Diodes Inc (DIOD) 2005 Q3 法說會逐字稿

Good afternoon. My name is Melissa and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Diodes third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Mr. Coulson, you may begin your conference.

Thank you, Melissa. Good afternoon, everybody and welcome to Diodes' third-quarter 2005 earnings conference call. Joining us today from Diodes office in Taiwan is the Company's President and CEO, Dr. Keh-Shew Lu and joining us from the Company's headquarters in Westlake Village in California, we have the Chief Financial Officer, Carl Wertz and also Mark King, Diodes' Vice President of Sales and Marketing.

Before I turn the call over to them, I would like to remind our listeners that in this call, management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions on the call. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today and therefore we would like to refer you to a more detailed discussion of the risks and uncertainties contained in the Company's filings with the SEC.

In addition, any projections as to the Company's future financial performance represent management's estimates as of today, October 26, 2005 and Diodes assumes no obligation to update these projections or estimates in the future as market conditions change.

For those of you unable to listen to the entire call at this time, we're going to make a recording available and you can find that for 60 days at the Investor Relations section of Diodes' website at www.diodes.com.

Well with those formalities out of the way, it is now my pleasure 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. I particularly want to welcome the new shareholders that participated in our recent formal offering. We appreciate your interest and we will do everything we can to keep our investors informed about Diodes' performance, strategy for growth and (indiscernible) outlook. I am pleased to report another very strong set of results for the third quarter this year. Diodes is positioned in the right markets and have continued to grow our share with (indiscernible) OEM customer base.

Our new products and the design wins continue to fuel our sales momentum and to boost our margins. Here are a few of the highlights of our third-quarter results. Revenue increased 9.8% year-over-year to a record $54.2 million. New product revenue was strong at 15.2% of total sales. Gross margin improved 90 basis points to 34.8% from 3Q last year. We reported net income of $8.4 million or $0.51 per share, up from $7.2 million or $0.47 per share in the third quarter '04.

This result reflects the strength of our business model that delivers profitable growth to our shareholders while continuing to gain share in our addressable market and to build strong customer relationships. During the first nine months of this year, Diodes generated $41 million in cash flow from operations and on September 22nd, we closed on a (indiscernible) secondary offering of 1.7 million shares of our common stock, which generated net receipts to the Company of approximately $60 (ph) million. As of September 30th of this year, we have $104 million in cash and investment, shareholders' equity of $202 million and a $42 million variable line of credit. This very strong financial position provides Diodes with the ability to aggressively pursue our (indiscernible) growth initiatives.

When I joined the company in June this year, we announced that as part of our long-term growth trend Diodes would extend our product range into adjacent technologies, including (indiscernible) and the mixing of devices. This strategy is a natural evolution of Diodes that view our highly efficient scalable manufacturing capabilities and our strong and diverse OEM customer base. We believe the move into adjacent technologies will enable us to significantly expand our addressable market, deliver greater value to our customers and enhance our margin realizing our vision of the profitable growth.

I am pleased to say that we are already making plenty of progress in realizing this vision. We have made seven new hires, including a global new product manager and a product (indiscernible) manager who are bringing us their case of experience in analog and the mixed signal devices at the leading global semiconductor companies. We have developed our initial product roadmap and identified a number of product areas where we see a defined need from our existing customers and a good fit with our existing strengths in packaging and application engineering.

We are gearing up to produce new package at our Diodes channel facility that will be suitable for disk (ph) spender (ph) analog device. This includes the SO8 or we call the small (indiscernible) 18 package and our SOT-223 package, which we (indiscernible) our popular PowerDI packaging and we are actively evaluating a number of strategic acquisition opportunities that offer Diodes substantial intelligent property and a proven standard in our product so as to accelerate the introduction of new analog mixed signal devices.

While it is not possible to predict the outcome of those efforts, we have seen a number of comparing (ph) candidates and expect to have something to announce in the quarters to come. We expect to launch our first analog device during the first half of next year and are beginning to recognize meaningful revenue from those products in the second half of next year.

Our plan is to begin with introducing standard analog devices and then to leverage our strength in applications, specific multichip circuits we call SMAC to drive a range of products that combine discrete, analog and debilative (ph) devices in a single package. We see a broad range of opportunity in which circuit integration at the packaging level can deliver space, power and design efficiency to our customers. In fact, lowering their cost while at the same time enhance our margin.

We have proven this concept with our discrete array products and the (indiscernible) market position and the market potential is very substantial. By 2007, we expect to be launching our multichip analog and mixed signal device.

So what is our strategy for growth? First, we will continue to aggressively introduce new products and the platforms in both discrete and analog technologies, gradually introduce our new and proprietary product has I'm able (indiscernible) Diodes to (indiscernible) our customer relationships, expand our addressable market and enhance our margin performance.

