This quarter, Alpha and Omega reported a beat in Q1, yet gross margins are contracting due to eroding average sales prices (ASPs). AOSL guided Q2 below consensus with further margin pressures for both gross and operating margin. The commentary implies a weak Q4, one that is weaker this year than it was last year, despite 2024 largely being an expected rebound year.
Regarding AOSL’s partners, it seems that AMD’s beat on desktop is flowing through to AOSL, with management stating desktop helped offset laptop weakness. Although there is bound to be progress in the graphic cards and AI accelerator cards eventually, the emerging AI use case is less clear in this quarter as these both took “a pause before the next platform transition.”
Our firm is weighing sitting a quarter or two out on AOSL, but it’s worth noting management reiterated the bullish comment about bill-of-materials expected to increase from $5 to $6 for MOSFETS to up to $20 for the MOSFETs powering GPUs.
This and more is detailed below.
Revenue
Due to consumer weakness, AOSL missed revenue guidance for the December quarter. The company was expected to report 6.3% growth for revenue of $175.7 million, and is instead guiding for 2.8% growth for revenue of $170 million. This was more than $5 million below the analyst estimates.
This quarter ending in September, AOSL reported $181.9 million in revenue in fiscal Q1, up 0.7% YoY and ahead of expectations by $1.3 million. AOSL reported YoY growth in the quarter despite expectations for a marginal YoY decline.
The miss for next quarter is primarily due to an erosion in average sales prices, as the CFO stated: “During the quarter, we did see increased pricing pressure. I mean, I guess this is a reflection of softer overall market recovery. Competitors impacted by inventory correction and demand slowdown, especially in automotive and industrial. They're shifting more toward consumer-related markets to fill their fabs.
So we see increased competition from all players, large or small. Right now, I mean, the ASP erosion for this year is more trending toward high single-digits annual erosion versus typical mid to high single-digits. Here, what we want to do is to accelerate our new product rollout to counter the ASP erosion. So that has been what we have been doing all along the years.”
Looking forward, AOSL seemed to imply that it would be more of a calendar Q2 turnaround with comments that they lack visibility into 2025 (which is not exactly encouraging): “At this point, our visibility into 2025 is limited and the calendar first quarter of 2025 is typically seasonally soft as well.”
Margins
Q1’s report missed on the guided gross margin and guided adjusted gross margin, at the midpoint. Management is also guiding for further contraction on gross margin next quarter and also a contraction on the operating margin next quarter. As stated above, the weaker gross margin is due to lower average sales prices.
- GAAP gross margin was 24.5%, slightly below guidance for 25% at midpoint and contracting 120 bp QoQ and 370 bp YoY. Adjusted gross margin was 25.5%, below guidance for 26.4%, and contracting 90 bp QoQ and 330 bp YoY. Management said the contraction in adjusted gross margin was “mainly impacted by ASP erosion and mix changes.”
- GAAP operating margin was (0.1%), improving from (0.9%) last quarter and ahead of guidance for (1.1%); however, this was a 530 bp YoY contraction from 5.2% in Q1 FY2024. Adjusted operating margin was 4.4%, improving from 2.0% last quarter but contracting from 6.2% in the year ago quarter.
- GAAP net margin was (1.4%), improving from (1.7%) last quarter but down from 3.2% in the year ago quarter. Adjusted net margin was 3.5%, improving from 1.6% last quarter but down from 5.5% in the year ago quarter.
Looking ahead, management forecast pressure on margins across the board in Q2:
- GAAP gross margin was guided at 24.0%, +/- 1%, for a 50 bp QoQ and 260 bp YoY contraction. Adjusted gross margin was guided at 25.0%, +/- 1%, for a 50 bp QoQ and 300 bp YoY contraction.
- Based on operating expenses guidance, GAAP operating margin is expected to be (2.5%), down 240 bp QoQ and 180 bp YoY. Adjusted operating margin is expected to be 2.2%, down 220 bp QoQ and 290 bp YoY.
EPS
Given the margin weakness, AOSL slightly missed EPS expectations.
- Adjusted EPS of $0.21 missed expectations by $0.01.
- For Q2, analyst estimates were at $0.21 heading in to Q1’s report, but given the below-consensus revenue guide and forecast for margin contractions at the gross and operating level, it’s likely that Q2 adjusted EPS estimates will be revised downward in the coming days.
- GAAP EPS of ($0.09) missed estimates of ($0.02).
Cash and Balance Sheet
Operating cash flow remained strong despite weaker margins, while cash on hand was relatively unchanged QoQ.
- Operating cash flow was $11.0 million, down (20%) YoY but up 55% QoQ. OCF margin was 6.0%, down from 7.7% in Q1 FY2024 but up from 4.4% last quarter.
- Free cash flow was ~$4.3 million, for a FCF margin of 2.4%, versus 0.7% in the year ago quarter and (0.1%) last quarter.
- Cash and equivalents totaled $176.0 million.
- Debt totaled $35.5 million.
- Net inventory decreased by $10.8 million QoQ to ~$184.7 million.
Key Segments
Computing
Computing revenue increased 8.6% YoY and 6.6% QoQ to ~$76.3 million. This marked a dramatic deceleration from 37.6% growth Q4, despite coming against a rather weak comp of (21.2%) YoY in Q1 FY2024.
Management said the company “saw relative strength from PC desktops, notebooks, and servers, which was offset by softer graphics and A.I.- accelerator cards due to a pause before the next platform transition.” Reading between the lines suggests that this is another reference to Nvidia’s Blackwell platform, ahead of its launch; however, it is a bit odd to see some softness given the channel checks we have imply very strong demand for Blackwell.
