Alpha and Omega is openly being considered as a supplier for Nvidia’s B300 systems, expected to ship mid-year. Given its tiny revenue of $173.2 million, and our ability to combine technicals with fundamentals, we feel it’s a shot worth taking. Should AOSL be confirmed as the supplier over Monolithic Power Systems, then the company would theoretically surge. Should they not be confirmed, the stock would theoretically plummet. It’s not for the faint of heart, yet we continue to like the risk/reward the stock offers.
AOSL supplies the PMICs and MOSFETs powering each GPU, and for the upcoming platform of this customer (widely known to be Nvidia), AOSL will additionally sell the total solution controller and the multiphase controller. The number of PMICs/MOSFETs is expected to triple from 9 to 16 up to 50 MOSFETs per GPU.
With that introduction, the earnings report this quarter matters very little — what matters is if AOSL becomes a confirmed supplier. That announcement, or any supply chain whispers, will likely happen outside of an earnings report as we approach CY Q1-Q2.
For example, this week, a new write-up caused AOSL’s stock to rise 11%, stating AOS’s new power-management IC (PMIC) controller and DrMOS chips helps to “significantly cut transient power demands by several hundred watts during the brief periods when the SoC draws peak power” and was available in production quantities with a lead time of 12 to 16 weeks.
However, last month, there was a third-party analyst that stated AOS was seeing thermal management issues, causing over-heating. The same analyst also indicated AOSL would be a GB200 supplier, yet management is pointing toward the B300s (and associated systems) as the main design they will participate in.
Regardless of the factual accuracy of any single analyst, AOS is certainly in the middle of the action when it comes to qualification testing for the outsized power requirements of Nvidia’s road map. With this small of market cap and revenue base, the news and rumors can quickly change the stock price in either direction.
Below, we do our due diligence on the earnings report, including what management is saying about their AI systems partner, the weak margins that drove some of the weak price action this quarter, and an idea on timing for when the stock will (or will not) show a sizable impact from being the chosen PMIC and controller supplier for the new server design.
Revenue
Alpha and Omega reported a slight revenue beat in Q2, but that was unfortunately overshadowed by lingering margin weakness.
Looking ahead, management hinted that Q3 would be the bottom for the year, signaling that revenue and margins are expected to recover “beyond the March quarter with incremental growth likely from smartphones, graphic cards and AI.” Management also hinted at increasing contributions from next-gen GPU platforms beginning in the middle of the calendar year.
Q2 revenue increased 4.8% YoY to $173.2 million, accelerating from 0.7% growth last quarter. Management said the results came in ahead of expectations and confirmed that inventory corrections are complete.
For Q3, revenue was guided at $158 million, +/- $10 million, for YoY growth of 5.3%. This was below expectations for $161 million, with management seeing some pricing pressures from a more “subdued” market environment. However, the low guide was also partially due to the wind down of licensing and engineering revenue with the 24-month contract expiring this month – for reference, licensing revenue was $5.4 million in Q4.
Management reiterated on a lack of visibility into 2025, though they did explain that they “expect both revenue and margin to recover beyond the March quarter.”
As stated in the introduction, this all comes down to whether AOS is chosen as the supplier over Monolithic Power, and if they are chosen, to what extent
Margins
This was the weakest part of the report, with margins coming in at the low end of the guided ranges and forecast to contract again across the board. Gross margin is now approaching the low-20% range, while operating margin was guided to drop to the lowest level in two years.
Given Q2’s margins came in low across the board, management is forecasting further contraction in a seasonally slower Q3, partially impacted by the wind down of licensing revenue as the 24-month contract expires this month
- Gross margin contracted to 23.1% in Q2, coming in at the low end of the 24%, +/- 1% guide. The QoQ decline was once again attributed to “ASP erosion and mix changes.” On a YoY basis, gross margin is down 3.5 points.
- For Q3, management guided for gross margin to contract further to 21.5%, +/- 1%, with some impacts from the phase-out of licensing and engineering revenue in the quarter.
