Diodes Inc (DIOD) 2005 Q2 法說會逐字稿

Good morning. My name is Unlee and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Diodes Inc. second-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). Mr. Crocker Coulson, you may begin your conference.

Thank you Unlee. Good morning, everyone. Welcome to Diodes' second- quarter 2005 earnings call. With us today are Diodes' President and CEO, Dr. Keh-Shew Lu; the Company's Chief Financial Officer, Carl Wertz and also Mark King, Diodes' VP of Sales and Marketing. Before I turn the call over to them, I want to remind our listeners that in this call, management's prepared remarks 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 is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and therefore we would like to refer you to a more detailed discussion of these risks and uncertainties 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, July 28, 2005. Diodes assumes no obligation to update these projections in the future as market conditions change. For those of you unable to listen to the entire call at the time, we're going to make a recording available via webcast for 60 days and you can find that at the Investor Relations section of Diodes website. Well with those formalities out of the way, I am now going to turn the call over to Diodes' President and CEO, Dr. Keh-Shew Lu.

Welcome, everyone and thanks for joining us on the call today. As many of you know, I joined Diodes as the President and CEO just about two months ago, after serving for several years on the Board. I am very pleased to report the strong results we published this morning with record revenue and record net income for the second quarter of this year, 2005. Here are a few of the highlights.

Revenue increased 7.6% year-over-year and 4.1% sequentially to a record of $50.6 million. New product revenue was strong at 15.7% of total sales. Gross margins improved 260 basis points to 34.6% from last year to the second quarter. Operating income increased 21% to $9.5 million and we reported record net income of $7.7 million or $0.47 per share, up from $6.1 million or $0.40 per share in 2Q '04.

I am very excited to take on this new management role at Diodes, which is growing into an innovation leader in the discrete semiconductor segment under the leadership of C.H. Chen (ph). Diodes has demonstrated that we have an outstanding business model and (indiscernible) profitable growth to our shareholders while continuing to gain marketshare in our addressable market and to build strong customer relationships. As the CEO, I plan to build upon Diodes strength while expanding our growth horizons.

For those of you who have not yet met me, a few words on my background. My experience includes 27 years at Texas Instruments, where I served as a Senior Vice President of TI and the General Manager of all (ph) wide mixed signal and the logic (ph) products. I had responsibility for all aspects of (indiscernible), mixed signal and (indiscernible) products for Texas Instruments worldwide, including design, process and the product development, manufacturing and the marketing. I helped to grow this business unit into a multibillion dollar business. I also served as President of Texas Instruments Asia and have very deep knowledge of that market. While serving as the Director of Diodes for the past four years, I have gained an in-depth understanding of the Company's growth strategy and worked closely with a very cohesive and experienced management team that has been behind our impressive results.

In line with our long-term growth strategy, Diodes intends to move into adjacent technology, which can include analog and the mixed signal that offers potential to expand our addressable market and accelerate our transition toward value added devices. These are natural evolutions that would leverage our world-class packaging capabilities and to grow more sales channel to deliver greater value to our customers. We believe that, in many instances, multichip integration at the packaging level is the best solution for our customers use. Our focus will be on such (indiscernible), come to the market and integration of multifunction to reduce cost, power and the space requirements.

We have proven this concept with the success of our discrete array products which was expanded with a new driver and the voltage regulator compressed array announced earlier this week. Our innovative packaging technology and the flexible cost-effective manufacturing provides us an edge in this market. We see a broad range of opportunity in where we can deliver high-volume repeatable service (ph) that delivers performance improvement over (technical difficulty) devices. Our team is now in the midst of developing a (indiscernible) roadmap and you can expect to see some tangible progress in this regard.

In recent months, we have increased to be recognized by a number of national publications for our strong financial performance. We were ranked number 10 in the Fortune small-business magazine. We were ranked number 28 in the Business Week magazine and we ranked number 45 in Business 2.0, quickest growing technology company. We believe those rankings shows that Diodes is a company that has a very solid strategy for growth and a strong focus on shareholder value. As the CEO, I intend to work to sustain that ranking while taking the Company into the next phase of this growth and financial performance. Now, I would like to turn it over to Carl for a more detailed discussion of the financial for this quarter.

