2023-03-11 07:29:22 ET
Summary
- Alpha and Omega’s revenues decreased in fiscal 2Q 2023 and are expected to decrease further in fiscal 3Q 2023.
- However, due to the reopening of China, the company may start recovering soon.
- Alpha and Omega company has generated negative free cash flow since the fiscal fourth quarter of 2022.
- Notwithstanding a decline in its cash generation, AOSL’s equity level is well enough to cover the debt amount.
- The stock is a hold.
Year-to-date, Alpha and Omega Semiconductor's (AOSL) stock price is down 15%. From 25 March 2022 to 11 March 2023, AOSL stock price dropped by 62% from $66 to $25. This sharp drop occurred as the world entered into a recession after its short-term recovery from the Covid-19 pandemic. China and Hong Kong sales account for more than 90% of AOSL's total revenues. As the number of new Covid-19 cases jumped again in 2022, China's government started its lockdowns again, which hurt the demand for semiconductors. Thus, AOSL's China and Hong Kong revenues decreased in the three months ended 31 December 2022. However, due to the reopening of China, Alpha and Omega may recover in the following months. Also, the long-term demand outlook for semiconductors is strong. The stock is a hold.
Quarterly results
Alpha and Omega Semiconductor's financial results in the fiscal second quarter of 2023 were weaker than in the previous quarter. In its fiscal second quarter of 2023 financial results, AOSL reported revenue of $188.8 million, compared to the fiscal first quarter of 2023 financial results of $208.5 million. The company's net income dropped from $26.0 million in 2Q 2023 to $6.3 million in 1Q 2023. AOSL reported a gross margin of 34.1% in the fiscal second quarter of 2023, compared with a gross margin of 28.1% in the fiscal first quarter of 2023. Moreover, compared with the same period last year, AOSL's 2Q 2023 financial results were impaired.
"While our business was negatively impacted by the industry-wide inventory correction and reduction of customer demand, we are proactively implementing measures to ensure that we emerge from this downturn stronger and more successful than ever," the CEO commented.
For the fiscal third quarter of 2023, the company expects its revenue to be about $130 million. Also, AOSL forecasted its gross margin to decrease further to 22.5% in its fiscal 3Q 2023 results. However, the company expects to start recovering after that and get back on track.
"Even as we project a decline in our March quarter revenue, we expect to recover a good portion of the sequential decline in the June quarter, with further recovery in the 2nd half of calendar year 2023, especially with the re-opening of China," the CEO stated.
The market outlook
One of the reasons was that because of the global recession and hiked interest rates in major economies to combat inflation, from the beginning to the end of 2022, the demand for semiconductors decreased continuously and the semiconductor industry experienced a downtrend. Another reason was the extensive new restrictions on China's access to advanced semiconductors that has been implanted by the U.S. government in October 2022. Figure 1 shows that in the three months ended 31 December 2022, Hong and China's revenues accounted for 93% of AOSL's total revenues. In the three months ended 30 September 2022, Hong Kong and China's revenues accounted for 96% of AOSL's total revenues. The company's Hong Kong and China revenues decreased from 200.3 million in fiscal 1Q 2023 to 175.0 million in fiscal 2Q 2023, down 12.6% QoQ. It is important to know that AOSL's revenue from China decreased by 43.8% QoQ to $15.7 million.
The company's U.S. revenues decreased by 43.7% to $4.5 million. This number means that despite the negative effect of hiked interest rates in the major economies that have limited the growing demand for semiconductors in the past few quarters, does not mean so much for AOSL; however, is not negligible. On the other hand, the company's revenues from Hong Kong and China which are under the positive effect of China's reopening and the negative effect of the recent restrictions on the sale of advanced semiconductors to China, determine AOSL's future revenues. PCs and Smartphones, are AOSL's two largest product segments. On the other hand, the revenue from the selling of advanced semiconductors (which are restricted to be sold to China) doesn't account for a large portion of AOSL's revenues.
AOSL's revenues in fiscal 3Q 2022 are expected to be considerably lower than in fiscal 2Q 2023. However, with the reopening of China that has the potential to boost AOSL's Hong Kong and China's revenues in the following months, I expect the company's revenues in fiscal 4Q 2023 and 1Q 2024 to be higher than in 3Q 2023. It is worth mentioning that in the long term, the demand for semiconductors is strong. The global semiconductor market size is expected to reach from $573 billion in 2022 to $1381 billion in 2029, with a CAGR of 12.2%. Thus, in the long run, AOSL's financial results can beat its previous results and the company can do much more than just a recovery from the recent downtrend.
Figure 1 - AOSL's revenue by geographical location
AOSL performance outlook
Since the first quarter of 2023, the company's cash and equivalents decreased by 8% to $287.8 million in 2Q 2023 versus its amount of $316 million at the end of 1Q 2023. Also, the company's drop in its debt amount of $103.3 million in 1Q 2023 to $98 million in the second quarter of 2023, combined with lower cash generation, kept its net debt at a negative level. In minutiae, AOSL's net debt has been negative during the last year and sat at $(190) million in 2Q 2023. Furthermore, AOSL's total equity improved slightly to $899.7 million in 2Q 2023 compared with its previous amount of $885.5 million at the end of 1Q 2023. Also, the company's equity level is over 13% higher year-over-year versus its level of $794 million in 2Q 2022. Thankfully, the debt level is well beneath its equity amount, which would tailor a scope of capacity to bring benefits to its shareholders. However, the capital structure may not provide an accurate picture of the company's condition unless we investigate its cash structure as well (see Figure 2).
Figure 2 - AOSL's capital structure (in millions)
Alpha and Omega's cash operations dropped deeply due to a massive decline in net income. The company's operating cash dropped from $30.7 million in 1Q 2023 to only $0.3 million in the second quarter of 2023. Also, AOSL's capital expenditure decreased slightly by around 29% to $28.3 million in 2Q 2023 versus its previous amount of $40.3 million at the end of the first quarter of 2023. When all was said and done, the company's free cash flow declined further and sat at $(28) million in 2Q 2023. Since the fourth quarter of 2022, AOSL's free cash flow has been negative, which means the company's revenue cannot catch up with its costs, and in a company like Alpha and Omega, it could be a warning sign of the company's ability provide reliable distributions (see Figure 3).
Figure 3 - AOSL's cash structure (in millions)
Summary
Alpha and Omega did not report strong financial results in fiscal 2Q 2023. Also, the company expects its 3Q 2023 revenues to be lower than in the previous quarter. However, the zero-Covid policy in China has ended and the AOSL's China and Semiconductor revenues may start to recover in 4Q 2023. Also, despite its impaired cash structure, the company has been able to remain healthy by decreasing its debts and can cover its obligations. The stock is a hold.
For further details see:
Alpha and Omega Semiconductor: Reasons To Hold The Stock