- Operating was contracted to (3.4%) in Q2, down from (0.1%) last quarter. The contraction stemmed from R&D expenses coming in slightly above expectations combined with the weaker gross margin.
- For Q3, operating margin is expected to contract further to (7.9%), with operating loss more than doubling sequentially to ($12.5 million).
- Net margin declined to ($3.8 million) in Q3.
EPS
Adjusted EPS came in just ahead of estimates, though GAAP EPS missed the mark.
- Adjusted EPS was $0.09 in Q2, beating estimates for $0.08. GAAP EPS was ($0.29), missing estimates for ($0.23).
Adjusted EPS estimates have come down significantly due to the recent margin weakness, and likely will come down further given Q3’s weak margin guide. Last quarter, AOSL was expected to report $0.35 in adjusted EPS in the second half of the fiscal year — $0.14 in Q3 and $0.21 in Q4 – though that was seen at just $0.08 combined heading into Q2’s report.
Cash and Balance Sheet
Despite the margin shortfall, operating and free cash flow both improved sequentially.
- Operating cash flow was $14.1 million in Q2, up from $11.0 million in Q1. OCF margin improved from 6.1% to 8.1% in Q2.
- Free cash flow was $6.7 million in Q2, up from $4.3 million in Q1. FCF margin improved from 2.4% to 3.9% in Q2.
- Capex was $7.4 million in Q2, and guided to be $7 million to $9 million for Q3, a slight sequential increase at midpoint.
- Inventory decreased $1.2 million sequentially to $183.7 million.
- Cash and equivalents totaled $182.6 million.
- Debt totaled $32.6 million.
Key Segments
Computing
Computing revenue increased 6.0% YoY but decreased (0.5%) QoQ to ~$76.0 million. This decelerated further from 8.6% growth last quarter. Management said that the segment’s results were slightly better than typical seasonality, though they were “slightly worse than our original expectation for slight sequential growth.”
During the quarter, PC and graphics card strength was offset by seasonal declines in notebooks and tablets. Servers and AI GPUs were “softer as the industry prepares for the next platform transition.”
Management added in the prepared remarks: “Within AI for large data centers, we are a contender in the middle stages of the design-in phase and we see potential for these products to contribute to revenue in the middle of the calendar year. On graphics cards, the next generation platform is ramping up to mass production. With this new platform, we expect BOM content to increase as more power stage ICs, paired with our controller, are being used to power the GPU.”
For Q3, management said Computing revenue will “will likely decline due to seasonality,” with PCs expected to be flat as “tariff uncertainty is leading to demand pull-in with PC makers.”
Consumer
Consumer revenue declined (3.9%) YoY and (28.8%) QoQ to ~$22.5 million, in line with management’s expectations due to seasonality in gaming and appliances, with wearables normalizing after reaching a record level last quarter.
Management added that they do not expect “gaming to return to meaningful growth until the customer transitions to the next platform.” For Q3, revenue is forecast to see a low-single digit decline QoQ due to continued seasonality for gaming and TVs, with some softness in home appliances.
Communications
Communications revenue rose 14.2% YoY but declined (6.4%) QoQ to $33.3 million. Management explained that this was ahead of expectations for a double-digit QoQ decline as US and China smartphone demand only moderated slightly, with Korea increasing in preparation for product launches.
Management added that the “better-than-expected results are due to combination of market share gains, a mix-shift to higher end phones in China, and generally higher charging currents driving increased BOM content.”
Looking ahead to Q3, management expects a low-teens QoQ decline due to seasonality.
Power Supply and Industrial
Power Supply and Industrial revenue was flat YoY and up 9.6% QoQ to $34.9 million, driven by strength in quick chargers and power tools, with steady demand for e-mobility and AC-DC power supplies. Management said that they see opportunities ahead in 2025 for “quick chargers due to increased BOM content driven by higher charging currents,” while they are working on “leveraging relationships in Taiwan to partner on DC fans for server racks.”
