Diodes Inc (DIOD) 2004 Q2 法說會逐字稿

At this time, I want to welcome everyone to Diodes' second-quarter 2004 earnings conference call. (OPERATOR INSTRUCTIONS) Mr. Coulson, you may begin your conference.

Good morning, everyone. Welcome to Diodes' second-quarter 2004 earnings call. With us today are Diodes' President and CEO, C.H. Chen; Diodes' Chief Financial Officer, Carl Wertz; and Mark King, Vice President of Sales and Marketing.

Before I turn the call over to them, I would like to remind our listeners that in this call management's prepared remarks do contain forward-looking statements. These are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore we would like to refer you to a more complete and detailed discussion of these risks and uncertainties that is contained in the Company's filings with the SEC.

In addition, I should point out that any projections as to the Company's futures performance represent management's estimates have today, July 28, 2004. Diodes assumes no obligation to update these projections in response to future market conditions or other events.

For those of you who are unable to listen to the entire call at this time, we are going to make a recording available via webcast for 90 days. You can find that at the IR section of Diodes' website which is at www.Diodes.com. With those preliminaries out of the way, it is my pleasure to turn the call over to Diodes' CEO, C.H. Chen.

Welcome, everyone, and thanks for joining us on the call today. We are extremely pleased with our performance in the second quarter. Here are a few of the highlights of the results we published this morning.

Second-quarter revenue grew by 41 percent over the year-ago quarter to $47 million; and it grew 13.5 percent sequentially, our fifth consecutive quarter of record revenue. Once again, Diodes' share of our addressable market hit a new high in the quarter. We introduced the PowerDI productline and expanded the SOT-563 productline. Both were very positively received in the market.

Our gross margin expanded by 120 basis points sequentially. Net income jumped 182 percent year-over-year to $6.1 million, also a record high. We believe that the fundamentals in our served market remain strong, and expect to build on our performance in the second half of the year.

The past year's expansion in the discrete market has led the rest of the industry as many of the broad line (ph) semiconductor manufacturers have de-emphasized the discrete market to focus on higher density devices. Inventory growth at our distributor in old-yen (ph) is in line with sales. While the pace of this expansion may be more moderate in coming quarters, we continue to see a positive growth environment for the balance of 2004 and to beyond.

Further, we believe that Diodes is poised to continue to outperform the overall discrete market by a factor of 2 for several reasons. First, many of our core end-user markets have grown in consumer technologies such as wireless LANs, digital cameras, and the flat-panel displays; and we're just now starting to field a position in the handset market.

Second, our effort to develop higher valued-additive devices and the customized array have clearly had a positive impact on our margins and the revenue growth, and have been a major contributor to our ability to continuing to outperform the overall discrete industry. We are on track to sustain the pace of project innovation in coming quarters. We are intensifying our efforts to develop a core interactor (ph) (indiscernible) that will form the basis for tomorrow's leading-edge productline.

Finally, during this market upturn, we have been adding capacity at a measured (ph) higher pace while restating our existing capacity toward higher value-additive devices. This prices (ph) a tremendous growth we have experienced this year. We have kept a tight control on our overhead costs. We believe this effort will help to optimize our margin going forward.

All these factors lead us to believe that Diodes will continue our strong performance in the second half of 2004 as we build upon the accomplishments already in the quarter and upholding strategy developed over many years. Now, I would like to turn it over to Carl for a more detailed discussion of the financials for the quarter.

Thanks, C.H. Good morning, everyone. As C.H. mentioned, our second-quarter results were significantly stronger than we expected, and we believe we're well positioned to continue that momentum into the second half of the year.

Revenue for the second quarter was 47 million, a record high. This is an increase of 41.4 percent from the same period last year, and a sequential increase of 13.5 percent from our very strong first quarter. This is also our fifth consecutive record revenue quarter.

New product sales advanced to 11.7 percent revenue from 11.5 in the prior quarter. Gross margin at 32 percent was up 120 basis points from the previous quarter and nearly 700 basis points from the second quarter of 2003. The margin improvement can be attributed to increased capacity utilization, manufacturing efficiencies, and a product mix incorporating more of our new proprietary devices that carry higher margins.

During the quarter, our manufacturing facility in China continued to run near capacity and produced a record level of units. Our wafer fab also ran at more than 90 percent capacity, producing 13 percent more units than it did in the previous quarter and 29 percent more than it did a year-ago quarter. We're bringing on additional capacity in a disciplined manner to meet demand and while reshaping our existing capacity towards higher management products.

