Alpha & Omega Semiconductor will announce its Q4 FY2024 results on August 07th. The midpoint of the management revenue guide for FQ4 is $160 million, representing a YoY decline of (-0.9%). Analysts expect revenue growth to resume from the December quarter.
Management has been quite transparent throughout the inventory corrections in the PC space in 2022 and the growth opportunities it sees in the computing segment, not just in PCs but also extending to graphics and AI accelerators. Management is seeing signs of a gradual rebound in the coming quarters and is approaching a recovery phase of the next cycle. Until we see actual improvement in the fundamentals, we would treat the company as a momentum play.
Revenue
Analysts expect FQ4 revenue to decline by (-0.9%) YoY to $160.03 million. Revenue will further decelerate to (-3.5%) YoY to $174.37 million and then return to growth, accelerating to 4.2% and 11.9% in the subsequent quarters.
FQ3 revenue grew by 13.2% YoY to $150.1 million, in line with analyst estimates. Management expanded on seasonality, saying that while the “March quarter is historically our seasonally lowest revenue quarter due to the technicality of consumer spending, the year-over-year growth indicated the strength of our recovery from the inventory corrections.”
Margins
- Gross margin improved 50 bps YoY but was down 290 bps sequentially to 23.7%. Adjusted gross margin improved 10 bps YoY but was down 280 bps sequentially to 25.2%. Management attributed the sequential decline to lower utilization and ASP, partially offset by a better mix.
- Management guide for the next quarter is 26.3% at the midpoint. Over the longer term, management remains optimistic about a return to 30% adjusted gross margin as it works towards hitting its $1 billion revenue goal:
Q, Analyst Craig Ellis: “What are some of the bigger gives and takes that we should be aware of for gross margin and really the pace of expansion and what do you need to see to be confident that gross margins can move back to that 30% level and then at some point higher? Thank you.
A, CFO Yifan Lang: At this point and I mean we still think on our mid-term target model and when we reach the $1 billion in revenue, we expect to get to 30% gross margin on the non-GAAP basis level.”
- Operating margin improved 390 bps YoY and declined sequentially by 630 bps to (-7.0%). Management guide for the next quarter is (-5.2%). Adjusted operating margin improved 150 bps YoY and declined by 580 bps sequentially to (-0.7%). Management guide for the next quarter is 1.6%. Higher payroll taxes at the start of the year also negatively impacted the operating margins.
- Net loss came at (-$11.2 million) or (-7.5%) of revenue compared to (-$18.9 million) or (-14.3%) of revenue in the same period last year. Adjusted net loss came at (-$1.2 million) or (-0.8%) of revenue compared to (-$5.9 million) or (-4.4%) of revenue last year. GAAP loss per share came at (-$0.39) and beat estimates by 18.2% and adjusted loss per share came at (-$0.04) and beat estimates by 71.4%.
- The analysts expect adjusted EPS to decline (-77.2%) YoY to $0.04 in FQ4.
Cash Flow and Balance Sheet
- Operating cash flow was $28.2 million or 18.8% of revenue compared to $11.6 million or 8.8% of revenue in the same period last year. The operating cash flow included $9.9 million in repayments of customer deposits. Management expects to refund about $4.5 million of customer deposits in the June quarter.
- Free cash flow was $20.5 million or 13.7% of revenue compared to (-$11 million) or (-8.3%) of revenue last year. Capex was $7.4 million compared to $22.7 million in the same period last year. Capex was higher last year due to the Oregon fab expansion. Management guide for FQ4 capex is in the range of $6 million to $8 million.
- The company repurchased 287,000 shares of employee restricted stock units vested for $6.7 million.
- The company had cash of $174.4 million and debt of $41.2 million compared to $162.3 million and $44.1 million in the previous quarter.
Key Segments
Computing
Computing segment revenue grew by 80.4% YoY and declined by (-4.3%) sequentially to $68.7 million. It was the largest segment and represented 45.8% of the total revenue. The growth was led by graphics cards, tablets, and AI accelerators and partially offset by seasonal decline in notebooks. Management expects the computing segment to grow in the mid to higher single digits with continued strength in graphic cards, AI accelerators and tablets.
Consumer
The consumer segment declined by (-47.1%) YoY and up 0.3% sequentially to $23.6 million. The inventory correction in gaming continued in the March quarter. However, the rate of decline slowed, and management expects double-digit sequential growth in the segment, which will be helped by the end of the inventory correction in gaming.
