Diodes Inc (DIOD) 2004 Q3 法說會逐字稿

Good morning. My name is Melanie and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Diodes, Inc. Third Quarter Earnings Conference Call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period.

(OPERATOR INSTRUCTIONS).

Thank you. Mr. Coulson, you may begin your conference.

Well thank you Melanie. Good morning everybody. Welcome to Diodes' Third Quarter 2004 Earnings Call.

With us today are Diodes' President and CEO, C.H. Chen, the Company's Chief Financial Officer, Carl Wertz, and Mark King, Diodes' Vice President for Sales and Marketing.

But before I turn the call over them, I'd like to remind our listeners that in this call, Management's prepared remarks do contain forward-looking statements that are subject to risks and uncertainties. And Management may make additional forward-looking statements in response to your questions this morning.

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'd like to refer you to a more detailed discussion of the risks and uncertainties in the Company's filings with the SEC.

In addition, any projections as to the Company's future performance represent Management's estimates as of today, October 27, 2004. Diodes assumes no obligation to update these projections in the future as market conditions change.

For those of you who are unable to listen to the entire call at this time, we're going to make a recording available via webcast for 90 days, and you can find that at the Investor Relations section of Diodes' website at www.diodes.com.

Well, with those formalities out of the way, it's my pleasure now 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 financial results. During the third quarter, Diodes continued to grow faster than the rest of the discrete semiconductor segment, and even the overall semiconductor industry.

Here are some of the earning highlights we published this morning. Third quarter revenues increased by 41.2 percent over the year-ago quarter to $49.4 million and grew 5 percent sequentially, making our sixth consecutive quarter of record revenue.

Sales of new products hit 14.2 percent of total revenue, a record high. Our gross margin expanded by 190 basis points sequentially to 33.9 percent.

Net income jumped 182.9 percent year-over-year to $7.3 million, also a record high. This result confirms that our strategy to position Diodes as a leader in the discrete semiconductor test core (ph) is working, as they illustrated the strong financial and operating discipline that underpin our success. As, I have said in the past, there are 3 essential components to our strategy. One, position Diodes as an innovation leader for discrete devices by investing in developing next-generation technology that delivers meaningful improvement in performance, size and power consumption.

Two, tirelessly pursue manufacturing excellence as to ensure that our product quality, cost structure and ability to respond to changing customer demands has the faith in our industry.

And three, apply our record financial discipline to make sure that we maintain tight control over our overhead, optimize our working capital management and deploy tech so judiciously.

I am pleased to say that we are on track with this strategy in every important respect. For the first 9 months of 2004, our revenues are up by 41 percent. Our gross profit is up by 78 percent. Our operating income is up by 158 percent. And our net income is up by 174 percent. Our balance sheet keeps getting stronger and despite the aggressive program of capital investments an increase in working capital to support our growth, will continue to generate positive cash flow for the first 9 months of 2004.

This type of performance doesn't happen by accident. It comes from having the right strategy, and then executing the strategy quarter-by-quarter and day-by-day. As we enter the fourth quarter, it appears that the blistering pace of growth we have seen in the first 9 months may be moderating. However, we believe that the plastic industry fundamentals are still intact. And we have a high degree of confidence that Diodes will continue to outperform our industry.

Now I would like to turn it over to Carl for a more detailed discussion of the financials for the quarter.

Thanks C.H. and good morning everyone.

As C.H. discussed, our third quarter results were at the upper end of our expectations. Revenue for the third quarter was $49.4 million, our sixth consecutive record high. This is an increase of 41 percent from the same period last year and a sequential increase of 5 percent from our record second quarter sales.

New product sales also jumped to a record 14.2 percent of revenue, up from 11.7 percent in the prior quarter, and 13.5 percent in the third quarter of '03.

Gross margin at 33.9 percent was up 190 basis points from the previous quarter, and up 770 basis points from the third quarter last year. The margin improvement can be attributed to the improved product mix, new product revenue expansion, and our continued focus on manufacturing efficiencies. 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 near capacity producing 22 percent more wafers than in the year-ago quarter.

We have been bringing on additional capacity in a disciplined manner to meet demand, while reshaping our existing capacity towards higher-margin products. During the quarter, we invested $8 million on plant and equipment to meet expanding demand.

Selling, General, and Administrative expenses for the quarter were $6.2 million, or 12.5 percent of sales compared to $5.1 million, or 14.6 percent of sales in the last year's third quarter. We are strictly controlling our overhead costs and much of the increase of SG&A during the third quarter was related to higher sales commissions, incentives and royalties reflecting our success in growing our topline, as well as expenses related to Sarbanes-Oxley 404 compliance.

Research and Development spending was $942,000, or 1.9 percent of revenue for the quarter. This compares to $815,000, or 1.7 percent in the prior quarter, and is a 54 percent increase of R&D spending over a year-ago quarter. As we discussed over the last few quarters, we expect that R&D spending will increase both absolutely and as a percentage of revenues over time as we invest in developing proprietary next-generation discrete technologies.

Operating income rose 204 percent from $9.6 million, or 19.5 percent of sales, from $3.2 million or 9 percent of sales in the year-ago quarter.

Depreciation was $3.4 million for the quarter and $9.5 million for the year.

EBITDA for the quarter was $13.1 million and $33.5 million for the year.

Our effective income tax rate in the third quarter was 22.2 percent compared to 18 percent last quarter as a greater portion of our profits were aimed in our U.S. operations at higher effective tax rates.

Net income for the third quarter was $7.3 million or 47 cents per diluted share, up 183 percent from $2.6 million, or 18 cents per share in the same period last year. On a sequential basis, net income improved 18.4 percent from $6.1 million or 40 cents per share.

Now, turning to the balance sheet, we have $16.7 million in cash and $44.3 million in working capital as of September 30. Our total debt balance is $19.6 million, down from $21.1 million at year-end. Our total debt-to-asset ratio has improved to 38 percent.

Inventories were at $21.4 million, with inventory turns of 6.2 in the quarter as compared to 6.6 in the second quarter. The decrease in turns is partially due to our increased use of sea freight instead of air freight during the quarter. We keep a careful on the tradeoff between shipping expense and supporting higher inventory levels, with the focus on being sure that we can always meet our customers' needs.

Days' sales outstanding were 75 days in the third quarter as compared to 71 days in the prior quarter. The increase was due to the revenue increases in Asia and Europe with longer credit terms.

As mentioned earlier, capital expenditures were $8 million in the third quarter and $18.4 million year-to-date. We accelerated our CapEx plan to meet increased demand and invested in equipment to increase our manufacturing efficiencies. We expect CapEx to run about $20 to $22 million for the full year.

As to outlook, as C.H. also discussed earlier, 2004 have been a year of dramatic growth for Diodes based on the combination of relatively favorable market conditions, excellent customer reception to our next-generation devices and our continued expansion in new geographic regions, and new customers. Based on our current visibility, we expect that the pace of this growth will moderate somewhat in the fourth quarter. However, we continue to think that the positive dynamics in the majority of our end-markets remain intact.

We have recently launched some new major platforms that we expect will be moving into design wins and then full-scale production in the coming quarters. And we expect to sustain the pace of our new product introductions as we head into 2005.

Based on these factors, we feel confident about our ability to outgrow the discrete segment by a factor of 2 times and increase our margins over time. Coming off 6 consecutive record revenue quarters, as well as the significant gross margin expansion this past quarter, we expect fourth quarter revenues and gross margins to be similar or slightly below those of the third quarter.

I'm 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 that were behind our revenue growth for the quarter. He'll also give you a sense of some of the general direction of the marketplace.

Thanks Carl, and good morning everyone.

As you have now heard, the third quarter was highly successful from a sales and marketing perspective. The next-generation devices that we've talked to you about in past calls, such as PowerMite 3, PowerDI 123, SOD-523, and our ultra-miniature array are now being integrated into the latest generation of products across our customer base.

Our past success in design wins on these platforms in now translating into increased market share and margin expansion as evidenced by our record third-quarter results. We recently announced another new platform, the PowerDI 5, which we expect to drive a new wave of growth in 2005 and beyond. And we continue to make inroads into new customers, new geographic regions, and product line expansions that have the potential to fuel considerable future expansion.

We continue to intensify our research and development efforts. This has resulted in several new packaging technology and wafer developments that extend the performance envelope for discrete devices. As many of you know, discretes have long been thought of as a low-growth category that our broad-line competitors do not invest in and do not focus on. We believe that by pushing the cycle time and performance characteristics of discretes, we are positioning Diodes to gain share and improve margins. Given the size of the market and the absence of any truly focused competitor in the category, we believe the strategy that will continue to be productive for many years to come.

During the first 9 months of fiscal 2004, we successfully launched our breakthrough new PowerDI 123 packaging technology, as well as a new line of SOT-563 sub-miniature components. All of these solutions received a very strong, positive reception.

And just this month we introduced our new High-Current Density packaging type PowerDI 5. Using new patent-pending technology, PowerDI 5 is able to accommodate larger die sizes and higher amperage so as to achieve thermal performance unequalled by Legacy, SMC, and D-Pak Package Design. The improvements in space and power consumption combined with high amperage capabilities make the new package ideally suited for a wide range of end equipment applications, including automotive, computing, and telecommunication markets.

In the third quarter, new product sales rose nearly 28 percent to $7 million, or 14.2 percent of sales from $5.5 million, or 11.7 percent of sales in the previous quarter. This is an historical high for Diodes, which was attributable to significant gains across PowerMite 3, Zener, SOD-523, and array product lines. Our market share also reached new highs in both North America and Asia. While Europe was flat sequentially, we continue to expand our distributor platform in that region and develop new customers that could grow into meaningful contributors to revenues over time.

We also introduced 22 new part numbers from 5 different product families, including multiple-performance Schottkys, Zener, and array products, as well as our new line of pre-biased transistors and recently-announced 563 sub-miniature packages.

Additionally, we had design wins at 60 new or existing customers in the quarter as our products continue to build momentum.

Moving to market segments, orders were strong across our diversified end equipment markets. During the quarter, increased demand for digital audio players and set-top boxes, as well as new shipments in cell phones, drove sales in the consumer market segment. Notebooks were key demand drivers for the computer and peripheral segments.

For the quarter, our segment breakout was 37 percent consumer, 31 percent computer and peripheral, 19 percent industrial, 8 percent telecom, and 5 percent automotive.

Geographically, our markets were strong and the proportion of our sales from each remain consistent with the prior quarter, with 58 percent of our sales in Asia, 40 percent in North America, 2 percent in Europe.

In Asia, order growth continued to accelerate driven by strength in computing and consumer electronics. We continue to gain share in the notebook market. On a year-over-year basis, revenue was up 52 percent and units rose 50 percent. ASPs were up 1.4 percent year-over-year and only 5 percent sequentially as lead times have leveled bring price pressure on commodity products.

The North America discrete market softened in the third quarter due to demand slowdown and some inventory corrections, which affected bookings to customers. Arrays and our new products, PowerMite 3 and PowerDI 123 continue to gain greater acceptance. Component sales fell 2 percent sequentially, but were up 41 percent year-over-year. ASPs were down 2 percent sequentially due to the lack of supply constraints, but were up 4 percent year-over-year. OEM sales were driven primarily by set-top box.

High volume production continues to shift to Asia, but our design activity and quoting remain very active in the region. Much like last quarter, wafer units were also strong. Wafer units increased 24 percent from the year-ago quarter and 14 percent from the second quarter. ASPs declined 1 percent year-over-year but were up 8 percent sequentially.

In Europe, sales were seasonally soft in the third quarter. However, we achieved several milestones in establishing our position in the market. First, we have signed a distribution agreement with one of the largest distributors of electronic components in Southern Europe, Silverstar Srl, an Arrow Company. Their primary distribution center in Milan, Italy is the largest automated distribution center in Southern Europe, servicing and delivering products to Italy, Portugal, Spain, France, Greece, Slovenia, Turkey, Romania, Bulgaria, ex-Yugoslavia, North Africa, and Israel. This agreement gives us the ability to service our customers' requirements logistically and competitively as well as helps increase brand recognition.

We also won 2 significant European contracts for 2005, one in an automotive industry and one in the communications industry. And finally, we received and shipped the first production orders on a custom array design win announced last quarter from a major industrial account. As a result, we believe that European market could account for 4 to 5 percent of our total sales in 2005.

Looking at sales channels, distributor sales accounted for 34 percent of total sales in Q3 as compared to 37 percent in Q2 and 34 percent in Q1. Inventory growth at our distributors is in-line with sales.

Design wins -- third quarter another successful quarter in design wins, with multiple wins at 60 new or existing accounts. They came from manufacturers in our core-end equipment markets of wireless devices and consumer electronics, such as wireless LAN, digital audio players, set-top box, LCD modules, panels, and TVs, personal computer, and notebook, DC-to-DC converters, battery packs, and mobile handsets. Design wins from our core automotive and industrial markets were strong as well.

Notable wins include 6 new wins on a high-volume digital audio player, including recently-announced SOT-563 array products and multiple SOD-523 devices. In Q3 we had our first significant PowerDI 123 win in a digital camera. Also in digital camera, we had several SOD-523 wins at a high-volume Japanese manufacturer. We secured key wins in notebook and set-top box, including a customer-specific array device. Both wins are examples of Diodes offering an alternative solution and eliminating the Legacy design. We believe these are platform wins that will migrate across all customer platforms.

After 2 years, momentum on our proprietary QSBT40 data-line protection device is really beginning to ramp up. And we received another win on this part in an instrument I/O protection application. We were also successful in migrating our recent design success at a European mobile handset manufacturer to their 2005 model.

In summary, while the pace of expansion may moderate somewhat in the fourth quarter, we continue to see an attractive growth environment for Diodes. Our new products are being well received. The end-equipment categories we are focused on continue to show growth for Diodes. Our focus on the discrete market is enabling us to expand our position with key OEM accounts and distributor partners.

Our market share has once again reached an all-time high. We are moving into new geographic regions, new customers, and expanded product ranges that we have never participated in before. All these factors give us a high degree of confidence that Diodes remains on track to expand our market share, grow our margins, and out-perform our industry growth rates.

With that, I'll open up the floor to questions.

(OPERATOR INSTRUCTIONS).

Mark Grossman, America's Growth Capital.

New products were 14 percent. Do you have any sense for where you think that could be by the end of next year, and then given the pop in gross margins what do you think the implications are for gross margin targets by the end of next year?

Mark we've always been presenting that we're trying to grow new products up to 20 percent of our revenues. It's pretty hard to determine exactly what quarter of what year that will fall into, but I think just the significant increase this last quarter. Hopefully we’d continue to do that. And then again, we have talked about the margins of new products being significantly greater than our more or less standard margins -- a factor of 2 times. So that was a definite contributor to that 190 basis points in the third quarter.

As Mark and his team continue to introduce new products out in the field, hopefully we can offset any of the other price problems or issues or concerns that we may have out there with excess capacity coming on board in the market.

Right, and can you talk about the order trends that you saw over the course of the quarter in the last few weeks? Have things stabilized, picked up, or been trending downward?

It's definitely been a little bit softer over the past quarter from a booking perspective. The book-to-bill was a little bit higher in the second quarter. There is some pressure on the marketplace, but it hasn't been dramatic at this point. So we're cautiously optimistic that it's kind of a little bump in the road.

Okay, lastly can you talk about inventory at distributors and customers where you think they are relative to where they normally are?

I think that there may have been some second quarter excitement that built inventories due to what people perceived was going to be a supply shortage. But I think that that has leveled off somewhat. Our distributor inventory, I can't speak for their other inventory, but in our position we watch that very closely and it's been pretty much in line with sales and only up slightly from the end of the year or the second quarter. So we think that that's pretty well in control for us.

The main effect is the question is -- is the demand growth at the end equipment.

Right, great, thank you.

Gary Mobley, B. Riley and Company.

Mark, could you give me again what the disti mix was for the quarter?

Thirty-four percent disti, 66 percent OEM.

Okay, you feel that you have a pretty good handle on the inventory situation at your distributors, but you really probably have little insight into what it is at OEM customers?

We pretty much see our forecast -- we don't think that -- our customers are quite comfortable with our ability to supply product, and thus I find very -- that they would be in building too much inventory. Now, if they're building an excessive amount of inventory of their end product, then I can't control that. I think we're in a pretty good position on our product. If there's demand, that they'll be buying product from us.

Regarding the disti inventories, as you noticed we were 37 percent in the second quarter and only 34 percent in the third quarter, so they pretty much adjusted themselves over the quarter.

Okay, and was the book-to-bill ratio below parity for the quarter?

Gary I believe it was just right about parity, maybe slightly down. Like Mark said, it was a little bit less than it was going into the third quarter.

Okay, so I would assume that your dependence on turns business for your forecasted Q4 revenues is roughly equal to what it was in Q3?

Yes. And certainly the lead time positions in the industry have been changed. So the customers generally adjust very quickly and reduce their order cycles also. So definitely we'll see a shorter order period over this next quarter because they're not so concerned about supply.

Gary Mobley; Okay, and Mark could you go over again the overall average selling price trends and unit volume trends for a sequentially year-over-year basis?

Yes, let me dig in here and find out where that is.

Okay, maybe you could go to the next question and hop back with an answer.

Okay.

Ramesh Misra, C.E. Unterberg, Towbin.

Clarification on the tax rate. This quarter it was around 22 percent I believe. Do you see that going up? Is that kind of the balance going forward?

That's a good million dollar question. It's always been a challenge. I think we've always talked about the tax rate being somewhere in the range of 18 to 21, 22 percent going forward. Again, if we assume we have the same mix profitability in the fourth quarter, then yes, that would be the same rate.

One thing we will be doing is looking at as much tax planning going into 2005 as we can to see what we can do to minimize that, if anything. But for planning purposes, probably 22 percent is probably a reasonable number. One thing, with our increased R&D expenditures now, we will take a look at that and see how that can come into play to help offset some of that expense as well.

Okay, in regards to your Kansas City Fab -- Mark this may be a question for you. How much of your wafers output from there is internally used and how much is being shipped out to customers?

I think we're up to our internal use -- and this is an exact figure, and I can verify this exactly, but I think we're up around 30 percent at this point internally used. And on-track to continue to expand that internal usage of that. Over time, our goal is to internalize more of that output and reduce the foundry sale.

Okay, what proportion of your wafers in the quarter came from Lite-On?

At this time, we don't buy any wafers from Lite-On. We use the Lite-On assembly facility to package some of our wafers. We don't buy any raw -- I mean maybe a negligible amount. We buy very little wafers from Lite-On.

Okay, and how much did they account for your sales in the quarter?

You mean products that we purchased from Lite-On?

No that you sold to them.

Oh, we'll have to get back to you on that one.

It might be in the 15 range, so I’m not sure we’ve actually done an analysis for this quarter yet. Ramesh, maybe we’ll have to get back to you.

Maybe approximate, around the 5 million is the wafers there.

I see, okay, got it, and a question in regards to the China market. A lot of your peers have been complaining about inventory build over there. Obviously, you guys seem to have been managing that a lot better. Can you kind of give us a little more background on that, how you're doing so well over there, and what are the trends kind of going forward?

I can't speak for really what they're doing and what we're doing. We're just fighting for every opportunity we can. And from an inventory buildup, possibly they were more aggressive in forcing product into their shelves with longer lead times than we did and so forth, and our situation never reached that. In our case, we find our customers are quite confident in our ability to deliver, so thus they don't feel the need to build excessive amounts of inventory that could create overhang.

I see, okay.

I can head up some portion on this. I think it’s -- a lot of people may thinking that China is a low-level area, so they use a lot of the -- production is not the non-automatic -- automating. But we use the quite automating and use less people, that's the first one. And chances are very good to have (indiscernible) on the operation.

Second is we have very aggressively to train the local people, so a lot of the local manager now is to the price participant, and we only have very few as possible over there.

Okay, and then finally just a clarification on CapEx. I think you had said that last quarter your CapEx was around $11 million. I guess that doesn't quite fit.

I think the $11 million was probably year-to-date.

Oh, I see, so $11 million was -- okay so Q1 and Q2 CapEx were about $7 million?

Right.

Okay, all right, thanks very much guys. Good job.

Gary, I have your answers to the ASP questions. In Asia, our ASPs were up 1.4 percent year-over-year and .5 percent sequentially. In North America, they were down 2 percent sequentially, but up 4 percent year-over-year. And our wafer sales were down 1 percent year-over-year but 8 percent sequentially. So we had an improved mix then, from our wafer standpoint.

Gary Mobley, B. Riley and Company.

Thanks Mark for that clarification. I just have a question. Lead times, if I'm not mistaken I think they peaked at 8 weeks a few quarters ago. And could you give us an update on what they are now?

It's shifting anywhere from -- it's probably 4 to 6 weeks lead time, anywhere from stock to 6 week lead time, so it's a little bit tighter. But it's not dramatically changed. We were continuing to grow and maintain pace with our capacity during those periods.

And maybe there's a little more stock in inventory from the competitive base, and so forth. But it hasn't changed dramatically from start to finish.

What's your estimate as far as utilization rate for you guys, relative to utilization rate for the industry and some of your larger competitors?

On the short-run, frankly, I just can't answer that question. I follow mine very closely. I -- clearly they're probably a little under-utilized. But frankly I think that they've still been under-utilized for the last 2 years. I think we're one of the few who have been so well -- full through 2003 to mid-2004. And really, I try to really look at this from the long-term perspective. As I mentioned in here, we still see a lack of investment in the areas that we're participating in. So even if there's a short-term drop in demand, it's possible that product will become very available for short periods of time.

But the long-term trends are, units are up, investment is down. So in any peak periods of demand, or good consistent growth periods of demand, I think that there's going to be shortage in supply of the product that we participate in. So we think the long-term trends on units and utilization is very favorable to our strategy.

Okay, thanks.

Frank Carrou (ph), Singleman (ph).

Hey guys, great quarter. Very impressive given what everyone else has been doing these days.

Thank you very much.

A couple of questions, I noticed inventories were up more than sales this quarter and that trend's been going for a couple of quarters. Is there any risk there that the environment may be slowing down a little bit when we get into maybe seasonally down Q1? I guess what is seasonality usually for you in Q1?

Frank, let me start with that and I'll let Mark add a little bit more on the industry side. Again, we've watched inventory very closely. We did take the decision to start putting a lot more of it on ships versus air freight to save the costs in shipping. I believe that the 6.2 turns, which is around 59 days average turn, I believe that's a little less than what I've seen in our peer comparison. So I think we're adequately positioned like Mark had said earlier. I think the revenue is in-line with our inventories. I don't know if Mark wants to add a little bit to that.

Regarding – yeah, I mean, I think, our inventory -- we internally do not have an inventory problem. Of course we're continuing to push our inventory down, and that's one of C.H.'s mantras towards us. I think we're okay in an inventory position in the field.

Regarding the seasonality of the first quarter, the seasonality trends have changed quite a bit over the last few years, and actually the first quarter has been usually an up quarter over the last 2 years as I remember. So we're not looking for any significant drops in the first quarter. Second quarter has always been a questionable. Prior to last year, the second quarter was a questionable quarter because there’s lack of back-to-school or Christmas or whatever to drive that quarter. But again, the second quarter was relatively strong on last year. So I think that seasonality trends are changing, and it's difficult to predict.

Okay, and then wafer sales, how much was that of your sales again?

We don't really give a clear picture. I always kind of figure that we say – I don’t know if it’s --

We don't put out the breakdown on wafer sales.

Okay, and the wafer sales go primarily to Lite-On, is that right?

The 2 major consumers are ourselves and Lite-On, and then we probably -- another 10 percent of the wafers go to other customers. So it's a pretty tight mix of customer base on that. And obviously the goal is to internalize that for our use in the Lite-On facilities and in our facilities and really not be a foundry wafer supplier.

And then the gross margins on wafers, that's above or below corporate average?

Below.

I believe run below.

Okay, and those ASPs were down 8 percent quarter-over-quarter?

Up 8 percent quarter-over-quarter.

Now can you walk me through this? I mean, it seems like most parts of the industry are loosening up a little bit. Why would wafer ASPs be up 8 percent quarter-over-quarter? Shouldn't they be trending the other way?

Change in mix. We constantly try to change our mix. Sometimes we go through periods when we sell a certain mix to fill the fab, but when the fab is relatively filled, we squeeze the mix into a positive direction, and that changes the ASPs dramatically.

I see, and how does the negotiation work there, because I guess they're also a shareholder and a customer. How do you keep it kind of unbiased?

We negotiate it based on market price. I mean, it's a very open Schottky wafer, there are a lot of competitors for Schottky wafer, and we fight with Lite-On about those prices just like we fight with any other customer about any other sale.

Okay.

And it really is -- there’s not -- it’s readily a sale situation and a customer situation.

Frank, any of the related party transactions -- we watch them very carefully. Actually, I oversee quite a few of those pricings after they've negotiated, to be sure that they are proven out to be market pricing overall. That's one of the critical issues every quarter that we have in our audit committee meetings, that related-party transactions need to be at arm’s-length market price -- and we have to have our internal audit manager verify that and everything. So we're very careful in those arrangements.

Okay, it makes sense. And the revenues -- that's recognized on sell-in or sell-through in distribution?

Sell-in.

That's on sell-in. And how do you monitor that because I guess if -- how do you know that the distribution is taking, is there any way to mitigate that risk that sometimes companies would sell-in have had troubles in the past?

Well frankly, we just manage the POP versus the POS. And as long as they're tracking we don't have an issue. And in all reality, we watch their inventories very closely, and when we see significant upswings in certain types of product, we immediately identify those down to a customer and so forth.

We've been quite tight for product for a year, so we're watching our distributors very closely for accumulation.

Makes sense, what’s distribution inventories, like how many weeks do they hold now versus maybe a quarter ago, a year ago?

I think it's really pretty consistent. I don't think that, month-in and month-out it may go up and down, but I don't have the weeks of inventory that they have in stock at this point. They probably -- our average distributor is probably just turning their inventory, again, similar to us, about 6 times a year, some more than others.

Nice strategy. And you know, a lot of other companies that have complained about credit policies in China and that's why some of these distributors are reducing inventories. Are you guys seeing any of that problem? I mean, it's impressive that you guys have been able to avoid all of that.

I don't really, credit policies to mean -- meaning having trouble getting their Chinese customers to pay?

Well no, I mean more in terms of since the borrowing terms, interest rates, have gotten more expensive, they need to keep less inventory because they can't afford to keep as much on the shelves because it costs them more in terms of cost of money.

Right, frankly, probably our inventory turns in Asia are even much higher than they are in North America. And certainly distributors in Asia want to hold -- some of the deals are much bigger and a much narrower customer base so they're going to want to hold quite a bit less inventory because of the cost of the money. And the margins are much lower for distributors in Asia. But we're not really seeing that as an issue. We see the distributors in Asia very hungry for business.

We have more distributors in the North America/European market than we do in Asia on a percentage of revenues too, so we have a lot more direct sales in Asia.

Okay, and last question, what are typical ASP trends? I guess they've been up year-over-year, and some areas are starting to decline. Is typical flat or down, or what's a kind of a typical trend? Where do you see it going?

I think our mix is changing, and we see that we're selling fewer, or we're selling as a percentage less commodity product, and we're consolidating more devices into single packages. We see the ASP trend increasing, okay? And clearly that's our objective is to continue to keep the trend moving forward.

So how about year-over-year in terms of on a part-by-part basis. If you were to not mix adjust it and mix adjust it, what's the trend? I mean, I'm assuming mix is helping you while the price part is declining.

I would probably say that in the commodity ranges, we're probably facing mid-single-digit price erosion on an average. The new products, that's like Mark said, we're definitely getting a better mix and a better gain on those.

Actually in the second -- in 2004, the price erosion on the real core commodity products didn't happen because it had been killed so badly the years before. And actually we were able to achieve some price increases. Now, we're seeing some of those price increases now erode back to the original level. But at a certain point, those parts can't go any further. So we still see some erosion on our more profitable devices because they've become more -- they’re more interesting to our competitive environment, so there are more people attacking those on price and people have more room. So we have a lot of part numbers and a lot of different series, so it's maybe not so simple to break it down so easily.

Okay, thanks guys. Great job again.

Thank you.

Joe Meccalo (ph) with Amarant Advisors.

Hi, this is actually Jill Matherony (ph) from Amarant (ph) Advisors. A couple of questions. Can you guys quantify what your turns will be needed to make this quarter?

I don't have that figure in front of me. I really don't study that figure.

Okay, but sort of -- I'm just trying to get a handle on what your typical visibility is as you enter a quarter.

It moves around a little. We probably have a 3-month backlog that's shrinking because of the lead time environment. But I think we pretty much, based on our guidance, have viewed where we think our order position and our forecast position is from our customer base and our distributor base. And basically, view it from that direction.

And also looking at your balance sheet and the debt levels, are you guys potentially looking at raising some form of cash to pay down that debt or firm up the balance sheet?

Jill we have pretty good cash flow, ample credit facilities. One thing we didn't mention, we still have over $30 million of credit available through numerous banks globally. But we are also looking at all options out there as we always have been. We're adequately positioned from a cash requirements and resource capability right now.

Okay, most -- all my other questions have been asked. So congratulations, guys. It's a great quarter in a really tough environment.

Thank you very much.

(OPERATOR INSTRUCTIONS).

At this time there are no further questions. Mr. Coulson, are there any closing remarks?

Well, we'd just like to thank everybody for joining us on the call today and look forward to coming back to you with more news after we've tabulated our fourth quarter results.

Thank you very much.

This concludes today's Diodes, Inc. Third Quarter Conference Call. You may now disconnect.