Thanks, Dr. Lu. Good morning, everyone. We are very encouraged by our strong second-quarter results in which we achieved sequential revenue growth in a relatively flat market while continuing to expand our margins. Our new products are very well-received by customers. We continue to focus on the highest growth regions end equipment categories and our ability to respond to changing customer demands and maintain control over expenses resulted in a solid earnings growth.

Revenue for the second quarter was a record at $50.6 million, an increase of 7.6% from the same period last year. On a sequential basis, revenues were up 4.1%. Gross margin increased to 34.6% compared to 34.1% of sales for the first quarter of 2005 and was up by 260 basis points from the second quarter of 2004. This improvement was due to the positive contribution of higher margin new products, a more favorable product mix and efficient utilization of manufacturing capacity.

Selling, general administrative expenses for the quarter were $7.2 million, or 14.2% of sales, compared to 6.4 million or 13.6% of sales a year-ago. Sequentially, SG&A expenses increased by 503,000 over the first quarter of 2005. The increase in SG&A was primarily attributable to a non-cash expense of 358,000 related to the granting of a total of 220,000 shares to Dr. Lu and C.H. Chen (ph) as part of the Diodes' recent strengthening of its senior management team. In addition to the expense, the 220,000 shares are included in the diluted shares outstanding calculation. The combined impact of this share grant reduced Diodes' earnings per share during the second quarter by $0.02 from $0.49 to $0.47. The share grant will continue to be expensed quarterly based on Diodes' stock price over the required four-year vesting period.

Research and development expense was $150,000, or 1.7% of revenue in the second quarter. As Diodes expands into the analog and mixed signal segments, we expect our R&D expense to grow to 2 to 3% of sales. We have been able to demonstrate a very strong return on our R&D investment as we introduce new products to the market. Operating income rose 21% to $9.5 million or 18.7% of sales from 7.8 million or 16.6% of sales in the year-ago quarter.

Capital expenditures for the quarter were $4 million and 6.8 million year-to-date. With our China facility at near capacity and solid demand, we're now increasing our 2005 CapEx projection from the previous 12 to $14 million to 15 to $18 million by the end of the year. Depreciation expense was 3.9 million in the quarter and 7.8 million year-to-date. EBITDA for the quarter was 13.4 million compared to 10.6 million in a year-ago quarter. We recognized a $1.5 million income tax expense during the quarter for an effective tax rate of 15.6% as compared to 16.2% in the first quarter of 2005. We continue to take advantage of available strategies to optimize our tax rates across the jurisdictions in which we operate.

In 2004, we accrued for an approximately $8 million dividend to the U.S. under the American Jobs Creation Act and our analyzed benefits of increasing this dividend. Currently, for 2005, we have accrued an additional $370,000 for taxes, an additional dividend to be made under the Jobs Act. Net income for the second quarter was $7.7 million or $0.47 per share, up 25% from 6.1 million or $0.40 per share in the second quarter of last year. On a sequential basis, net income increased 5.9% from 7.2 million or $0.46 in the first quarter of '05.

Our balance sheet continues to strengthen with $33.33 million in cash and 66.5 million in working capital as of June 30th. At the end of the quarter, we had $10.8 million in term debt, no short-term borrowings when we increased our total unused available credit facilities to $50 million. Our total debt to assets improved to 0.3 compared to 0.4 a year ago. Inventories were at $22.3 million with inventory turns of six times in the quarter, the same as in the first quarter of '05. We keep a careful eye on the trade-off between shipping expense and supporting higher inventory levels with the focus of being sure that we can always meet our customers' needs.

Days sales outstanding were 85 days in the second quarter as compared to 83 days in the first quarter of '05. The increase was due to the continued growth of our sales in Asia where longer credit terms are the norm.

As to our outlook, during the first half of 2005, Diodes' revenue grew by a solid 12% despite a somewhat flat demand environment and competitive pricing for commodity devices. The flat demand in the worldwide discrete semiconductor market and coming off our record revenue performance, we expect to see modest sequential revenue growth and comparable gross margins for the third quarter 2005. Entering the third quarter, Diodes' shipments and orders for delivery continue to show strength with a book-to-bill ratio slightly above one. We're seeing strong demand in categories such as notebook and digital audio players as we head into the third- quarter build cycle.