During the quarter, we invested $11 million in plant equipment to meet expanding demand. For the quarter, selling, general, and administrative expenses were $6.4 million or 13.6 percent of sales, compared to 4.8 million or 14.3 percent in the last year's fourth quarter. Despite the solid growth and strong demand for our products, we are strictly controlling overhead costs, and much of the increase in SG&A during the second quarter was related to the revenue increases.

Research and development spending was $815,000 or 1.7 percent of revenue for the quarter. That compares with 745,000 or 1.8 percent in the prior quarter, and 400,000 or 1.2 percent in the year-ago quarter. As we discussed over the last few quarters, we expect that our R&D spending will increase over time as we invest in developing proprietary Next Generation discrete technologies.

Operating income rose 149 percent to $7.8 million or 16.6 percent of sales, from 3.1 million or 9.4 percent of sales in the year-ago quarter. Depreciation was $3 million for the quarter. EBITDA for the quarter was 10.6 million and 20.1 million for the year.

Our effective income tax rate in the second quarter was 18 percent, compared to 22.4 percent in the second quarter of 2003. A higher portion of our income was owned by our Asia subsidiaries in lower tax jurisdictions than in the year-ago quarter.

Net income for the second quarter was $6.1 million or 40 cents per diluted share, up 182 percent from 2.2 million or 15 cents per share in the same period last year. On a sequential basis, net income improved 26 percent, from 4.9 million or 32 percent last quarter.

Turn to the balance sheet, we have 14.6 million in cash and 32.4 million in working capital. In the quarter, we paid down approximately $1.5 million in long-term debt and $3 million in the first half of the year. Our debt balance is 17.3 million; and our total debt to assets ratio improved to 39.6 percent.

Inventories at $19.7 million improved to 6.6 turns from 6.5 in the first quarter, and 6.2 turns in the second quarter of '03. Days Sales Outstanding were 67 compared with 65 in the second quarter of last year.

Capital expenditures as mentioned were $11 million in the second quarter, and 14 million year-to-date. We accelerated our CapEx investment plan to meet increased demand to improve efficiency. We now expect CapEx to increase to about 20 to $24 million for the full year.

For the outlook, as C.H. discussed earlier we feel very good about the industry fundamentals as we proceed into the second half. Spending on mobile communications, consumer electronics, and personal computing products are driving demand for semiconductors. As we expect the pace to be sustained as we had into the traditionally strong third quarter, our design wins continue at brisk pace as our new leading-edge products are being very well received at all of our geographic markets.

Given these factors, and coming off 5 consecutive record quarters, including this quarter's 13.5 percent sequential revenue growth, we're projecting another record revenue quarter with a 2 to 5 percent sequential increase. We forecast a slight (indiscernible) sequential expansion in gross margins due to better product mix, new product revenue expansion, and product manufacturing. All of these factors should provide continued earnings per share improvement.

I am now going to turn the discussion over to Mark King, our Vice President of Sales and Marketing. Mark will discuss some of the new products and market opportunities we have that were behind our revenue growth for the quarter. He will also give us a sense for the general direction of the marketplace.

Thanks, Carl, and good morning, everyone. As you have now heard, the second quarter was highly successful from a sales and marketing perspective. For several years now, we have been working on positioning Diodes newer, higher value devices on Next Generation end equipment that we thought would provide the highest growth and margin potential. Our past success in design wins is now translating into increased market share and margin expansion, as evidenced by our record second-quarter results.

Demand for our product continues to be robust across our major geographic region and end equipment categories, and we continue to make inroads in new segments of the market that have potential to fuel considerable future expansion. We also continue to intensify our research and development efforts and launch product platforms based on proprietary technology that extend the performance envelope for discrete.

In the quarter we launched our first productline based on our breakthrough new packaging technology PowerDI. The PowerDI 123 high current density Schottky rectifier package rolled out this quarter to a very strong reception. We believe that its compelling performance and size advantages over competing packages will make the PowerDI the Next Generation performance package. We plan to expand this platform over time to accommodate expanded power parameters.

Our new line of SOT-f63 subminiature components rolled out this quarter to a very positive reception. And sales of our Powermite 3 platform more than doubled in the quarter, as previous design wins hit production. We expect the continued growth in the Powermite 3 sales over the balance of 2004.

In total, new product sales rose nearly 15 percent to $5.5 million or 11.7 percent of sales, from 4.8 million or 11.5 percent of sales in the first quarter. And we had design wins at 67 new and existing customers in the quarter, as our performance Schottky array and zener products continue to build momentum.