Second, we will leverage our strength in next-generation addressable package and insight into customer design requirements to drive multichip devices that deliver even greater value to our customers.

Third, we will continue to distinguish ourselves through our intense customer service. Four, we will continue to expand our manufacturing capacity to accommodate customer demand and to gain scale benefits. We currently have the capacity to turn our overnight business unit per year and we have increased our capital investment trend to bring additional capacity online by year end.

And finally, we are pursuing strategic acquisitions that can accelerate our growth strategy to where we can realize efficiencies by capitalizing on Diodes (indiscernible), manufacturing and blue-chip global customer base. We are very pleased to have recently named ranking number 26 on Forbes Magazine. This of 200 best small companies, up from number 100 in the prior year. This recognition was based on the outstanding record of growth and the profitability Diodes has achieved over the past five years. And we are very excited about the potential (indiscernible) of exceptional performance that we (indiscernible) the growth strategy that I have outlined above.

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

Thanks, Dr. Lu and hello, everyone. We feel very positive about our solid third-quarter results, which were accomplished despite continuous softness in the global demand for discrete devices. We continue to align ourselves at the most attractive growth regions and equipment categories. Also our disciplined fiscal plan enables the Company to manage costs and expenses effective to serve our customers' rapidly changing needs with innovative, high margin product. This approach has provided us with consistent quarterly earnings growth. The Company's results for the third quarter included revenue at a record $54.2 million, an increase of 9.8% from the third quarter of 2004 and a sequential increase of 7.1%.

Gross margin advanced 90 basis points to 34.8% year-over-year compared with 33.9% in the third quarter of 2004 and 34.6% in the second quarter of 2005. The improvements in gross margin were the result of a positive contribution of higher margin new products, a favorable product mix and efficient utilization of manufacturing capacity. Selling, general and administrative expenses for the quarter were $7.6 million or 14% of sales as compared to $6.2 million or 12.5% of sales in the comparable quarter of last year. The increase was primarily attributable to the non-cash expenses related to the share grants made in connection with the strengthening of Diodes senior management team.

These 220,000 shares will continue to be expensed quarterly based upon Diodes' stock price over the required four year vesting period. Research and development spending was $938,000 or 1.7% of revenue compared to $942,000 or 1.9% of sales for the third quarter of 2004. We expect that Diodes' R&D expense should reach 2 to 3% of sales as the Company advances into the analog and mixed signal segments. Given the robust market demand we see for our new higher margin products, we believe that the potential return on investment of this higher R&D investment is justified and in fact essential for Diodes' future growth and overall profitability.

Operating income increased 7.5% to $10.4 million or 19.1% of sales compared to $9.6 million or 19.5% of sales for the third quarter of 2004. Capital expenditures were $6 million and $16.3 million year-to-date. Depreciation expense for the quarter was $4.1 million and $11.9 million year-to-date. At our Diodes China facility, currently running at capacity, we have already begun making investments in new packages that will support the first lines of standard analog devices. As a result, we are raising our annual CapEx forecast from 15 to $18 million to a range of 20 to $23 million for 2005.

This larger budget level will equip us with the sufficient resources to increase production of higher margin products and be able to satisfy current and anticipated customers' requirements. EBITDA for the quarter was $14.2 million compared to 12.9 million in the year-ago quarter. We recognized $1.6 million in income tax expense for the third quarter for an effective tax rate of 15.7% as compared to 22.3% in the third quarter of 2004. We continuously seek to take advantage of all available strategies that optimize our tax rate for every jurisdiction which we operate.

As we mentioned in our second-quarter earnings call, we are analyzing the benefits afforded under the American Jobs Creation Act and now expect to increase our foreign dividend repatriation from $8 million announced last year to a total of 20 to $24 million to take advantage of the 85% tax credit.

Net income for the third quarter increased 15.8% to a record $8.4 million or $0.51 per share compared to $7.2 million or $0.47 per share for the three months ended September 30, 2004. On a sequential basis, net income grew 9.4% from $7.7 million or $0.47 per share in Q2 '05. Shares outstanding properly reflect only a few days of the follow-on shares with the full impact to be in effect for fourth quarter '05.

Our balance sheet continues to strengthen with $104 million in cash and short-term investments, $135 million in working capital, $14 million in long-term debt and unused and available credit facilities of $41.6 million. This reflects the contribution of our recent follow-on offering in which 1,750,000 shares were sold by the Company resulting in net proceeds of the Company of approximately $60 million.