As a result, we see an exciting future for profitable growth for Diodes in 2005 and beyond as we begin to move into adjacent technologies Dr. Lu referred to previously. I should also point out that our strong balance sheet and cash flow performance provides us with the flexibility to pursue strategic acquisitions that could enhance our strong organic growth. 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. During the second quarter, Diodes has continued to be successful in expanding our marketshare through our focus on high growth end equipment categories, including digital audio players and notebook computers and our strong position in the Asia marketplace. We launched a stream of new products that deliver meaningful space and power saving over legacy devices and expanded the range of our breakthrough packaging platforms. Robust design win activity in our SOT-523, PowerDI 123 and array product lines translate into strong new products for revenue and expanding margins. And we continue to make inroads into new regions and customers that have the potential to fuel considerable future expansion.

Let's start with new products. We introduced a total 45 new part numbers from seven different product series in the second quarter, including three customer-specific array designs. We launched a new breakthrough DFN packaging platform using Quad Flat No-Lead technology, which will be employed in a line of ultra miniature devices broadly used in mobile phones, PDAs, portable media and entertainment devices, digital cameras, notebook computers and wireless equipment. We continue to expand our compact PowerDI 123 and ultrasmall SOT-523 packages with new product offerings reducing size and power consumption suited for a wide range of portable electronic devices, consumer electronics and automotive applications as well as switch mode power supply design.

This new momentum is continuing in the third quarter with the launch of our new relay driver and voltage regulator complex arrays. These products announced earlier this week extend our multichip integration capabilities with arrays that combine multiple functions in one single smaller consolidated package. We're very excited about this new platform which will provide an indication of the future direction we will be pushing our packaging technologies.

Design wins. Interest in our new products translated into strong design win activity during the quarter. We had a multiple win in 51 new or existing accounts. They came from manufacturers in our core end-equipment markets with applications that range from automotive applications and a home heart monitoring system to digital audio players, LCD modules and panels, set-top boxes, PC and notebooks, DC-DC conversion and PDAs smart phones. Design activity for our small outline packages, SOT-523 and PowerDI 123, we're extremely strong and PowerDI 5 and array, both standard in customs, continued to gain traction with our OEM customers.

Highlights included our first six wins on satellite radio applications. The PowerDI 5 wins on two different notebook computers, a DC-DC converter and an automotive application, PowerDI 123 wins on a DC-DC converter, a Bluetooth headset, two different positions in a high-speed powerline network adapter and a new high-end high-volume consumer flashlight, DLP05LC protection circuit wins in two separate set-top box applications, multiple array wins, including four part numbers on a portable navigation unit and multiple part numbers in digital still camera, and finally several SOT-523 Schottky wins in LCD panel and module as well as smart phones and lithium ion battery applications. These wins position us well as the next generation of end equipment that goes into production.

Our new product sales remain strong at 15.7% of revenue, consistent with the previous quarter. New product revenues were primarily driven by SOT-523 product lines, array products in various packages and early revenues generated by the PowerDI 123.

Moving to market segments, computer was the strongest end equipment segment during the quarter at 36% of consolidated sales driven primarily by strong notebook volumes in Asia. Consumer followed close by at 34% of sales driven by digital audio players. Industrial made up 18% followed by telecommunications at 8% and automotive at 4% of sales. Geographically, Asia contributed 66% of our revenues in the second quarter with only 31% of our sales coming from North America and 3% in Europe. 68% of our sales were to OEM customers during the quarter with the balance going into distribution channels. In Asia, sales were strong and continue to be driven by the computer and consumer sector. Units were up 20% sequentially but ASPs were down 11% primarily due to mix and an increase in commodity units. We had a significant share increase in notebook computer market during the quarter and expect further gains next quarter.

Our China facility operated at near 100% of its capacity. We continue to increase capacity at a measured pace. Lead times in Asia remain short and price pressure on commodity products continued to be intense. However, we believe that pricing pressures may ease in the third quarter. North American revenue was flat sequentially for the quarter on a 5% increase in units with a 3% decrease in ASPs. Price pressure on commodity products continued for the third straight quarter. The shift of global electronic production to Asia continued. Set-top box and DSL business, normally good segments for Diodes, have been less robust than anticipated. Demand in sales for products designed in the U.S. and built in Asia remain strong. Array designs continue gaining traction with expanding interest in custom arrays and a very strong interest in the PowerDI 123 and in PowerDI 5.

