Diodes Inc (DIOD) 2004 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Diodes fourth-quarter earnings conference call. All lines have some placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Mr. Coulson, you may begin the conference.

Thank you. Good morning, everyone. Welcome to Diodes' fourth-quarter 2004 earnings call. With us today are Diodes' President and CEO, C.H. Chen; the Company's Chief Financial Officer, Carl Wertz; and also Mark King, Diodes' VP of Sales and Marketing.

But before I turn the call over to them I want to remind our listeners that in this call management's 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. Therefore the Company claims the protection of the Safe Harbor for forward-looking statements that's 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 as contained in the Company's filings with the SEC. In addition, any projection as to the Company's future performance represent management's estimates as of today, February 7, 2005. Diodes assumes no obligation to update these projections in the future due to changing market conditions or other factors.

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 and that will be up for 60 days at the Investor Relations section of Diodes' website which you can find at www.Diodes.com. With those formalities out of the way I'd now like to turn the call over to Diodes' CEO, C.H. Chen.

Welcome, everyone, and thanks for joining us on the call today. We are very pleased with our performance in the fourth quarter and for the entire year of 2004. Looking at our full year 2004 results it is evident that this was a year of tremendous success for our Company. Revenue grew by 36 percent to a record $186 million. Gross profit grew by 66 percent to a record $60.7 million. Gross margins increased by 600 basis points to 32.7 percent. Net income increased 153 percent to a record $25.6 million. And we reported record earnings per share of $1.65, up from 70 cents in 2003. Return on asset was nearly 18 percent for the year. Return on equity was almost 28 percent for the year.

This outstanding performance confirms that Diodes has a (indiscernible) strategy in place and we are on track with (indiscernible) on its essential component of that strategy in 2004. Our research and development initiative delivered a stream of break-through products are establishing Diodes as a technology leader for discrete semiconductor. This has positively impacted our margins and allowed Diodes to consistently win sales from larger competitors.

We extended our Asia in the marketing reach (ph) in Asia and Europe and (indiscernible) platform to be able to better serve our customers. We are able to rapidly adjust to (indiscernible) demand and enter a number of important new customer accounts in 2004. We pursue manufacturing excellence through a (indiscernible) of our product quality and the cost structure in place in our industry. We achieved potential increase in units output while continuously improving yields and cost efficiency. And we continue to (indiscernible), resulting in excellent working capital management, improving operating margins and even stronger balance sheet (indiscernible) operating (indiscernible).

During 2004 Diodes continued to outperform the discrete semiconductor segment by a wide margin and we feel confident we will repeat this performance in 2005. Our (indiscernible) product introduction has already (indiscernible) in 2004 resulting in a record 16.2 percent of sales coming from new products in the fourth quarter. This is up from 11.7 percent in the fourth quarter 2003 and we have continued this momentum with the introduction of our new PowerDI 5 series.

I would like to close by congratulating the entire team for their outstanding performance in this past year. Now I'd like to turn it over to Carl for a more detailed discussion of the financials for the quarter.

Thanks, C.H. Good morning, everyone. Our prior guidance for the fourth quarter was for revenues to be flat to slightly down sequentially. While I wish we could report different, our revenues for 4Q were down 3 percent for the first time in over seven quarters, but we did outperform the market as the discrete semiconductor market was down 5.3 percent in the fourth quarter. Nevertheless, we are pleased to report another quarter of strong margin performance and record profitability.

While the pace of the industry expansion eased during the quarter, our results reflect that Diodes is in the right markets and we have the ability to rapidly respond to changing customer demands and that we will continue to reshape our sales and mix towards higher margin performance and proprietary devices.

Revenue for the fourth quarter was $47.9 million, an increase of 22.2 percent from the same period last year. For the full year revenues were a record $185.7 million, a 35.6 percent increase over the 137 million reported for 2003. Gross margin at 33.9 percent was comparable to the third quarter and up by 440 basis points from the fourth quarter a year ago. For the year gross margin was up 600 basis points to 32.7 percent. Margin improvement can be attributed to an improved product mix, more stable pricing, higher contribution by new products and higher plant utilization.

During the quarter our manufacturing facility in China continued to run at better than 90 percent capacity utilization and produced a record level of units. Our wafer fab also ran better than 80 percent capacity producing nearly 40 percent more wafers than a year ago. We continue to invest in reshaping our existing capacity to support production of higher margin products investing $7.8 million in plant and equipment in the fourth quarter and a CapEx total of $26 million for the full year 2004. We are watching the market situation closely, but our initial CapEx guidance for 2005 is in the range of $12 to $16 million.