Management further added that their “backlog for both graphics cards and A.I. accelerator cards is now growing due to the new platform transition,” and they expect BOM (bill-of-material) content “to increase as more power stage ICs, paired with our controller, are being used to power the GPU.”
For the December quarter, AOSL guided to slight sequential growth due to “share gains in desktops, as well as strength in graphics cards and servers,” while seasonal slowdowns were expected in PCs, notebooks, and tablets.
Management also hinted at some larger announcements next quarter, saying “we are collaborating with customers on larger data center opportunities slated for 2025. We anticipate having more to talk about with these developments during our next earnings report.”
Consumer
Consumer revenue increased 2.0% YoY and 12.4% QoQ to ~$31.7 million. While this marked a return to growth in the segment, it may be short lived, with management forecasting a near (30%) sequential decline in Q2.
For Q1, management said that the results “were in-line with our forecast for low double digit sequential growth and were primarily driven by gaming, wearables, and TVs, offset by a decline in home appliances.” Given the strength in gaming, management believes that the inventory correction has passed, but demand and “meaningful growth” may not arise until the next platform transition. Management also said wearables “were a notable standout” in Q1.
Looking ahead to the December quarter, as previously mentioned, management forecast a nearly (30%) QoQ decline due to seasonal gaming and TV declines, alongside softness in home appliances.
Communications
Communications revenue rose 14.2% YoY and 29.4% QoQ to ~$35.5 million, ahead of expectations for double-digit QoQ growth as its Tier-1 US smartphone customer geared up for a new product launch, alongside “strong sequential growth from China OEMs.”
For Q2, management expects “a low double-digit sequential decline in the December quarter due to seasonality and overall limited visibility on smartphone sell through heading into next year.”
Power Supply and Industrial
Power Supply and Industrial revenue declined (23.7%) YoY but rose 15.6% QoQ to ~$31.8 million, driven by “seasonal strength in AC-DC power supplies and quick chargers.”
Looking ahead, management expects the segment “to grow low single digits sequentially primarily driven by e-mobility and continued growth from quick chargers,” with more opportunities ahead in 2025 for quick chargers “due to increased BOM content driven by higher charging currents.”
Earnings Call:
AI Accelerator Card Opportunity
Given we may step aside from the position until roughly Q2 time frame, it’s important to reiterate the bigger picture for AOSL. When an analyst asked about the dollar content across its socket opportunities, the CEO answered the following:
“[…] In general, I think you've heard us talking more about selling total solutions and this is one evidence of that happening in the market now and we can sell both the controller as well as the power stages. And in this case, in terms of BOM content, it's going to grow from what used to be maybe around $5 to $6. It can — and then going to the next platform, it can range anywhere from $7 to $15 to maybe even over $20 a content, depending upon the number the power or the level of the GPU being paired with.”
Guiding Below Seasonality for Consumer:
Although management referred to the QoQ decline as seasonal in the Consumer segment, there was a question on the call that pointed toward it being steeper than seasonal. Last year, the September quarter matched this quarter at about $31 million in revenue, yet the QoQ decline into December is steeper for 2024 than it was for 2023. This year’s QoQ decline is expected to be (30%) compared to last year’s at (24.4%). This especially matters considering 2024 was largely expected to improve for Consumer facing semiconductors.
Here was the question on the call – since the puts and takes here are critical to the stock, I’m including the full excerpt:
David Williams
Great. Just wanted to ask too on the seasonality. It looks like you're guiding down just a bit more than seasonality. Is it fair to assume that, maybe we're back to a place that we can expect kind of seasonal trends here, or is there still enough volatility out there that you think is too early to call?
Stephen Chang
I think for the standout markets that we've been in Computing and Consumer, that seasonal pattern has returned. But at the same time, the full recovery, especially for PCs hasn't come yet. We're still waiting for PC shipments to grow, I guess, for the replenishment cycles to come back again. Therefore, at least for the last few years, after the inventory correction of the previous year, right now, we're just waiting for the PC shipments to be able to grow more.
That said, we are not standing still and even in those in the PC markets, we're seeking to gain more BOM content as we sell more of a total solution going into that application. We do think that seasonally, yes, it's going to go through that cycle, where the September quarter is typically the peak because of back-to-school and the holiday seasons.
And then going into the March quarter is probably more of a trough when it comes to the PC shipments, but that should come back up again and going into the following year. We're hoping that, to be able to layer that in especially with our advances in the graphics card and AI-accelerator card side that can help to fill in the gap and layer in on top of what we see as our base business.
Conclusion:
There was an anticipated Consumer rebound this year, that according to management teams, is not materializing. AOSL is one of quite a few in the Consumer-facing supply chain saying we can’t meet analyst expectations. Apple also missed its Q4 guide at the midpoint, guiding for “low to mid-single digits” which implies lower than the 7% YoY growth analysts expected.
As you know, the I/O Fund leans cautious for the moment with cash as our largest position, which is not to say we aren’t bullish in the medium-term — but rather, the risk/reward for an all-tech portfolio is not where it was a year ago. Apparently, having a large cash position is popular at the moment.
We’ve had a stop in place for AOSL at $31.50 and the stock is trading a penny below that price in the after-hours. If the stock remains below this level, expect us to trim or exit depending on the price action. In terms of timing on our re-entry, we foresee this matching when we resume buying Nvidia, AMD, Broadcom, TSM and some of the other AI bellwethers.
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