For Q3, management forecast a low-teens QoQ decline due to seasonal declines in quick chargers, offset by e-mobility and AC-DC power supplies.
Earnings Call
AOSL’s Commentary about Being a Potential B300 Supplier
Reading between the lines suggests that AOSL is stating they are in the qualification stages for Nvidia’s upcoming B300s, due mid-year this year, as the company is quite explicit in stating they are currently in the design phase for a release mid-year. The B200s are well beyond their design phase, and beginning to ship.
Here is what management stated: “The second category of projects that we are targeting is the AI data center portion. And this is where our solutions are being used on board to power GPUs and these go into their server solutions.
And this is something that we are very excited to take part in, to be able to design into. We are right now still in the middle of that designing phase and we're closely working with that customer in bringing up boards and working with them. And I'm not going to go into details about the design but we did already indicate that this is something targeting mid-year for the launch.”
When pressed again on where they are in terms of timing and content share, the response was the following – indicating the potential for promising things for AOS over the next few months.
“Yes, we certainly think the potential for our business in data centers to be much bigger than that of the graphics portion simply because the usage goes up much more. As you can imagine in these data centers, the power levels are significantly bigger, so it simply requires more power stages to power each of these GPUs.
I don't want to quantify that at the moment, but basically it is something that is multiples bigger, you can say, in terms of the total attempt that we can go after. We know that we're not the only one players going after this, so the share is still to be determined. The final design, everything is still to be finalized as well, too. So we're working closely with the customer. Again, at this point, we can say that we're targeting for a mid-year launch.”
Notably, the company was asked about thermal issues but politely declined responding, stating they would not discuss the designs of their partner or any rumors. They simply reiterated they are “one of the main contenders.”
Margins:
At one point an analyst asked about the long-term target of $1 billion in revenue with a 30% margin, which was stated previously at an analyst day. The CFO corrected him and answered it was their medium-term target, which is incremental positive.
“Yes, our midterm target model is revenue reaches $1 billion. And then at that time, we expect non-GAAP gross margin to be around about 30% range. So that's our midterm target.”
Bill of Materials (BOM) will go up in any AI-design related wins. We’ve covered this in the past here. Additionally, the margins are expected to bottom next quarter with improvement as AOS goes into the June quarter – below is what the CFO stated.
“Sure. I mean, generally, I mean, yes, for the next 12 to 18 months, I would expect that the product mix probably will improve from this March quarter low point of the margin. I would expect probably in the June quarter, we can expect the gross margin on a non-GAAP basis to get back to the December quarter level. So the March quarter was mainly some product there and also the decrease in license and engineering service revenue, and along with the Lunar New Year period, which is not going to help on the margin side. So then, I mean, I would expect that, yes, we can bounce back and recover from there.”
Average sales prices (ASPs) are currently seeing some erosion, yet management pointed toward the new product line being a way to counter this: “Okay, sure. Yes, I mean, for the whole year, ASP erosion was in the range of mid-to-high single digit range on the same product basis. So going forward for this calendar year 2025, we continue to expect the mid to single digit — mid single digit type of ASP erosion. What we do here is we will accelerate our new product rollout to counter the ASP erosion. So with some good opportunities designed in here, yes, we expect beyond March quarter that all of gross margin can bounce back and recover.”
Conclusion:
AOSL sold off following the report as AI-related design wins are not appearing in the financials yet, and meanwhile, the company is seeing headwinds to its margins. Whether we buy more AOSL or sell AOSL will not be determined by this earnings report, it is nearly meaningless until we get more indication of how the design qualification is going for the B300s.
Fortunately, we use technicals to guide our high beta stocks, which can often show strength long before the fundamentals – especially in the case of supply chain whispers (or leaks). Therefore, we will continue following our plan for AOSL while adhering to our stops, yet also being generous with those stops to make sure the volatility does not prevent us from participating in the upside. Should we get the announcement we are seeking, the upside could be sizable. We want to hang in there and see how this plays out.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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