Distributor inventory dropped slightly and remains at a two-year low. Our Fab Tech (ph) facility operated in the mid 80% capacity during the quarter, way (ph) for ASPs declined by 3% from the first quarter. In Europe, the market remains soft as a result of accelerating outsourcing to Asia, high pricing pressure and short-term -- short lead times. Europe (ph) discrete demand is now expected to be off 5% for the year. Despite these factors, we continue to make progress in the market and sales were up over 17% from the prior year quarter as we penetrated new accounts through our continuing distributor relationships with EROL, Future and Mutronics. To expand our European sales outreach, we recently signed a distributor agreement with Abacus Promax to enhance our sales in the Nordic region. This also completes our objective to have two strong distributors present in each European market. We see a lot of opportunity to continue to take share in this market based on our growing portfolio of performance products and customer service focus.

In summary, we're pleased with our performance during the first half of 2005 with revenues up 12% and net income up 36% in a flat market. Heading into the third quarter, we are seeing some modest pickup in demand and expect that pricing conditions may stabilize. Our new products are being well-received by our customers highlighted by our margin performance. Our strong presence in the Asia market and broad diverse customer base enables us to zero in on the best opportunities for growth and margin.

As we look to the future, we see a tremendous opportunity to build upon our strengths by moving into adjacent technology. Diodes' core competency and advanced packaging technology and our flexible state-of-the-art manufacturing facilities create an opportunity to grow our current position with our customers by continuing to deliver innovative and cost-effective solutions. We remain focused on areas in which multichip packaging integration offers distinct advantages over silicon. We see a broad array of opportunities in that regard. This is consistent with the approach we have taken of migrating advanced discrete technologies into subminiature devices suitable for high-volume applications. Under Dr. Lu's leadership, we're moving forward rapidly to put this strategy into action. With that, I will open the floor to questions. +++ q-and-a.

(OPERATOR INSTRUCTIONS). Chris Chaney with Stanford Group.

Good morning, gentlemen and nice quarter. I wanted to ask you first of all, I'm sure this was on everyone's mind, Carl, you mentioned that the R&D expenses were likely to go up maybe a percent or so up to 2 to 3% over the next, I don't know how man, quarters. But I wanted to ask you sort of what are your plans for R&D spending in the next let's say two to three quarters? At what point do you think you might get to 2 to 3% of sales? I guess if you could highlight a little bit more about your strategy for moving into the adjacent technologies, i.e. analog and mixed signal through area packages, it would be very helpful. Thank you.

Chris, let me answer part of that and then I'll turn it over to Dr. Lu also. We have also always maintained that we want to continue to grow R&D linear and as we have the opportunity. I think in the past we've really never tried to put a terminal date out there. I do believe, as Mark mentioned, we plan on escalating some of our -- accelerating some of our action plans and I'm sure Dr. Lu has that in mind. I know he does in fact. But again, we are pretty cautious in saying we're going to get to 2% by X quarter. Bear with us. We're going to put more on the P&L and we're going to definitely get a return for that as we have demonstrated in the last 2% of R&D that we put on the books.

And the impact on the operating margin, vis-à-vis, the gross margin, do you expect to sort of grow R&D expense as you grow gross margin or are we going to see a little bit of operating margin compression going on in the next couple of quarters?

Let me put it this way. Our vision is the topic of growth. We are going to (indiscernible) between the growth and profit and really how we look at this is how to maximize our bottom line which is a new (indiscernible). So we could not really (indiscernible) that growth on the profit margin or growth of revenue. What we really do is try to do the best, what would be how to maximize our earnings per share, which is really the value for our shareholders.

One thing that -- it may be some slight step functioning because as we bring on R&D, we can't immediately turn it into sales. So there may be some slight steps in there. Like Dr. Lu points out, we're focused on long-term profitable growth.

Michael Bertz with WR Hambrecht.

Nice quarter. Quick question for you. I guess kind of following -- I also will apologize in advance, we're doing construction next door so it may be a bit noisy but -- As we look towards these (indiscernible) and we've talked about this a little bit, can you give us some sense of, may be sort of in the nearer term, places where you might have target initial applications and markets for the analog and mixed signal multifunction packages?

