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Bull of the Day: Alpha & Omega Semiconductor Limited (AOSL)

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Many times management promises a recovery strategy, but then falls short of their expectations.  But our Zacks Bull of the Day, Alpha & Omega Semiconductor Limited (AOSL - Free Report) was able to increase capacity, improve margins, and crush their recent earnings expectations.  

This Zacks Ranked #1 (Strong Buy) is engaged in designing, developing and supplying a broad range of power semiconductors globally, including a portfolio of Power MOSFET and Power IC products. The Company seeks to differentiate itself by integrating its expertise in device physics, process technology, design and advanced packaging to optimize product performance and cost. Its portfolio of products targets high-volume end-market applications, such as notebooks, netbooks, flat panel displays, mobile phone battery packs, set-top boxes, portable media players and power supplies. The Company utilizes third-party foundries for all of its wafer fabrication and it deploys and implements its proprietary MOSFET processes at these third party foundries.

Recent Earnings Results

For Q3 17, AOSL beat the Zacks consensus earnings estimate for the 8th consecutive time, and beat the Zacks consensus revenue estimate for the 6th consecutive time.  Further, management increased guidance for the seventh consecutive quarter as well (sales guidance was lifted to $97 million, above the consensus of $96.2 million for Q4 17).  On a year over year basis, AOSL saw increases in the following: revenues +12.4%, gross margins improved from +19.7% to +24.3%, operating income was up from -$0.2 million to +$3 million, net income improved from -$1.3 million to +$3.6 million, and income per share rose from $0.06 to $0.14.  

Management’s Take

According to Dr. Mike Chang, Chairman and CEO, “Our new product momentum continued to contribute to the revenue and gross margin growth.  AOS reported $93.3 million in revenue, close to the high-end of our guidance range, representing an increase of 12.4% from the revenue in the same quarter a year ago. We also posted the eighth consecutive quarter of gradual gross margin expansion and delivered $0.21 non-GAAP earnings per share despite the fact that the March quarter is seasonally our lowest quarter.  This, once again, demonstrates the strength of AOS recovery strategy that is now translating into a sustained improvement of our financial performance.  We are also taking proactive and deliberate steps to gradually alleviate capacity constraints, and we expect to see higher production output starting in the September quarter.  The entire team at AOS continues to keenly focus on developing differentiated technologies and introducing market driven new products, which we believe will further propel our business growth and profitability.”

Price and Earnings Consensus Graph

As you can see in the graph below, the stock price and future earnings estimates have been trending in the positive direction for 2016, and into 2017, but they saw a dip in the early part of 2017.  This most recent earnings announcement put the company back on a growth path once again.

Alpha and Omega Semiconductor Limited Price and Consensus

Alpha and Omega Semiconductor Limited Price and Consensus | Alpha and Omega Semiconductor Limited Quote

Increasing Earnings Estimates

Due to the strong earnings performance and increasing margins, earnings estimates have improved for Q3 17, Q4 17, FY 17, and FY 18; Q3 17 more than doubled from $0.06 to $0.16, Q4 17 rose from $0.14 to $0.21, FY 17 advanced from $0.34 to $0.55, and FY 18 was upgraded from $0.42 to $0.69.

Bottom Line

As the semiconductor sector remains red hot due to improving margins, and increased demand in China, AOSL is uniquely positioned to take advantage of the uptick.  Further, as AOSL’s gross margin improvement (+100 bps quarter over quarter) was driven by new products and manufacturing utilization.  Moreover, management was able to increase capacity at its Oregon fabrication facility to meet the increased demand for their products.

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