Nov 6, 2015

11/06/2015 | 01:10pm US/Eastern (You can enter multiple email addresses separated by commas) Message : *Required fields Except for the historical information contained herein, the matters addressed inthis Item 2 constitute "forward-looking statements" within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. Such forward-looking statements aresubject to a variety of risks and uncertainties, including those discussed belowunder the heading "Risk Factors" and elsewhere in this Quarterly Report on Form10-Q, that could cause actual results to differ materially from thoseanticipated by the Company's management. The Private Securities LitigationReform Act of 1995 (the "Act") provides certain "safe harbor" provisions forforward-looking statements. All forward-looking statements made in thisQuarterly Report on Form 10-Q are made pursuant to the Act. The Companyundertakes no obligation to publicly release the results of any revisions to itsforward-looking statements that may be made to reflect events or circumstancesafter the date hereof or to reflect the occurrence of unexpected events. Unlessthe context otherwise requires, the words "AOS," the "Company," "we," "us" and"our" refer to Alpha and Omega Semiconductor Limited and its subsidiaries.This management's discussion should be read in conjunction with the management'sdiscussion included in the Company's Annual Report on Form 10-K for the fiscalyear ended June 30, 2015 on August 27, 2015 .OverviewWe are a designer, developer and global supplier of a broad portfolio of powersemiconductors. Our portfolio of power semiconductors includes approximately1,500 products, and has grown significantly with the introduction of over 100new products during each of the fiscal years ended June 30, 2015 , 2014 and 2013.During the three months ended September 30, 2015 , we introduced an additional 24new products. Our teams of scientists and engineers have developed extensiveintellectual properties and technical knowledge that encompass major aspects ofpower semiconductors, which we believe enables us to introduce and developinnovative products to address the increasingly complex power requirements ofadvanced electronics. We have an extensive patent portfolio that consists of 539patents and 172 patent applications in the United States as of September 30,2015 . We differentiate ourselves by integrating our expertise in technology,design and advanced packaging to optimize product performance and cost. Ourportfolio of products targets high-volume applications, including personalcomputers, flat panel TVs, LED lighting, smart phones, battery packs, consumerand industrial motor controls and power supplies for TVs, computers, servers andtelecommunications equipment.Our business model leverages global resources, including research anddevelopment and manufacturing in the United States and Asia . Our sales andtechnical support teams are localized in several growing markets. We operate a200mm wafer fabrication facility located in Hillsboro, Oregon , or the Oregon fab, which is critical for us to accelerate proprietary technology developmentand new product introduction as well as to improve our financial performance inthe long run. To meet the market demand for more mature high volume products, wealso utilize the wafer manufacturing capacity of selected third party foundries.For assembly and test, we primarily rely upon our in-house facilities in China .In addition, we utilize subcontracting partners for industry standard packages.We believe our in-house packaging and testing capability provides us with acompetitive advantage in proprietary packaging technology, product quality, costand sales cycle time.During the three months ended September 30, 2015 , we released AO4294, the latestaddition to our family of high efficiency charging solutions. This new device isoffered in an easy-to-use SO-8 package, which helps manufacturers keep themounting cost low, while still getting the best efficiency and power dissipationpossible. The AO4294 is an ideal solution for synchronours rectification in highefficiency chargers and adapters for mobile devices. We also released AOZ3053, a5A EZBuck DC/DC regulator with smart mode adaption functions, available in athermally enhanced exposed pad SO-8 package. The AOZ3053 is the first of thisnew smart platform, which allows for more thermally efficient DC/DC solutionsfor consumer, networking and industrial applications such as LCD TVs, set-topboxes, cable modems, and power supplies.In September 2015 we entered into a preliminary agreement with the stateauthority of Chongqing, China , to form a joint venture for a newstate-of-the-art power semiconductor manufacturing facility in the LiangjiangNew Area of Chongqing . Under the proposed agreement, the initial capitalizationof the joint venture is expected to be approximately $300 million . The Chongqing authority would own 49% of the venture's equity and invest in cash. We would own51% of the equity and contribute primarily our existing assembly and testingequipment as well as certain intellectual property related to the operation ofthe facility. We are currently negotiating a definitive joint venture agreementwith Chongqing government to provide for the specific terms of thecollaboration. The joint venture offers the prospect of creating new competitiveadvantages that can fuel growth of our business. We expect the joint venture todeliver significant cost savings for us and allow us to reduce our tangibleassets as well as drive meaningful improvements in working capital and capitalexpenditures. 