I think that we want to expand using our multichip technology, expand from our current new product platform like array, discrete array, and multichip voltage regulator array, those kind of things will expand from only putting the discrete together and to put it with the discrete commodity (indiscernible) together for special customers. So we're going to provide customer solutions to address the major customers to provide a customer solution.

But clearly we're going to be focused in the same end equipment categories and in the same markets that we play strong with and move on our already strong customer position.

Okay. I guess that's what I'm driving at a little bit there. Is it something we would maybe see more in say notebooks or digital audio players first and then transition to other things or it would be in different applications?

We certainly want to stay focused. We think that we built a very very strong position in the customers that we play in. So clearly our product will be targeted to move in and expand our servable market in our present customer base.

Fair enough. As this trends on into the future, can you give us some idea about, I don't know, not really sort of a guidance, but in terms of sort of targets where you think this could trend gross margins toward?

Yes. I think just like just mentioned, our vision is for growth, and really we looking at is the bottom line, what will be the best to maximize our earnings per share, which is the value for the shareholders. So it's not continued growth, the TTM, the gross margin or the gross. Look on the balance (ph); it's in these two numbers to get the maximum amount of earnings per share.

Okay. That's fair, Keh-Shew. I guess what I'm kind of driving at, is it something where we see -- can see incremental improvements or basically being held flattish but driving overall revenue?

I think we can continue and our goal is to continue to expand our sales and margin, obviously, specifically, our margin. But not at the sake of being able to expand our overall position in the customer and reaching our revenue goals. So I don't think you're going to see a sudden change in our profile, but I think you'll see some of the same trends that we have seen over the last three to four years.

Okay, great. And then last question on the CapEx. Can you break out for us at all if it's more -- as you ramp this up, is this mainly for equipment or what that is intended for? Thanks.

Presently, the majority of our CapEx is going into packaging equipment in our China facility. As we mentioned, we've been running that at 100%. Frankly, we have been in the mid-90s for a long time and our units have increased dramatically over the last two years and continue to increase. So that's an ongoing program and that's where the majority of our CapEx is going.

Steve Smigie with Raymond James.

I was hoping you could comment a little bit on when the expense from the new CapEx might start to show up in the P&L.

Steve, we had the prior announcement at 12 to 14, and all of last year was pretty linear when we expanded, and then this year we indicated that we're sitting very close to 7 million or 6 million range right now, and that was linear. Pretty much the last quarter -- I'm sorry, last half will be somewhat linear. There may be a little bit of pickup kicking in maybe the end of the third quarter, early fourth quarter. By the end of the year, we really plan on having close to that 18 million, so it's a little bit of a ramp in the second half.

And in terms of the higher SG&A, obviously you discussed a certain amount was related to the stock that was granted, but my assumption is that you guys typically make an effort to bring SG&A down as much as possible. And I was just wondering if you have plans to continue to reduce SG&A, excluding the impact of the stock going forward, and also if you could indicate sort of a suggested range of the impact of the stock expense going forward as well?

Steve, without a doubt one of the things that we have historically done, I think very well, is we have kept a very tight control on our operating expenses. Dr. Lu is not going to be any different than the prior CEO. And we are very focused on bringing down cost. Everything we do is cost-benefit analysis, and also remember we had a pretty heavy hit with Sarbanes-Oxley at the beginning of the year. Now that is behind us. We expect to have a substantial reduction in those costs, and that's about a 400 or 500,000 adjustment compared to last year. So we do believe that we're going to be able to control our cost, and I am sure the Board felt that that was required to get us to the new level of Diodes' growth.

When does that 400 to 500 reduction come? Well, that's one question. The other is can you give us some guidance specifically for SG&A for next quarter, for Q3?

Probably the SG&A, we usually don't give out a whole of guidance, but I think it would be pretty comparable. We don't have any significant changes in store. And most of that cost on the Sarbanes-Oxley audit and accounting fees was pretty much absorbed as of June 30th. So we shouldn't have that going forward. That was offset against last year's numbers.

And do you expect the stock expense going forward to be about that same level or assuming a similar type stock price?

It's definitely tied into our stock price. Right now, I do believe that going forward it will be increased slightly because that number basically does not incorporate the full three months of the quarter, because Dr. Lou didn't come on board at the beginning of the quarter. So it will probably increase, I think, around 75,000, maybe 100,000. And it is also tied into the value of the stock price.

Last question, the tax rate was close to -- well, below 16% this quarter. Do you expect that sort of level for the rest of the year, and based on whatever visibility you might have to sales and to Asia, etc., you think that continues into '06?

We've been very focused on taxes in the last three quarters, and we have done a pretty good job overall of tax signing and we're still doing that. We have two accounting firms actually, our current auditors as well as EY working with us, and I guess that to be on the safer side, I would like to say that we are probably still expected to be in the high 15 to maybe 18% range overall. One of the things that may drive it up could be the dividend under the American Jobs Creation Act. We're still doing some heavy analysis on that and as we mentioned, year-to-date, we booked $370,000. But we may increase that. I believe there is a fantastic opportunity afforded by the U.S. government right now to bring back dividends. So there could be some increase because of that. But in definitely long run, it would be the right thing to do.

Ramesh Misra with CE Unterberg.

Good morning, guys. Great job again. The question that is probably might be for you, Carl. What is your sense of the impact of currency revaluation in China in terms of your production costs going forward?

A good question. As everybody knows that the China government did change their currency stance. Right now, there is a 2% decrease and we have done some high-level analysis in the last few days and we expect, for the remainder of this year, to probably incur just a little over $100,000 in foreign currency losses. We are looking at strategies to minimize that through some hedging opportunities and as we move into this quarter, we will get a little bit more in tuned to where we can position ourselves. Definitely, we are aware of it. We have been aware of it. We're working towards minimizing the effect of Diodes overall. Good question.

Dr. Lu, in terms of the analog and mixed signal, now obviously, the marketing organization for analog products, I presume, would be slightly different than that for discrete products. Obviously you're going to tap a lot into your previous TI expense to accomplish that. But what kind of timeline do you need and this actually may be for you too, Mark, how much time do you think is needed to really change the focus of your sales and marketing team in order to accommodate the analog products?

You're right. To address the analog market and to address discrete might be different skill set, okay. But the way we try to drive in this mixed signal and analog strategy, we are not really talking about going to complete high-performance analog, that kind of application. What we really are looking at is taking our current customer and their application and integrates their commodity (ph) type of product together with our discrete to make it a total solution for our customer.

So since we are addressed to the same customer base and maybe even to same applications, we just look around in that particular application and integrate the analog and the commodity analog and the discrete together, you would see a multipackaging -- multichip packaging technology. Therefore, the sales guy who pitches (ph), he going to pitch at the same customer, look at the same application and just realize that's our packaging integration. Therefore, I don't think you're going to see a major sales force change or major people change. We are just going to expand our current channel -- current distribution, our current customer and just one step forward to integrate and to provide our customer a safe (ph) distribution.

That's a great clarification. One follow-up question for Mark. In regards to the three customer specific array devices that you introduced, Mark. Are those proprietary parts or are they second source or second sourceable (ph) by others?

Second sourceable but they might find someone there that would be less interested to be so flexible to give them exactly what they need. And I think that that is one of the things that we offer is that the big broad liners they just want to pump out a bunch of parts and we want to pump out solutions for our customer to make ourselves deeper -- give ourselves a deeper position. So clearly, somebody could do them. The question is will somebody do them and will the customer drive someone to do them because there is really no need. So yes, there -- we are providing in some cases some are more complex than others but mostly simple solutions to problems our customers are experiencing or allow them to consolidate for cost saving and space-saving and so on.

And regard to these three critical parts, can you say which are market-based in the target? Is it consumer, digital, audio kind of space or is it --?

I think that frankly, I don't have the three of them in front of me. I believe one was in set-top box. So I think one was in consumer and another one was in telecommunications and so on. I don't have it right in front of me. There's a lot of design wins.

Andrew Route (ph) with OTA (ph) Asset Management.

I have a couple of quick ones. The 3.9 million a quarter in depreciation for next year, should we keep it at that level? Does CapEx sort of flow through slowly because it's building or should we go to like 4 2 or 4 5 a quarter?

I think you're probably pretty safe. Just keep it close to that same range.

What percent of your product is for distribution this quarter?

32%.

And that's about the normal level?