Fourth-quarter selling, general and administrative expenses were 5.4 million or 1.4 percent of sales as compared to $5.5 million or 14 percent of sales in the comparable last quarter or comparable quarter last year. Sequentially SG&A expenses were approximately $700,000 lower due to onetime reductions in Asia sales commissions and royalty expenses. Research and development spending was 902,000 or 1.9 percent of revenue for the quarter. This compares to $942,000 or 1.9 percent in the third quarter and is a 30.5 percent increase in R&D spending over the year ago quarter. We expect in 2005 our R&D spending will continue to increase as we focus on developing proprietary next generation discrete technologies.

Operating income for the quarter rose 115 percent to a record $9.9 million to 20.6 percent of sales from $4.6 million or 11.7 percent of sales in the year ago quarter. Other expense for the fourth quarter increased $465,000 due primarily to approximately $400,000 in currency exchange losses related to the weakened U.S. dollar, almost equal to the entire 2004. Depreciation expense was $3.6 million for the quarter and 13.2 million for the year. EBIT for the quarter was 11.4 million and 35.3 million for the year. Earnings before interest, depreciation and amortization for the quarter was $15.1 million and $48.5 million for the year.

The Company recorded a $1.8 million income tax provision for the fourth quarter for an effective tax rate of 19.7 percent. The tax expense includes a $1.3 million tax provision for planned foreign dividend distributions under the American Jobs Creation Act of 2004 offset by a $1.2 million foreign reinvestment tax refund net of U.S. taxes and a $600,000 research and development tax credit. We expect to repatriate a minimum of $8 million in foreign earnings under Jobs Creation Act during 2005. Going forward we'd expect our effective tax rate to run in the low 20 percent range.

Net income for the fourth quarter was $7.3 million or 47 cents per diluted share, up 113.5 percent from 3.4 million or 23 cents per diluted share in the same period last year. For the year net income increased 153 percent to a record $25.6 million or $1.65 per share. Return on assets for the year was 17.8 percent; return on equity was 28.6 percent.

Now turning to the balance sheet, we had $19 million in cash and 52.1 million in working capital at December 31, 2004. Also at the end of the quarter we had 11.3 million in term debt as compared to 12.6 million at the beginning of the year. We also converted $5 million of short-term credit facility to long-term. Our total debt balance is $17.5 million, down from 21.1 million a year ago. Our total debt to assets ratio also significantly improved to 34 percent compared with 42 percent a year ago. Cash flow from operations was 8.5 million for the quarter and $29.3 million for the year.

Inventories were at 22.2 million with inventory turns of 5.8 times as compared to 6.2 for the third quarter. We keep a careful eye on the trade off between shipping expense and supporting higher inventory levels with a focus on being sure that we can always meet our customers' needs. Days sales outstanding were 82 days in Q4 as compared to 75 in the prior quarter. The increase was due primarily to the continued growth of our sales in Asia where longer credit terms are the norm.

In 2003 Diodes grew revenues 18 percent while the discrete semiconductor market grew less than 5 percent and in 2004 Diodes grew its top on by over 35 percent compared to the discrete market growth of 18 percent. As C.H. discussed earlier, 2004 has been a year of dramatic growth for both revenues and earnings 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.

The initial outlook for 2005 for the semiconductor industry is somewhat subdued. However, as we enter the first quarter of 2005 Diodes continues to experience solid bookings and we expect sales and gross margins to be comparable to the fourth quarter of 2004. Given the strength of demand for our new products and continued stream of new performance devices we once again expect to significantly outperform the semiconductor market in 2005. I'm now going to turn the discussion over to Mark King, our Vice President of Sales and Marketing.

Thanks, Carl, and good morning, everyone. In the fourth quarter we accelerated the pace of our new product introductions, had excellent success on new design wins and orders on products introduced earlier in the year, and continued to expand into new markets so as to be able to more efficiently service our global customer base. This quarter really underscores Diodes is well positioned in the growth segments of the discrete marketplace and is able to rapidly drive our sales focus and manufacturing capacity to exploit shifting demand across multiple end markets we serve.

Market share and new product revenues both hit new highs. Just as significantly, many of the new products we are now bringing to market are based upon our proprietary packaging and wafer technology that significantly improve performance characteristics of discrete devices and answer pressing customer needs. A great example of this is our new patented high current density package type PowerDI 5. This package builds on the momentum of our PowerDI 123 package and is able to accommodate larger die size and higher amperage to broaden the range of high-performance devices we can offer our customers.

We introduced the first two devices in this series, the high voltage PDS3200 and PDF 5100H Schottky Barrier Rectifiers in October. They offer significant improvements in space and power consumption over legacy SMC and D-Pak Package Design. We have had a high degree of customer interest from a wide range of demanding and equipment applications including automotive, computing and telecommunications markets.

In December we licensed our PowerDI technology to Microsemi to provide customers with a second source for this next generation technology. This strategy will allow us to leverage Diodes innovative packaging technology to further exploit the numerous commercial applications that exist among our current customer base and serve markets.

Then last week we announced another six new Schottky Barrier Rectifiers using our PowerDI 5 package including the PDF 1040 and the PDF 1040 CTL (ph). These proprietary products deliver unparalleled efficiency and performance improvements in a smaller space. They combine lower board voltage drop with exceptionally low reverse leakage current resulting in the highest efficiency rectifiers of their type available and consume only a fraction of the PC board space occupied by competing products.

During the fourth quarter we introduced a total of 147 new part numbers from five different product families including multiple Schottkys, performance Schottkys, two customer ray (ph) products and expansions to our SOT-563 subminiature packaging line and our (indiscernible) Zener line.

The introduction of PowerDI 5 capped a very robust year of product launches. We launched a new line of subminiature SOT-563 discrete semiconductor components that extend our range of subminiature discretes and arrays targeted to markets including mobile phones, digital audio players and portable handheld electronics. And we successfully launched our breakthrough new PowerDI 123 packaging technology creating one of the most thermally efficient compact rectifier packages available on the market.

Customer reception to these devices has been very strong. We've been successful in getting our PowerMite 3, PowerDI 123, SOD-523 and our ultra miniature arrays designed into the latest generation of products across our customer base.

Moving to design wins. During the fourth quarter we had design wins at 50 new or existing customers. This includes wins on digital audio players; LCD module, panel and TV; set top box; PC and notebook; DC-to-DC conversions; mobile handsets and multiple wins in the automotive sector. Notable wins included a PowerDI 123 Schottky design win and production order on a high-volume plasma TV. 10 new designs with three different mobile handset manufacturers including our first win at a major Korean manufacturer.

While we only recently entered handsets we think this category has a lot of potential for our proprietary products -- two new SOT-563 wins on the latest generation of digital audio player. We also went into high-volume production on the 563 wins announced last quarter. Automotive wins at multiple accounts, including the Zener array wins and a new European account and a PowerDI 5 100 volt low leakage Schottky in an automotive audio application.

We had multiple customer wins in the communications segment and applications for voiceover Internet, ADSL gateway, wireless LAN and network interface cards for array products and our proprietary DLP05LC and QSBT40 protection circuit. Our past successes and design wins with these new product platforms is now translating into increased market share and margin expansion.

As a result new product sales reached a new record high of 16.2 percent of revenue, up from 15.6 in the previous quarter and 11.7 in the fourth quarter of 2003. We recently adjusted our calculation of new product sales to capture new products that are being shipped to customers direct from our China subsidiary, a number that grew very rapidly over the course of the year. Our market share also reached new highs driven by Asia while North America and Europe market share was almost flat sequentially.

Moving to market segment, the growth in the fourth quarter was clearly coming out of Asia where we saw continued robust demand in the consumer electronics category. Notebooks continued to be a bright spot in the computer and peripheral segment and we have consistently grown our share in that category. For the fourth quarter our segment breakout was 37 percent consumer, 31 percent computer and peripheral, 19 percent industrial, 8 percent telecom and 5 percent automotive.

Looking at sales channels, distributor sales accounted for 30 percent of total sales in Q4 as compared to 34 percent of sales in Q3 and 37 percent in Q2. Likewise sales to OEMs rose 70 percent as compared to 60 percent in Q3 and 53 percent in Q2.

Geographically Asia contributed 62 percent of our revenues in the fourth quarter with 35 percent of sales coming from North America and 3 percent from Europe. In Asia sales were driven primarily by end equipment categories such as digital audio players, set-top box and notebook while demand for digital cameras remained soft. Fourth-quarter revenue for Asia was up 5 percent sequentially and units rose 47 percent for the year. ASPs were up 2 percent for the year and 3 percent sequentially; although lead-times remain short and price pressure on commodity products remains intense.