Communication
The communication segment grew by 39.2% YoY and declined (-7.4%) sequentially to $26.8 million. Strong sales from the Korea and China-based OEMs were offset by a seasonal decline in shipments to the Tier 1 U.S. smartphone customers and a slowdown in networking. Management expects a strong sequential rebound in shipments to Tier 1 U.S. smartphone customers as they prepare for the fall launch, while they expect a sequential decline from Korea and China OEMs.
Management said “even with a sequential decline, our China OEM business remains strong and up significantly year-over-year. Overall, we estimate the Communication segment will be flat sequentially in the June quarter, which is notably higher year-over-year, because of our BOM content and market share increases.”
Power Supply and Industrial
The Power Supply and Industrial segment revenue declined by (-6.5%) YoY and (-29%) sequentially QoQ to $24.8 million on continued inventory corrections in quick chargers in addition to sequential declines in AC-DC power supplies, power tools and solar. Looking ahead to the June quarter, management expects sequential growth in the mid-to high-single digits as the quick charger inventory correction ends alongside strength in e-mobility.
Other Key Points to Watch
AI PCs and AI Mobile
In our recent deep dive here, we discussed that we will be closely monitoring the Computing segment that is expected to benefit from the strong demand for AI PCs.
We had noted, “Moving through the rest of 2024 and into 2025, Computing segment’s growth is likely to be driven by two primary factors – AI PC growth aided by Intel’s Meteor Lake platforms and AMD’s FP8 and FP11 next-gen chips, as well as a rather robust server and AI accelerator point-of-load (POL) roadmap.
For example, AOSL’s power delivery content is increasing significantly on Intel’s Meteor Lake chips, compared to the Arrow Lake predecessor, which should translate into a healthy BOM increase. Intel is targeting a significant 8x increase in Core Ultra AI PC chip shipments (across its Arrow Lake, Meteor Lake and Lunar Lake platforms) — from 5 million since December 2023 to at least 40 million by year-end 2024. This is estimated to grow 50% in 2025 to 60 million Core Ultra chip shipments.”
Intel CEO Patrick Gelsinger said in the recent Q2 earnings call that they shipped 15 million AI PCs since the Meteor Lake launch in December. “We have now shipped more than 15 million Windows AI PCs since our December launch, multiples more than all of our competitors combined, and we remain on track to ship more than 40 million AI PCs by year end, and over 100 million accumulative by the end of 2025.” They also mentioned Lunar Lake, the next generation AI PC, achieved production release ahead of schedule in July. Arrow Lake will follow it. Next, Panther Lake is expected in the second half of 2025.
“The AI PC will grow from less than 10% of the market today to greater than 50% in 2026. We know today's investments will accelerate and extend our leadership and drive significant benefits in the years to come. Our efforts will culminate with the introduction of Panther Lake in the second half of 2025.”
Lisa Su, CEO of AMD, provided positive insights into the Client segment in the recent earnings call “Our view of this is the AI PC is an important add to the overall PC category. As we go into the second half of the year, I think we have better seasonality in general, and we think we can do, let us call it above-typical seasonality, given the strength of our product launches and when we are launching. And then into 2025, you're going to see AI PCs across sort of a larger set of price points which will also open up more opportunities.”
Outlook
Management mentioned that they saw signs of a gradual rebound in the coming quarters and are approaching a recovery phase of the next cycle. We would closely watch management comments on the recovery of the PC and smartphone market. The CEO mentioned in the last earnings call, “Looking beyond, we anticipate the second half of this year will be stronger than the first half as customers gear up for new product launches in smartphones as well as PCs.
Looking beyond 2024 to the growth phase of the next cycle, AOS is transitioning from a component supplier to become a comprehensive solution provider, enabling us to go deeper with increasing BOM content and penetrating new products and verticals.”
GB200 Supplier
According to the analyst Ming-Chi Kuo, Alpha and Omega Semiconductor, a current supplier of MOSFETs and power ICs for HGX/DGX H100, is expected to become the new GB200 supplier. If the news is confirmed, it could be another positive catalyst for the stock.
Valuation
The P/S ratio peaked in March 2022 when the quarterly revenue was close to $200 million, GAAP profitable, and before the PC inventory correction. The company is currently trading at a P/S ratio of 1.5 and a forward P/S ratio of 1.4 and higher than the average P/S ratio of 1.2.
Conclusion
AI PCs may emerge as one of the stronger growth trends in consumer AI devices over the next few years. AOSL’s tie-ins to Intel’s Meteor Lake CPU and its position in the development stages for AMD’s FP11 platform position it for strong growth in this space. The company is also seeing signs of recovery in its segments. However, until we see actual improvement in the fundamentals, we would treat the company as a momentum play.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.
Recommended Reading: