Diodes Inc (DIOD) 2005 Q1 法說會逐字稿

Good morning. My name is Meredith and I'll be your conference facilitator. At this time, I would like to welcome everyone to the Diodes First Quarter 2005 Earnings Results 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. If you would like to ask a question during this time, simply press "*" then the number "1" on your telephone keypad. If you would like to withdraw your question, press the "#" key. I would now like to turn the conference over to Crocker Coulson. Please go ahead, sir.

Thank you, Meredith. Good morning, everyone. Welcome to Diodes' first quarter 2005 earnings call. With us today are Diodes' President and CEO, C.H. Chen; the Company's Chief Financial Officer, Carl Wertz; and also we have Mark King, Diodes' Vice President 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 prepared remarks do contain forward-looking statements, which 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 complete and detailed discussion of these risks and uncertainties as contained in the Company's filings with the SEC, in particular on Form 10-K. In addition, any projection as to the Company's future performance represent management's estimates as of today, April 28, 2005. Diodes assumes no obligation to update these projections in the future due to changing market conditions or otherwise.

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's going to be up for 60 days at the Investor Relations section of Diodes' website and that's at www.diodes.com. With those formalities out of the way, it's my pleasure now to turn the call over to Diodes' CEO, C.H. Chen.

Thanks, Crocker. Welcome everyone and thanks for joining us on the call today. We are very pleased to mark the start of 2005 with a strong first quarter. Despite a softer industry environment, Diodes was able to achieve solid revenue growth. End market share increased our margins and to sustain strong profitability. Here are few of the highlight of the results we published this morning.

Revenue increased 17.3% year-over-year to $48.6 million. New product revenues remain strong at 16.7% of total sales. Gross margin improved 330 basis point year-over-year, to 34.1%. Operating income increased 40% year-over-year to $9.1 million and we report net income of $7.2 million or 46 cents per share up from $4.9 million or 32 cents per share in the first quarter of 2004. We are very pleased with this solid financial performance given that of our industry demand for discrete product was flat during the quarter. As Mark will discuss, our new product have been very well received by customers.

During the first quarter, we expand our range of device, including our PowerDI 123 and the PowerDI 5 packaging and we launched a new DFN Packaging Platform using Quad Flat No-Lead technology. We have a solid pipeline of additional new product in development and we see opportunities to expand overtime into adjacent technologies that will leverage our [inaudible] capability and broaden the solution we can offer our customers.

Our goal remains to position Diode as an innovation leader for the discrete semiconductor market. Diodes [inaudible] are also earning us broader industry recognition. For the second consecutive time, Diodes has been included in electronics and computer [inaudible] nationwide this of the 30 [inaudible] company, ranked in 14th.

In summary, we are off to a good start and feel that the underlying drivers of our business are very solid. We are feeling very positive about what we can accomplish during the rest of 2005, and beyond. Now, I'd 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. Looking at our first quarter results, we are pleased to report another quarter of strong margin performance and profitability. Diodes was able to rapidly respond to changing customer demands in a weaker industry environment, to increase efficiencies, and to continually shaping our sales mix towards higher margin performance and next generation devices.

Revenue for the first quarter was $48.6 million, an increase of 17.3% from the same period last year. And on a sequential basis, our revenue was up 1.5% from the fourth quarter. Gross margin increased to 34.1% compared to 33.9% of sales for the fourth quarter of 2004 and was up significantly by 330 basis points from the first quarter last year. The year-over-year margin improvement can be attributed to an improved product mix, new product revenue expansion and manufacturing cost efficiencies.

For the first quarter, administrating expenses were $6.7 million or 13.8% of sales, compared to 5.5 million or 13.2% of sales a year ago.

Sequentially, SG&A expenses increased by $1.3 million over the fourth quarter 2004. This reflects $700,000 in the one time reductions to Asia sales commission and royalty expenses recorded in the fourth quarter, as well as increased professional fees associated Sarbanes-Oxley implementation, upgrades or ERP system and a donation in support of tsunami relief in the first quarter 2005.

Research and development spending was $900,000 or 1.9% of revenue for the quarter, This is consistent with the fourth quarter and is 18% increase on R&D investment over the year ago quarter. Operating income for the first quarter rose 40.4% to $9.1 million or 18.7% of sales from 6.5 million or 15.7% of sales in a year ago quarter.

So even traditional SG&A items, operating margins remain strong. Capital expenditure for the quarter was $2.1 million and depreciation expense was 3.8 million. For 2005, we have previously forecasted between 12 million to 16 million for CapEx in order to continue to accommodate increased production and higher value products and anticipated customer needs.

We continue to watch the market situation closely in relation to CapEx adjustment at our manufacturing facility. Earnings before interest and taxes for the quarter was $7.6 million, EBITDA for the quarter was $11.4 million. We recorded 1.4 million in income taxes during the first quarter for an effective tax rate of 16.2%, as compared to 19.9 for the full year 2004. [inaudible] in our tax rates reflects profits in lower tax jurisdictions. For example, our newest subsidiary located in the free export zone in Shanghai, China is contributing significantly to the lower consolidated tax rate because of the government incentive for investment there taxes are significantly lower. Net income for the first quarter was $7.2 million or $0.46 per diluted share, up 49.1% from 4.9 million or 32 cents per share in the first quarter last year.

On a sequential basis, net income increased 1 -- I’m sorry decreased 1.2% from 7.3 million or 47 cents in the fourth quarter of last year. Again we feel that this performance is consistent, given impact of unusual expense item I discussed earlier.

Our balance sheet continues to strengthen, as cash flow from operations was $11 million for the quarter. We ended the quarter with 27.9 million in cash, 60.5 million in working capital and $33 million is available under our bank credit facility. At March 31, our total debt balance was 15.8 million, our total debt to asset ratio improved to .30 from .45 in the first quarter of last year.

Inventories were at $21.2 million, inventory turns were 6.1 for the quarter, an improvement from 5.8 at year end. We keep careful eye on the trade-off between shipping expense and supporting a higher inventory levels. With the focus on being sure that we can meet our customers need. Day sales outstanding were 82 days in the first quarter. We do would expect an increase in AR days, with sales increase in Asia and Europe where longer credit terms are norm [ph].

Stockholders equity increased 7.9% to $121 million. As for our business outlook, entering the second quarter, we see Diodes shipments and orders for delivery continue to show strength. With the book-to-bill ratio slightly above one, but we are mindful that the industry environment remains mixed. Therefore, we forecast that our second quarter revenue and gross margin will be comparable to the first quarter. Given our continued progress in shifting our sales mix and expanding market share, we feel confident that we will continue to out perform the discrete semiconductor market in 2005. I am now going to turn the discussion over to Mark King, our Vice President of Sales and Marketing.

Thanks Carl and good morning everyone. I would echo that we feel very, this was a very respectable quarter given the relatively flat demand for discrete products. I think that for those of you that have watched the company for the last few years it has been quite evident that Diodes is positioned to perform very well in an expanding market for discreet devices. But in the past few quarters I think we are starting to show that we can also sustain our top line and margin performance in more choppy conditions.

During the first quarter, Diodes continued to execute the same strategy that served us well in 2004 and 2003. We continue to move up the technology chain by developing proprietary products that meet defined customer needs in driving advanced technologies to solutions suitable for high volume and the market application. We are well positioned in Asia where the majority of the growth is coming from, and we are focused in expanding our share in Europe which we see as a under service market. We have designed our sales and manufacturing organization to be both less flexible and customer centric. We are able to rapidly adapt our focus to changing end market demands. We continue to enter new customers with our differentiated products and then we will adversely grow our position with those customers overtime by being the most responsive and reliable source of this great solution.

Let’s start with new products. We introduced a total of 77 new part numbers from 6 different products series in the first quarter, including two customers specific array design. We continue to deliver products that extend the envelope of discreet device performance while simultaneously consuming less space and power so as to meet the demands of our global customer base. Just last week we introduced the new DFN ultra miniature packaging platform using QFN, Quad Flat No-Lead technology. The DFN package requires only 40% of the PC board area of the already sub-miniature SOD-523 packages, while maintaining the power dissipation of packages almost 10 times its size.

We intend to expand the CFN line over time to include 6 and 8 inch packages suitable for array to place multiple discretes within an ultra miniature form factor. We think that these DFN arrays will be very popular in portable applications where PCB real estate is at a premium and rapid design cycles are the norm. Here again we are adapting performance packaging to deliver flexible, high volume solutions to our customers. In March we introduced a new series of 1 watt Zener and 2-Ampere Schottky Devices using PowerDI 123 packaging. Again by delivering increased performance in a smaller form factor, Diodes is meeting the needs to increase circuit density on the next generation consumer electronics and commuting products. And we grew our portfolio with performance devices employing Diodes breakthrough patented PowerDI 5 package with the introduction of two new Schottky Barrier Rectifiers in February.