Moving to market segments, orders were strong across our diversified end equipment markets. Our Powermite 3 is seeing heavy demand from the end equipment categories of notebooks, digital audio players, D.C. to D.C. conversion, automotive audio, and storage area networks. We are also making inroads in the handset market, a new focus for Diodes.

For the second quarter, our segment breakout was 32 percent consumer, 28 percent computer and peripheral, 22 percent industrial, 12 percent telecom, and 6 percent automotive. This diversification allows us to counterbalance short-term fluctuations in any one segment.

Geographically, all our markets were strong, and the proportion of our sales from each remained consistent with the prior quarter, with Asia 58 percent of our sales, 39 percent in North America, and 3 percent in Europe.

In Asia, order growth continued to accelerate, driven by strength in computing and consumer electronics. Revenue climbed 16 percent sequentially and units grew 8 percent from quarter-to-quarter. On a year-over-year basis, revenue was up 54 percent and units rose 50 percent. ASPs were up 3 percent year-over-year and 8 percent sequentially.

The North American market remained strong. Component sales grew 18 percent sequentially and 34 percent year-over-year. Design and quote activity are high. ASPs are up 4 percent sequentially. High-volume productions continues to shift to Asia, however Diodes is benefiting from this trend with our strong manufacturing, sales, and distribution presence. Much like last quarter, wafer unit sales were also strong, although pricing was weak. Wafer unit sales increased 29 percent from year-ago quarter, and 13 percent from the first quarter. ASPs declined 13 percent year-over-year and nearly 11 percent sequentially.

In Europe, OEM sales drove the quarter as previous array and SOT-523 wins with a major mobile handset manufacturer moved into production. We entered a second major branded mobile handset manufacturer with a win for our ultraminiature SOT-523 Schottky product. In addition we had significant design wins in a major industrial account and our first approval at a high-profile consumer electronics account. We expect sales in European markets to grow to 4 to 5 percent of our total by year end.

Looking at sales channels, distributor sales continue to grow as a percentage of our sales mix. They accounted for 37 percent of total sales in Q2, up from 34 percent in Q1, and 31 percent in the fourth Q '03. Inventory growth at our distributors is in line with sales. Our efforts begun last quarter to streamline our distributor channel are clearly paying off. We're finding that rationalizing our channels has brought us greater focus from our distributor partners and increased efficiency in meeting our end customer demand. We're looking to further expand our European network over the next year.

Design wins. Design wins on our new products remain strong in Asia and the United States, and continue to build momentum Europe. As I mentioned earlier, we had multiple wins at 67 new or existing accounts during the quarter. They came from manufacturers in our core end equipment markets of wireless devices and consumer electronics such as digital audio players, digital cameras, set-top box, DSO modem, as well as personal and network computing devices such as notebook computers, flat-panel displays, wireless LANs, storage area networks. Design wins from our core automotive and industrial markets were strong as well.

Notable design wins include broad-based wins with mobile handset manufacturers. In addition to entering a new European handset manufacturer, we had broad-based wins at 3 Asian handset manufacturers. We had performance Schottky and array wins at 3 digital camera and 2 notebook manufacturers.

We secured Powermite wins in a variety of our core end equipment categories, including battery packs and TCs, and importantly we had growing interest in our proprietary custom array products. These include a win for our mixed technology custom array circuit, with a high-volume manufacturer of mobile handset chargers, and a win on an automotive sensor with our QSBT40 device, and in a set-top box with our DLP05LC protection device.

In summary, we continue to see an attractive growth environment for Diodes for the second half of 2004 and into 2005. Our new products are being well received. The end equipment categories we focus on continue to show growth. Our focus on the discrete market is enabling us to expand our position with key OEM accounts and distributor partners.

Our market share once again reached an all-time high. We continue to expand into Europe and are building share in the high-volume handset market. Prices are continuing to hold firm. All of these metrics combined with our book-to-bill and anticipated new product introductions in the coming quarter lead us to expect that we will sustain our positive business momentum in the coming quarters.

Despite the blistering pace of our growth in the first 6 months, we expect to show continued improvement at both the top and bottom line in the third quarter, and to outperform the discrete market in 2004. With that, I will open the floor to questions.

(OPERATOR INSTRUCTIONS) Gary Mobley, B. Riley & Co.

I was hoping that you could talk about some potential decisions that you guys may be bouncing around. Specifically the potential for you guys exiting some of your lower margin product categories, now that you're capacity constrained and now that new product design win momentum seems to be solid.

At this time, we really don't have any plans to do that. We continually shift our mix based on order availability and capacity. But from a capacity constraint standpoint we are keeping up with what is required. We're aggressively expanding to meet the demand, and we're well positioned to support our demand into the third and fourth quarter.

We mentioned that we expanded our CapEx range to 20 to 24 million. So I think we're right on schedule, and I think that that is one of the reasons for the strength in our numbers.

As a point of clarification, you mentioned inventory growth in line with sales growth. I am assuming sales growth of the distributors themselves, correct?

Right. We judge POP, which is point-of-purchase, versus POS, which is point-of-sale, and balance it towards the inventory. The percentage of inventory is in line to support the present POS rate and future growth rate expected.

I was hoping you could talk about the yield improvements at the FabTech on a sequential and year-over-year basis; and where you are at relative to where you can be?

I don't have the specific numbers on yield and improvement, but we have made significant inroads at continuing to improve our efficiency and the overall yield of the fab. So the progress at FabTech has been significant over the last 2 years and continues to improve.

Could you talk about some of the dynamics that are knocking down the average selling price of the 5-inch wafer? And what may be some of the catalysts to stabilize that?

One of the things that -- we have been continuing to grow our wafer output, so that it also requires us to search for more business. So as we build our wafer up, and our long-term goal is to consume more of our wafers, we have to sell those on the general market. In some product categories, the ASPs are quite aggressive. So, although the actual ASPs are decreasing the performance and profitability of FabTech is improved.

Sure. I will open it back up. Thanks, guys.

(OPERATOR INSTRUCTIONS) Gary Mobley, B. Riley & Co.

I hate to dominate the call, but I will if I have to. Carl, could you be more specific on tax rate for the remainder of the year? You came in quite below what I had forecasted for Q2. Is your expectation to continue to have a higher mix of Asian based sales?

Yes, we have always kind of maintained that our tax rate should be in high teens, low 20 range. As Mark indicated, a little bit more has shifted into Asia; more profits are coming out of that area as we grow sales there. We're also continually looking for all the extra tax strategies that we can work. We were continually looking at tax strategies and any area of savings we can do. We kind of look at all avenues.

So we expect it to maintain that range between the 18 to 22. We were pleasantly surprised as well with the whole quarter's overall success, and a part of that was the tax planning. We do have constant tax strategies in place, and we are always revisiting them.

If history is any guide, what is your expectation for Q4 sequential growth?

We just put our guidance out for Q3. As you know we have to watch (technical difficulty) and so forth. So I think at this point we're not prepared to say that.

Okay. What is your turns dependence, given the guidance for Q3?

I think our backlog is strong, and we're pretty well positioned to support our growth. Book-to-Bill was a little stronger in the first quarter than in the second quarter, but we're in still a pretty good position to support our thing. So it is probably relatively consistent with the previous quarters.

Okay. All right. Thanks again.

Dick Gould, Gould Investment Partners.

I just had a question in regard to the handset market. Is that a new market for you? Also, how significant might it be in terms of revenues?

It's definitely a new focus for us. Frankly in prior years we actually deemphasized that market so that we did not distract us from our core. It is quite a coveted market from our competitors. so we decided to focus on other things as we build size. We have now reached a size in manufacturing capabilities to support that, and we have moved into those packages. Those other hand equipments have driven us into the packages that the handsets have used, and we're now starting to be well positioned to support that market. So, we have started to put focus on it.

The other thing, in the early stages, the big cell phone idea was to go to a single chip solution. And now with the addition of all the accessories, smart phones and digital cameras and so forth, the discrete content on the cell phone is increasing. So it becomes much more important for us to participate.

Obviously the cell phone market and the volumes in cell phone are quite significant. So it does present a great growth opportunity for our Company going forward. Presently our revenue base is very minor in that category.

Can you give us an idea of how you expect that to ramp? Would it become a significant percentage of your overall revenues?

I think it will take time, and the progression will be slow. But over time it will. I haven't really isolated where I expect the revenue performance and what percentage of a revenue we expect to come from that at that standpoint. But it is definitely a high-growth opportunity for our company and becoming a focus.

Thanks.

At this time there no further questions. Are there any closing remarks?

We would like to thank everyone for participating in the call this morning and look forward to hearing from you again, or you hearing from us again when we report our third-quarter results. Thanks a lot.

Thank you, everybody.

Thank you. This concludes Diodes' second-quarter 2004 earnings conference call. You may now disconnect.