16-------------------------------------------------------------------------------- Factors affecting our performanceOur performance is affected by several key factors, including the following: The global, regional economic and PC market conditions: Because our productsprimarily serve consumer electronic applications, a deterioration of the globaland regional economic conditions could materially affect our revenue and resultsof operations. In particular, because a significant amount of our revenue isderived from sales of products in the personal computing ("PC") markets, such asnotebooks, motherboards and notebook battery packs, a significant decline ordownturn in the PC markets can have a material adverse effect on our revenue andresults of operations. Our revenue from the PC markets accounted forapproximately 46.0% and 47.3% of our total revenue for the three months ended September 30, 2015 and 2014, respectively. Since the beginning of calendar year2013, we have experienced a significant global decline in the PC markets due tocontinued growth of demand in tablets and smart phones, worldwide economicconditions and the industry inventory correction which had and may continue tohave a material negative impact on the demand for our products, revenue, factoryutilization, gross margin, our ability to resell excess inventory, and otherperformance measures.In response to this trend, we have been executing and are continuing to executeour strategies to diversify our product portfolio and penetrate into othermarket segments, including the consumer, communications and industrial marketsegments, improve gross margin ad profit by implementing cost control measures.We are making progress in reducing our reliance on the computing market, and weare also committed to continue to support our computing business and capitalizeon the opportunity with a more focused and competitive PC product strategy.However, as we develop and sell new products that serve more diversifiedmarkets, we expect that sales based on the PC markets, as a percentage of thetotal revenue, will continue to decline. If the rate of decline in the PCmarkets is faster than we expected, or if we cannot successfully diversify orintroduce new products to keep pace with the declining PC markets, we may not beable to alleviate its negative impact, which will adversely affect our resultsof operations.Manufacturing costs: Our gross margin may be affected by our manufacturingcosts, including utilization of our own manufacturing facilities, pricing ofwafers from other foundries and semiconductor raw materials, which may fluctuatefrom time to time largely due to the market demand and supply. Capacityutilization affects our gross margin because we have certain fixed costsassociated with our in-house packaging and testing facilities and our Oregon fab. If we are unable to utilize the capacity of our in-house manufacturingfacilities at a desired level, our gross margin may be adversely affected. Forexample, we may experience lower capacity utilization at our factories as aresult of declining PC markets, which could adversely affect our gross marginand profitability.Erosion of average selling price: Erosion of average selling prices ofestablished products is typical in our industry. Consistent with this historicaltrend, we expect that average selling prices of our existing products willcontinue to decline in the future. However, in the normal course of business, weseek to offset the effect of declining average selling prices by introducing newand higher value products, expanding existing products for new applications andnew customers, and reducing the manufacturing cost of existing products.Product introductions and customers' product requirements: Our success dependson our ability to introduce products on a timely basis that meet or arecompatible with our customers' specifications and performance requirements. Bothfactors, timeliness of product introductions and conformance to customers'requirements, are equally important in securing design wins with our customers.As we accelerate the development of new technology platforms, we expect toincrease the pace at which we introduce new products and obtain design wins. Ourfailure to introduce new products on a timely basis that meet customers'specifications and performance requirements, particularly those products withmajor OEM customers, and our inability to continue to expand our serviceablemarkets, could adversely affect our financial performance, including loss ofmarket shares with customers.Distributor ordering patterns and seasonality: Our distributors place purchaseorders with us based on their forecasts of end customer demand, and this demandmay vary significantly depending on the sales outlooks and market and economicconditions of end customers. Because these forecasts may not be accurate,channel inventory held at our distributors may fluctuate significantly, which inturn may prompt distributors to make significant adjustments to their purchaseorders placed with us. As a result, our revenue and operating results mayfluctuate significantly from quarter to quarter. In addition, because ourproducts are used in consumer electronics products, our revenue is subject toseasonality. Our sales seasonality is affected by numerous factors, includingglobal and regional economic conditions as well as the PC market conditions,revenue generated from new products, changes in distributor ordering patterns inresponse to channel inventory adjustments and end customer demand for ourproducts and fluctuations in consumer purchase patterns prior to major holidayseasons. In recent periods, broad fluctuations in the semiconductor markets andthe global and regional economic conditions, in particular the decline of the PCmarket conditions, have had a more significant impact on our results ofoperations than seasonality. 17--------------------------------------------------------------------------------Principal line items of statements of operationsThe following describes the principal line items set forth in our condensedconsolidated statements of operations:RevenueWe generate revenue primarily from the sale of power semiconductors, consistingof power discretes and power ICs. Historically, a majority of our revenue wasderived from power discrete products and a smaller amount was derived from powerIC products. Because our products typically have three-year to five-year lifecycles, the rate of new product introduction is an important driver of revenuegrowth over time. We believe that expanding the breadth of our product portfoliois important to our business prospects, because it provides us with anopportunity to increase our total bill-of-materials within an electronic systemand to address the power requirements of additional electronic systems. Inaddition, a small percentage of our total revenue is generated by providingpackaging and testing services to third-parties through one of our subsidiaries.Our product revenue includes the effect of the estimated stock rotation returnsand price adjustments that we expect to provide to our distributors. Stockrotation returns are governed by contract and are limited to a specifiedpercentage of the monetary value of products purchased by the distributor duringa specified period. At our discretion or upon our direct negotiations with theoriginal design manufacturers ("ODMs") or original