announcement helps to expand AOSL’s immediate opportunity considering the new platform for this unnamed customer is expected to ramp in H2 and into next year.
There is a contract expiring in early 2025 that we plan to go back and dig up information on this 24-month contract to make sure it’s not presenting an outsized risk. The contract, signed in February 2023, licensed AOSL's SiC tech and provided engineering and development services for 24 months, with a total fee of $45 million. $18 million was paid upfront by the customer, with AOSL also receiving $6.8 million in March and July 2023, with the remaining balance to be paid upon achieving certain milestones. Given that AOSL has already collected a majority of the contract's revenue, it does not look to present outsized risk here.
On the topic of risks, there is high customer concentration with AOSL as there is with most small cap semiconductor companies. For example, last quarter, the top two customers accounted for 71% of revenue.
AOSL is a stock where we are using technical analysis to its fullest. Our goal is to participate in opportunities where small cap suppliers expand their serviceable addressable market (SAM) as AI systems increase in complexity. However, the only reasonable way to do so is to adhere to our stops. You can expect updates from Knox as we go along.
Damien Robbins and Beth Kindig, Equity Analysts for the I/O Fund, contributed to this analysis
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