Now I’ll move to the design wins. During the first quarter we had designed wins at 54, new or existing customers. This strong design activity was primarily driven by our PowerDI line, SOT-563 array and SOT-523 product line. Notable design wins include PowerDI 123 wins in the next generation digital audio player and new PDA and a high volume modem ship reference design. PowerDI 5 wins on a new notebook computer, a digital audio player, DC to DC converter as well as DC Fan. Five new mobile phone wins which resulted in two new handset customers for Diodes. These product includes our small outline packages and performance Schottky ones. Automotive wins at 4 different accounts, we continue to see the great opportunity for long-term growth in the automotive segment, given the growth of the electronic content in the automotive deal system and the suitability of our latest performance product to this environment. We also have large number of array design wins including migration of previous sub-miniature stock 563 designs to three next generation digital audio platform.

We had two high volume customers for specific wins, one on a printer cartridge application and the other in a DSL application. Both have already generated significant products orders and represent good growth potential going forward. Following design wins in the previous quarter, we generated our first meaningful revenue from PowerDI 123 in the quarter. Our new product sales remain strong at 15.7% of revenue, compared to our record high of 16.2% in the previous quarter, this apparent decrease was attributed to a continued sales of PowerMite 3 line and some Zener line that have now been in the market for over three years, and therefore no longer can be classified as new product revenues. Although I should mention these lines continue to sell very well and generate healthy market. Diodes and equipment market remains in line with the previous quarter, with consumer electronics and computer accounting for 68% of our business during the first quarter of 2005. Sales growth was primarily driven by accelerating demand for our products in digital audio players, set-top boxes, LCD panels and notebook computer.

Geographically, Asia contributed 64% of our revenue within the first quarter with 33% of the sales coming from North America and 3% from Europe. In Asia, revenues continues to be driven by the consumer sector due to increased demand for our next generation devices used in end equipment digital audio player, set-top box with modest improvement in digital camera. Units shipped were up 29% year-over-year and 8% sequentially. We continue to take share in the notebook category although demand in this category was flat in Q1.

Lead times in Asia continue to be short and price pressure on commodity products is fairly intense. Average selling prices, ASPs, were down 8% year-over-year and 3% sequentially. Overall, Asian outlook remains positive and given our position, we have tremendous room to grow our share of the market in the future. North American discrete sale were soft in the quarter, but backlog and bookings improved slightly. North American design activity was strong. Units were up 7% year-over-year and 6% sequentially, while ASPs were down 8% compared to last year and 5% from Q4. Diodes experienced price pressure on commodity products for the second straight quarter due to continued lack of supply constraint. Customer demand was flat with inventories being worked down. Both distributor POP and POS improved from Q4 and distributor inventory was quite health at a two year low. Wafer unit sales were up 28% year-over-year and 1% sequentially, while ASPs were down 16% and 6% respectfully.

In Europe, market was also soft as customer demand was sluggish. Although our year-over-year sales grew 10%. Main European distributors are seeing the majority of total backlog is within the next two months. In spite of that, we continue to make rapid progress in strengthening our position in the European market. We have design wins at seven new European accounts in the quarter, including a PowerDI 123 high voltage device win in an industrial application, and a customer array win in a communications application. And we had our first orders from three key accounts during the quarter. We also signed a distribution agreement with Rutronik, one of Europe's leading broad line distributors of electronic components. This agreement provides us entry to the Central European market, particularly Germany, which represents approximately one-third of the European market, as well as giving Diodes access to Rutronik's Europe-wide network of 44 sales offices in all major countries in northern and central Europe. The addition of Rutronik enhances our existing network of future electronics and our new relationship in southern Europe with [Air Electronic].

In summary, while we do not expect the overall market to grow at the same rate as last year, 2005 is off to a very good start for Diodes. The major new platforms we introduced in 2004 are being well received by our customers and robust design win activity bodes well for sales of these new products in coming quarters. Our R&D investment continues to pay dividends in the form of new devices that position Diodes as an innovator in the discrete category. Asia continues to be the primary growth engine, but we also see good longer term potential in Europe. And despite a challenging price environment, our margins are increasing as we reposition Diodes' product mix and achieve operating leverage from our lean cost structure. While we are somewhat cautious about the second quarter, we feel that all these factors leave us well positioned to demonstrate continued improvement in our top line and bottom line performance for 2005.

With that I will open the floor to questions. Operator, you can provide instructions on asking questions.

At this time I would like to remind everyone, if you would like to ask a question, press "*" then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question is from Mark Grossman with Americas Growth Capital.

Great, thanks guys. Can you talk a little about order pattern, how were orders expended in March and in April, and it would help if you could breakout a little bit by difference in markets?