equipment manufacturers("OEMs"), we may elect to grant special pricing that is below the prices atwhich we sold our products to the distributors. In these situations, we willgrant price adjustments to the distributors reflecting such special pricing. Weestimate the price adjustments for inventory at the distributors based onfactors such as distributor inventory levels, pre-approved future distributorselling prices, distributor margins and demand for our products.Cost of goods soldOur cost of goods sold primarily consists of costs associated with semiconductorwafers, packaging and testing, personnel, including share-based compensationexpense, overhead attributable to manufacturing, operations and procurement, andcost associated with yield improvements, capacity utilization, warranty andinventory reserves. As the volume of sales increases, we expect cost of goodssold to increase. We implemented a process to improve our factory capacityutilization rates by transferring more wafer production to our Oregon fab andreducing our reliance on outside foundries. While our utilization rates cannotbe immune to market conditions, our goal is to make such rates less vulnerableto market fluctuations. We believe our market diversification strategy andproduct growth will drive higher volumes of manufacturing which will improve ourfactory utilization rates and gross margin in the long run.Operating expensesOur operating expenses consist of research and development, selling, general andadministrative expenses. We expect our operating expenses as a percentage ofrevenue to fluctuate from period to period as we continue to exercise costcontrol measures in response to the declining PC markets as well as align ouroperating expenses to the revenue level.Research and development expenses. Our research and development expensesconsist primarily of salaries, bonuses, benefits, share-based compensationexpense, expenses associated with new product prototypes, travel expenses, feesfor engineering services provided by outside contractors and consultants,amortization of software and design tools, depreciation of equipment andoverhead costs for research and development personnel. We continue to invest indeveloping new technologies and products utilizing our own fabrication andpackaging facilities as it is critical to our long-term success. We alsoevaluate appropriate investment levels and stay focused on new productintroductions to improve our competitiveness. We expect that our research anddevelopment expenses will fluctuate from time to time.Selling, general and administrative expenses. Our selling, general andadministrative expenses consist primarily of salaries, bonuses, benefits,share-based compensation expense, product promotion costs, occupancy costs,travel expenses, expenses related to sales and marketing activities,amortization of software, depreciation of equipment, maintenance costs and otherexpenses for general and administrative functions as well as costs for outsideprofessional services, including legal, audit and accounting services. We expectour selling, general and administrative expenses to fluctuate in the near futureas we continue to exercise cost control measures in response to the declining PCmarkets.Income tax expenseWe are subject to income taxes in various jurisdictions. Significant judgmentand estimates are required in determining our worldwide income tax expense. Thecalculation of tax liabilities involves dealing with uncertainties in theapplication of complex tax regulations of different jurisdictions globally. Weestablish accruals for potential liabilities and contingencies based on a more 18--------------------------------------------------------------------------------likely than not threshold to the recognition and de-recognition of uncertain taxpositions. If the recognition threshold is met, the applicable accountingguidance permits us to recognize a tax benefit measured at the largest amount oftax benefit that is more likely than not to be realized upon settlement with ataxing authority. If the actual tax outcome of such exposures is different fromthe amounts that were initially recorded, the differences will impact the incometax and deferred tax provisions in the period in which such determination ismade. Changes in the location of taxable income (loss) could result insignificant changes in our income tax expense.We record a valuation allowance against deferred tax assets if it is more likelythan not that a portion of the deferred tax assets will not be realized, basedon historical profitability and our estimate of future taxable income in aparticular jurisdiction. Our judgments regarding future taxable income maychange due to changes in market conditions, changes in tax laws, tax planningstrategies or other factors. If our assumptions and consequently our estimateschange in the future, the deferred tax assets may increase or decrease,resulting in corresponding changes in income tax expense. Our effective tax rateis highly dependent upon the geographic distribution of our worldwide profits orlosses, the tax laws and regulations in each geographical region where we haveoperations, the availability of tax credits and carry-forwards and theeffectiveness of our tax planning strategies.Results of OperationsThe following tables set forth statements of operations, also expressed as apercentage of revenue, for the three months ended September 30, 2015 and 2014.Our historical results of operations are not necessarily indicative of theresults for any future period. Three Months Ended September 30, 2015 2014 2015 2014 (in thousands) (% of revenue)Revenue $ 81,439 $ 88,217 100.0 % 100.0 %Cost of goods sold 66,378 70,057 81.5 % 79.4 %Gross profit 15,061 18,160 18.5 % 20.6 %Operating expensesResearch and development 6,164 6,796 7.6 % 7.7 %Selling, general and administrative 9,659 9,604 11.9 % 10.9 %Total operating expenses 15,823 16,400 19.5 % 18.6 %Operating income (loss) (762 ) 1,760 (1.0 )% 2.0 %Interest income and other, net 11 48 - % 0.1 %Interest expense (10 ) (73 ) - % (0.1 )%Income (Loss) before income taxes (761 ) 1,735 (1.0 )% 2.0 %Income tax expense 1,214 1,171 1.5 % 1.3 %Net income (loss) $ (1,975 ) (2.5 )% 0.7 % Share-based compensation expense was allocated as follow: Three Months Ended September 30, 2015 2014 2015 2014 (in thousands) (% of revenue)Cost of goods sold $ 131 $ 154 0.2 % 0.2 %Research and development 193 206 0.2 % 0.2 %Selling, general and administrative 465 742 0.6 % 0.8 %Total $ 789