Almost 30.

Yes, 30.

It will fluctuate a couple percent.

Do you do all sell in or some of your accounting sell through for DIS/D (ph)?

All sell in.

All sell in. In every geography?

In every geography. And we just balance it and watch very closely and we balance it to the POP versus the POS.

So the sell out of DIS/D has been pretty closely matched in the sell in to DIS/D?

Absolutely.

And what are the lead times that you are seeing right now?

Lead times are relatively short depending on the product mix, anywhere from four to eight weeks. Obviously, there is stock position on certain devices.

And the addition of some capacity in China, do you think you can bring any of the longer lead times within that range down or is it probably going to stay about the same range?

Frankly, in our Company, lead time is a decision. Okay? It's not an absolute. If the opportunity is there to expand our position in a customer or solve a customer problem then the decision is made to move. We have a lot of flexibility and we have a lot of movement and we are very focused on utilization but we can also change on a dime.

That makes sense. Then you mentioned commodity and you're talking specifically about ASPs. Do you break down your product mix by commodity versus value add?

We really haven't done that. We really haven't published that figure at this point. But we still -- we have done well in our new product but we're still very commodity-based. When I talked about the ASP mix, a lot of that is -- we are expanding our units very rapidly and we understand how to move units and then rechase our mix. So when we are expanding units very quickly and you're picking up significantly millions of units per month in share, you have to go at the low hanging fruit and then move it into your position. So that is why we have sometimes significant ASP shift.

So you said pricing probably moves in your direction this quarter, what sort of --?

I wouldn't say it was going to move in our direction. That might be a little bold. I think we have seen some bottoming out in some of the core commodity areas in Asia.

So the price increase isn't something we should think about, just less than --.

I wouldn't build that into any model.

Last question is do you think about -- I mean you have been very clear about optimizing EPS. But do you think about just simplistically, because that's how I think, just a target model of gross margin, OpEx and operating margin as you look out sort of a year or two from now?

We actually don't go out that far in our projections. We kind of refer you to some of our current analyst projections if you will.

I guess another way to ask it is you're running, excluding the comp charges this quarter, 19 and a bit percent Op margin, is that above the level and then the revenue growth grows because more mix signal and integration with multichip or can that become 25 30% over time?

I think one of the things ideally we would like to see and it's not a projection but if we get to a 35% gross margin with a 15% total operating expense and a 20% operating profit and then get the mid teen range for taxes and then go out and continue to grow our revenues to X industry. That is a nice return and that is what we have been striving for. We have been accomplishing it. I'm sure Mark and Dr. Lu will have more to say about revenue markets and gross profits. But I think we're just going to continue to refer to our historical paths and hopefully we can use those to lead us into the future.

The final question is utilization rate, did you say, was 100%?

It grows as the month goes on.

Near capacity.

Near capacity.

And that's on the packaging, not the wafer side?

Elias Moosa with Archer Capital Partners.

I had a couple of questions. I may have missed this. I know a part of it I missed. Can you go over the end market mix again one more time please?

Yes. Off the top of my head, we were 36% computer, 34% consumer, 18% industrial, 8% telcom, and 4% automotive.

And on the consumer side, about how much of it is digital audio?

We don't get into that level of detail.

It's not though kind of an 80/20 thing where it is --?

Absolutely not. We are in a very very broad base of consumer products and there's no dominance.

Understood. A couple of other things. Carl, if you can give us a good idea, maybe you discussed this and I missed it, on the in share count increase quarter-to-quarter and what is your anticipation for share count going forward? I'm sure it varies with the stock price and all that. But just in general, does it step back down or is there another step upcoming beyond just variations in the stock price?

I think one of the things, in general, looking at a year-ago number on those number of shares is with our share price at record highs now, we have had considerably more of our hundreds of employees that have stock options exercised. Now those are out in the fully diluted, out in the basic number now. I believe that we will not have any more of the onetime adjustments as we had in the second quarter, the 220,000 shares. In general, going forward it would just be on a historical trend of options.

I see. But there is not a step down either coming right necessarily?

No, not that I am aware of.

And where is the stock expense you talked about? Where is that on the income statement?

The stock expense rolls up into the SG&A.

How did you -- what is the basic premise behind that? I'm sorry if you explained that already. Where is it coming from and what is the outlook for it?