North America had a soft fourth quarter as customer demand remained flat with inventories being worked down across the supply channel. However, design activity with OEMs has remained strong as array designs continue to gain traction. North American discrete ASPs were down 8 percent sequentially but up 1 percent for the year. Wafer ASPs were down 7 percent sequentially and 5 percent for the year.

In Europe our sales remained soft at 2.6 percent for the quarter; however, we are optimistic about establishing our position in this market and during the fourth quarter we achieve some critical steps to make this happen. First we entered into a new representative relationship for northern Europe with Spectrum-Nordic that will give us coverage of the Scandinavian countries with important potential accounts. This will cover Sweden, Finland, Denmark and Norway. This region is very focused on mobile phone and high-end telecom design.

Second, we continued to make progress in customer entry with significant design wins with four new customers. Third, we achieved our first orders from two new customers on design wins from the previous quarter including a second mobile handset manufacturer. And finally, we won exciting contract awards from two existing customers in Q4 representing both an increase in revenue and share at both accounts. Given this progress we've made, we believe the European market could account for 4 to 5 percent of our sales in 2005.

In summary and looking into 2005, we believe that all these accomplishments create a platform for continued success in the new year. We expect to see a continued stream of new product introductions that employ our breakthrough packaging platform. We expect positive trends in new product revenues to be sustained based on strong sampling and design win activity we have already enjoyed with products we launched in 2004. And we have a number of other technologies and devices that we expect to introduce over the balance of the year.

We are continuing to strengthen our distribution platform by both adding relationships that move Diodes into promising new regions and streamlining our existing distribution network to be able to better serve our customers. While 2004 was a banner year for Diodes, we remain excited about the potential to grow our position in the discrete market and continue to establish ourselves as a technology leader in this category. And we feel confident we will continue to outperform the industry growth rates during 2005. With that I'll open the floor to questions.

(OPERATOR INSTRUCTIONS) Mark Grossman, America's Growth Capital.

I wonder if you could talk about inventories at distributors; do you think that's mostly been depleted or at what point do you think consumption equals demand for your component?

Frankly, I think our inventory position is quite healthy and is at levels dating back to the 2000 time frame. So I think we're in pretty good shape there. Some of the depletion of inventory was -- affect in the channel was not necessarily our inventory but was overall inventory. So we think we are in pretty good shape, and we believe the point of purchase should start coming back.

Okay, great. Carl, you mentioned there were some onetime items in SG&A. How should we think about SG&A in Q1 and the rest of '05?

We kind of flagged that to make sure everybody understood it was basically a onetime reduction in both Asia commissions as well as some royalty expenses. So you probably ought to factor that out of your model.

What was the size of that exactly?

It was 700,000, was basically the combination of the two issues.

Last one, can you talk about the order trends that you have seen since the beginning of the year? Have things picked up or been flattish or decelerated? What have you seen in the last few weeks?

Actually, I think in there we said our book to bill remained strong, and we had seen good, solid booking trends going since the beginning of the year.

Okay, thanks a lot.

Ramesh Misra with C.E. Unterberg.

A question on the CapEx; you guided it to be down this year. What is the reason for that?

Part of the reason you will recall, we put 26 million in; we put it on pretty much linear last year. And as we look at the market, which we study it very religiously to make sure that when we spend the money, we have it and market for that equipment -- or the product is going to go with that equipment. And we are starting off at 12 to $16 million, which actually is a fairly decent number going into 2005.

So that is an initial estimate for the year?

It's initial, yes. Again, I think we're trying to be on the conservative side to make sure there is no major issues going down as the market's relatively subdued in this year's projections.

You might also note that our fourth-quarter was relatively high, so we have a little space in there to get us going in the beginning of this year.

Right now, as per your plans, what is the split between wafer tech (ph) and your China facility in terms of CapEx?

The majority of our CapEx is always earmarked for the production out of China. There will be some maintenance and some quality type CapEx, probably at the fab, but the majority of the CapEx is really geared for production out of China.

I'm not sure if you talked about this earlier on. How did wafer units do during the quarter, and on a blended basis? I know you're talking on a geographical basis, in terms of your wafer pricing, but if you could just update us on wafer units overall and overall pricing during the quarter, that would be great.

Wafer units were down slightly in the fourth quarter from the third quarter, and I think I said the ASPs were down 7 percent; that's 5 percent for the year.

Yes, 1 percent for the quarter and what's ASP down for -- and about 7 percent for the whole year.

So the 7 percent down --.

I'm sorry, 7 percent for the quarter. I'm reading this (indiscernible).

5 percent for the whole year.