It trended clearly there, the market continued to improve from -- as the quarter moved on and January and February was soft and March was the stronger month and April appears to be at a level, closing to the March figures. So I think that its trended favorably. The questions though as considered in the quarter is how the quarter will end as we enter the summer. That seems to be the question that we are waiting to see.

Okay, great. And one housekeeping on -- you gave guidance for revenue and gross margin. Can you talk about what you’re expectations are for operating expenses and tax rate going forward?

Yeah, Mark, you know I think that the first quarter expenses are pretty much, the normalized numbers. We don’t have any adjustment as we did before. The only thing that was probably a little higher in the first quarter that we should not have going forward in the magnitude is the implementation of the Sarbanes-Oxley audit. So, I think those are probably reasonable numbers to use. As far as, tax rate, we’re constantly as we’ve always stressed trying to figure out how to improve our tax position. By forming that new subsidiary last year, in China, that’s definitely afforded us a little bit of a betterment. So, we’re still continuing to look for additional tax planning opportunities. As well as, investigating the American Jobs Creation Act, and what that can still afford for us.

Okay, great, and then last one. Can you talk about what your expectations are for utilization in Q2? If I remember last quarter China was over 90 and the fab was over a 80, is that still going to hold --

Yeah, thanks for bringing us to that one. We should have probably brought that up. You are right. The fab is in the mid-80 range and the packaging is in the 90 plus range.

Again as we mentioned watching our CapEx expenditures to make sure they are in full alignment.

Okay, great, thanks a lot guys.

Your next question is from Ramesh Misra with C.E. Unterberg.

Good morning, gentlemen and congratulations on a very solid quarter. Just a further clarifications on the tax issue of Mark’s question earlier. I think previously you were looking at tax rate for the full year around 22%. This quarter you came in at 16% should we be looking at that you know closer to the 16% level for the rest of the year, I know your looking to always reduce it, but --

Yeah, it's probably somewhere going to fall between the 16% to 19%, 20%. We did have a little bit of an upside benefit in the first quarter that we’re going to try and capitalize as we can going forward.

Okay.

So you know again that’s a tough one to figure out all the time even for us. So I think 16% to 19%, 20% is a fair estimate going forward.

Got it. Okay. Mark you talked about units and the ASPs on a geographical basis, can you provide kind of a number on an overall basis, how did units do overall in the quarter and how did the ASPs do overall in the quarter?

If I have it?.

If you have that?

Give us a second, we will find it.

Your next question is from Gary Mobley of B. Riley and Company.

Hey Mark. I guess while you’re digging for the overall units of ASPs --

Yeah. Why don’t we start, let me get that out of way.

Yeah, lets go back to remissions on the ASPs.

Okay, just for one second. The units were up 7 -- overall were up around 7% and the ASPs were down about 5.2% business, but our average unit costs was down about 5.6%.

That’s on a sequential basis.

Right. And I think some of that might be mixed and increased volume, so you know as we add to capacity to our factory we will [attack] lower end mix while we position our next generation of our desired mix. If you bring on capacity, you can’t time everything perfectly. So, we tend to move in these periods of expansion. We tend to move back into commodities at a stronger pace while we reposition the mix that we want. And that’s kind of our strategy with certain product lines like SOT-23.

It's helpful for all of us. Mark, refresh my memory what your expected mix from Europe was guided for FY'05 and whether you are on track to hit that. I think it was 5% previously?

Right. You know, frankly I think we might be a little bit soft on that, but we you know, we just have our, you know, we just have you know, aero relationship, it's just starting to generate good, strong activity and [code] activity and booking activity. And Rutronik you know just started this quarter. So you know, we are expecting to have a pretty heavily back loaded plan in the Europe area. So, I think -- I’m still comfortable that we can achieve in the range that we’ve discussed.

Okay. And could you talk about what the, what sort of actions your competitors are taking right now with respect to try to gain share and penetrate the market in North America or any other region for that matter?

Yeah. You know its clear that our competitive basis isn’t as quite as utilized as we are and as the broadliners can’t steal their mix, they also come back to a discrete mix. So, we definitely see pressure from a couple of the broadliners to reenter discrete in a search for revenue and/or in a search for utilization. And that’s definitely causing the price pressure on the commodity products. From an overall strategy perspective, and customers entry perspective we don't see much impact at all.

Okay. A very high level of question if I can, talk about your development efforts to add some analog functionality to the various product pipelines?

I think the only thing that we've really mentioned here unless C.H you might want to take this, is that we're really continually study how we can move into the adjacent areas and really try to look at some of the commodity areas as an entry point, but at this point we have nothing to quantify or clarify.