Well basically, the 350 some odd thousand we expensed, that was not the full quarter. Going forward, I think it's going to be just a little over 400,000 per quarter and that is based on a $35 stock price and that will be vested over four years. Dr. Lu and C.H. have a four-year vesting period with those grants.

So your expensing goes right now on a quarterly basis around 400,000?

Correct. A little over 400.

So if I'm going to try to calculate or make a forecast for OpEx for you guys, about 350,000 of this quarter's OpEx overall was from the stock expense and that steps up to 400,000 and then whatever the normal growth or decline in OpEx is beyond that?

Hang on one second, okay? Basically, right now, the numbers are calculated on our current stock price of $35. Then, as our stock price goes up or down, that value will be adjusted per quarter. So we would love to see going up to 50, 60, $70 stock price. Seriously, though, it's based on the current stock price.

So if the stock price goes higher, your expense is lower?

No. As it goes higher, our expense will be greater.

The stock expense that will show up in your OpEx will be greater?

Correct.

Is there a way to gauge that for us? Is there a formula that we can use in order to be more prepared for it and hopefully the stock price will go higher but then we won't get surprised on the OpEx line when we see it. Can you give us a formula for that?

(Multiple speakers) 20,000 shares and at a $35 stock price, divide that over a four-year period.

What is the total number of shares again?

220,000.

220,000. $35 stock price. So now what happens if the scenario of the stock price goes to 40?

If it goes to 40, the value would increase. The expense would increase by 5 dollars times 220,000 shares divided by the four years.

Divided by four years per quarter. So immediately, that quarterly portion would flow into the OpEx for that quarter?

Correct. Frankly, I think we're all hoping for a greater expense every quarter.

Steve Smigie with Raymond James.

Sorry. Just a follow-up question. I'm not sure if you answered this already. But the modest growth that you mentioned in terms of sequential guidance, does modest means flat to up 1% or does it mean sort of 3% tech (ph) growth?

Can I reverse the question? How do analysts perceive modest? What is the definition in analyst terms?

Well, that's the question, what do you mean by modest?

Again, I think somewhere between 1 to 5% is modest. We indicated our book-to-bill is slightly above 1. If you back and you look at our prior announcement, that is very similar to what we talked about last quarter.

And I believe you said similar gross margin sequentially. Is that similar growth in gross margin sequentially that you saw or similar in terms of seeing --?

Percentage. I think it's safe to assume percent.

There is a follow-up question Ramesh Misra with CE Unterberg.

Just a follow-up. In regards to your wafer fab operations. Very roughly, what is the range of wafer sales contribution to your overall sales? Is it 10%? Is it 5%? Is it 20%?

We really don't get into that. The one we can say is the trend on wafer sales towards internal consumption is increasing by every quarter.

That is our goal anyway.

So that the trade revenues are coming down on wafer is because we're starting to use more internally.

We're very focused on that. It is not -- the wafer sales are filler.

I see. And is the key external customer for wafer sales Lite-on?

(OPERATOR INSTRUCTIONS). Chris Chaney with Stanford Group.

Just following along with the last question on the wafer fab. When you go into production on these areas that have both discrete and some analog components on them, do you plan to source the wafers for those analog components within that turn on wafer fab or will you try to go out -- will you have to go outside to get those?

Well, if we took them at analog, we probably need to source them from outside because our facility is more in the discrete bipolar (ph) and depending on what kind of analog circle we're looking at, then we need to look at it different. If we are looking at pure CMOS then we need to go to CMOS fab. Now if we use things bipolar, then we might look at -- obviously we look at our fab first. But we would not bet (ph) our wafer strategy or our practical knowledge of (indiscernible) to what we want to do. So if we need to go into the CMOS then we should go to outside.

You are now running at about 80% utilization on your wafer fab. As you move to I guess utilize more of that internally, going into next year, do you see a time where you're going to have to start spending more CapEx on that fab again?

No, I don't think so.

We really have no long-term plans to expand CapEx in the wafer facility now. We will continue to use as much as we can internally and then outsource the others.

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

I think we'd like to thank everyone for their participation this morning. Thanks for the number of questions. Look forward to coming back to you in future quarters.

This concludes today's Diodes Inc. conference call. You may now disconnect.