And that was for both -- I mean overall that wasn't just for North America.

That was for wafer sales.

Thank you.

Chris Chaney, Stanford Group.

My question really is about the utilization rate. You mentioned that the China facility was running about 90 percent utilization. Can you remind us what that was last quarter?

I think last quarter we were talking I believe it was mid 90 range.

And your expectation for utilization for Q1, would that be fairly consistent with Q4?

Yes, or hopefully a little bit better. Again, we brought on the 7.2 million CapEx in the fourth quarter -- a little bit higher than the other averaged three quarters, so that pulled it down just slightly.

Also on gross margin, the gross margin was relatively flat sequentially, but the percentage of new products was up a couple percentage points quarter-to-quarter. I'm wondering what that implies? That must imply that the lower and ASPs were down a little bit more than they were the previous quarter or (indiscernible). In other words, why wasn't gross margin up just a little bit more?

I mentioned there was still some intense pricing pressure on the commodity products in Asia.

And does that tend to be continuing in Q1 or has that lightened up a little bit?

I think that's probably the signs that we're going to be looking for for Q1.

I think we also had slightly lower revenue in North America affect it too. Our margin rates are a little higher in North America.

Thank you very much.

Michael Burch (ph), W.R. Hambrecht.

Just a couple quick questions. First, I guess to kind of follow along with the gross margin conversation. When you're looking forward here as to what kind of opportunities you have to improve that, can you talk a little about what you might be able to get more coming from your products and then what else you could get in terms of cost reductions to improve yield, etc.?

We work on both sides of that. We have a very complex margin (indiscernible) and it involves utilization and it involves mix and it involves everything. I think it's pretty difficult to describe exactly how to break that out. It's balancing it very tightly.

Okay, but in terms of targets that you would have for '05 exiting this year is something where you might want to try and head?

We haven't given a target. We basically gave the projection for the first quarter to be comparable to the fourth. As Mark said, it's very complex with the international side of it and the utilization and the pricing pressure and demand. And we're always balanced between margin growth or revenue growth; trying to do both sometimes is not the easiest thing to do. So, I guess for your model we probably ought to just stay with very comparable to the fourth quarter.

That's fine. I'm just trying to think more in terms of the target models. That's fine. And in terms of -- obviously you guys are taking some share here, especially in Asia. If we were to think competitively, if you're thinking about more -- any of your competitors that would be a threat to that would you see that more coming from some of our Asian competitors or some more of the larger U.S. discrete manufacturers?

We think the long-term trend for the larger U.S. discrete manufactures -- or we really wouldn't call them discrete manufacturers, we'd call them broad liners. We see the long-term trend is a de-emphasis of the discrete area. So long-term we would see the pressure coming from Asia suppliers and we think we're developing as a bridge between the broad liners and the Asian suppliers. If that answers your question.

Yes, it does. Thanks a lot.

At this time there are no further questions.

Operator, maybe you could remind people one more time how to ask a question and then we'll just see if there's any further.

(OPERATOR INSTRUCTIONS) Ramesh Misra, C.E. Unterberg.

One other question on your telecom space. You talked quite a bit about new design wins and new business opportunities in the handset, but as a proportion of your sales telecom has been for the much flat at 8 percent. Is this more in terms of new orders, new design wins where you're getting a lot of momentum and is that primarily from Europe?

We're seeing more -- obviously that's a focused segment for us in Europe and we're seeing more and more revenue from the handset (indiscernible). But we're also -- there's some new emerging applications that are more suitable for high-volume in the communication segment that we're focusing on at this point. But it is a small segment and not necessarily because it's decreased, it's because our other segments have grown. At one point we were much larger in communications but our consumer and computer segments have grown so strong that they kind of dwarf the revenue in that area.

And then finally, with 60 percent of your sales coming from Asia Pacific, what kind of impact are you currently incorporating on account of the lunar new year holidays and shut downs at many of your customers?

I think we end up picking up what we lose in February, in January and in March. So we kind of go through this every year and sometimes you're not really sure how people are going to go in and come out, but we've taken that into consideration in our guidance.

All right, thank you.

At this time there are no further questions.

We'd like to thank everybody for participating in this quarter's call. And certainly if you have any other more detailed questions feel free to give Carl a call at the conclusion. We look forward to having you come back next quarter for a further update on Diodes' progress during the year 2005. Thank you.

Thank you, everyone.

Thanks for listening in, everyone.

This concludes today's Diodes fourth-quarter earnings conference call. You may now disconnect.