Yeah, [inaudible] total solution providers. So, sooner or later [we think] would get into the analog area, but we have taken very positive step and continue to close in on that step.

You know our Diodes investor presentation and the roadmap we still pretty much have [power managed solution] as the goal and objective as well as customize array of product, packages. We haven't added the analog to our presentation yet, so we're still investigating whether we are ready to do that.

Your next question is from Steve Nishi (phonetic0 with Raymond James.

Great thank you. I was wondering if you could comment on what percentage of your revenue still come -- from sales from third party purchases of product. I guess --

You mean what percent of our products is not manufactured in our systems?

Correct.

Okay. I think you know right now that's roughly -- you know we consider our write-down and subsequently I think we are talking about around 80%, is internally manufactured.

Okay and could you comment on percentage sales to write on this quarter?

Percentage of sales of our wafers.

No just overall revenue, sorry.

Give us one second should it done that because really do the presentation with that in there. I do not think it's changed substantially, so I would definitely say it's still in the mid-teen range.

Okay, and I was hoping you could talk little bit about inventory in terms of, how your inventories in the channel and like a week for now you know 13 weeks or so forth?

Yeah, I do not really have it at weeks but if you really look at it guys, I mean kind of all over my distributor manager. I mean -- inventory -- distributors have done a really good job of brining their inventory down over the last two quarters. I mentioned in here that our inventory was now at two year low, okay. And at a higher POS rate, so I think our inventory pose well for POP order entry in the coming quarters.

Okay. As you reduced production little bit to bring down that inventory so may be you have a small gross margin going forward as you accelerate to normal lift.

I don’t think we reduced the production what you may recalled last part of last year we put little bit extra inventory on shifts and sort of their plants.

Right.

And I think now we caught up with that now.

Okay.

As well as you know our change in ratio, we continue in our core product areas. We continue to expand our capacity and we continue to expand our market share in those key lines where some of that balance by putting less emphasis on different products like some of those buy resell products that you asked for. So, you know, we -- we're constantly selling more units quarterly and building more units quarterly in our core products.

Okay. Great, thanks very much.

Your next question is from Chris Chaney with Stanford Group.

Thanks, and nice job in the tough environment guys.

Thank you.

My first question, actually most of my questions have been answered, but I was curious about what percent of sales apple represents and I think it was just under 10% last quarter at least very recently and on that percentage, how was that split between the kind of the traditional PC and sales to PC products versus the digital audio player, I think digital audio players mentioned several times in the commentary and if I could get an idea of how that's going?

Well, first of all, we've really never disclosed customer names on anything that we've done concerning what we do, and regarding that customary, obviously we do some business there and I think we have a good mix across all product lines in that end equipment and in that customer. Regarding the percentage of sales that that customer would do, is frankly, all that Apple has designed. So, we sell any Apple product would be through five different subcontractors.

Okay. So then, I guess from an end application point of view then, do you have multiple customers with the digital audio players?

Absolutely.

Okay. Alright, well that pretty much answers that question. Thank you.

Your next question is from Art Sherin (phonetic) with Wachovia Securities.

Hi guys, very nice quarter again. You discussed -- you are clearly expanding very rapidly and handsomely in Asia, could you discuss what you see as the trend in North America?

We are expanding for -- we are expanding our sales in North America?

Well you have been expanding your sales in Asia. Your percentage of revenue in North America seems to be as a percentage of the overall business decreasing quarter-by-quarter.

Right. And our market share in North America increases quarter-by-quarter, so basically we are pretty much gaining more share in a shrinking market, okay. If you look at 4 or 5 years ago North America was the largest market in the world, it's now the fourth largest market in the world for this three components. Europe is now 25% larger than the North America market, so if you look at our numbers we actually have a pretty good share of the North America market so it makes it more tougher. But what we do focus on in North America is North American design, okay and it is turning into design community. And our sales on a quarterly basis in Asia, I don’t know what the figure is, I haven’t seen this quarter yet, but anywhere from 20 to 28% of our sales in Asia are from North America design work. So it's a little hard to classify specifically our rate, so we are quite active in the marketplace and -- but it is a shrinking marketplace.

Thank you.

At this time, there are no further questions.

Great. We like to thank all our listeners on the call today, and look forward to turning back with you towards the end of summer quarter or second quarter results. C.H. any final comments?

No, thanks to the everybody.

Great, thank you.

Thank you.

Thanks everyone.

Bye, bye.

Thank you this concludes today’s conference call. You may now disconnect.