In October, Diodes sold 375,000 underwriters overallotment shares as part of the follow-on offering raising an additional $12 million. For the first nine months of 2005, shareholder equity increased 80% to $202 million. Our total debt to asset ratio improved to 24% compared to 33% a year ago. Our strength in the balance sheet provides Diodes with the flexibility to aggressively pursue strategic corporate initiatives, including acquisitional support of future growth.

Inventories were at $26.4 million with inventory turns of 5.4 times in the quarter compared to 6 turns in the second quarter of '05. Days sales outstanding improved to 81 days in the third quarter as compared to 85 days in the prior quarter. However, with our continued sales growth in Asia, we may expect longer credit terms.

Future outlook. As we continue to outperform the discrete semiconductor market with our book-to-bill above one, we expect a 1 to 4% sequential revenue growth with comparable gross margins for the fourth quarter of 2005. In regard to our analog initiatives, we anticipate delivering actual products to market by the first half of next year with a meaningful level of revenue from these products generating in the second half of 2006.

We believe that Diodes is well-positioned to execute within this time line given our allocation of additional resources and analog strategy and installation of a packaging capability for analog circuit production at our China facilities. Also our solid balance sheet and cash flow provided us with the latitude to pursue strategic acquisitions that could further augment our strong organic growth. I'm now going to turn the discussion over to Mark King, our Senior Vice President of Sales and Marketing.

Thanks, Carl and good afternoon, everyone. Diodes posted another successful quarter in expanding our discrete marketshare by aligning our product development, marketing and sales initiatives with the highest growth and equipment opportunities such as digital audio players and notebook computers and by strengthening our solid position in Asia.

Beginning with new products, we introduced a total of 64 new part numbers from six different product families in the third quarter. We expanded the Company's PowerDI 123 product group by introducing new lines of transient voltage suppressors, standard rectifiers and two Schottky dot devices. Diodes enhanced the Company's PowerDI 5 product line with five new Schottky devices. Diodes also launched a line of ESD protected small signal MOT sets in six different packages in both signal element and our ray design. These new MOT sets have built-in gate source protection rated to exceed 2000 volts and low ohm (ph) resistance for minimum power dissipation. We are offering them in dual and single configurations in small outlying packages. These devices are uniquely suited for use in cellular and cordless phones, computers, voltage inverters for LCD backlighting, digital still cameras and portable electronics.

At the beginning of the third quarter, Diodes also launched a new platform of application-specific array products, including relay drivers and voltage regulation circuits. These products extend our multichip integration capability with arrays that combine multifunction in a single, smaller, consolidated package. We're very excited about this new platform, which embodies the future direction of our packaging technology.

Design wins. High interest in our new products translated into strong design win activity during the quarter. We had multiple wins at 53 new or existing accounts. As with the previous quarter, design activity for both our small outlying package, SOT 523 and our PowerDI 123, were very robust with our PowerDI 5 and arrays enjoying continued success with our OEM customers.

Highlights include PowerDI 5 wins in two additional notebook models, PowerDI 123 wins in a Bluetooth headset, a mobile handset, portable POS terminal and a motherboard. Multiple array wins in DSC, or digital still camera, portable DVD, wired mobile headset, notebook, motherboard and an automotive sensor, performance Schottky wins in an automotive application and a set-top box, SOT 523 wins in digital still camera, mobile handset, portable GPS, notebook computer and a TSP display and our first design win for our new voltage regulation circuit in a DC fan.

Also, key design wins that we obtained in the previous two quarters for our PowerDI 5, our PowerDI 123 and some miniature array products went into actual production late in the third quarter to coincide with the expected mass production of the latest generations of digital audio players and notebook. Our new product sales were 15.2% of sales compared to 15.6% last year. As with last quarter, new product revenues were primarily led by SOT 523 product line, our array products in various packaging platforms and the PowerDI 123 offering.

Geographically, Asia generated 67% of our third-quarter revenues with North America coming in at 30.3% and Europe contributing approximately 2.7% of total revenue. While overall demand in Europe continues to be flat, our efforts here are beginning to gain traction as we continue penetrating new accounts and fully leveraging our new distribution partnerships to grow Diodes' market position in the region. 70% of our sales were to OEM customers during the quarter with the balance going through distribution channels.

In North America, sales were up slightly in the third quarter as pricing pressure on commodity products eased some and product leadtimes remained stable. Average selling prices were actually increased slightly from the second quarter but were still down 14% from last year. Given the ongoing shift of global electronic production to Asia, historically attractive segments for Diodes, such as set-top box and DSL business, continued to experience less than outstanding demand in the U.S.

Sales for accounts designed in the United States and built in Asia remained brisk with good overall design activity. Array designs remain very popular with highlighted interest in customer arrays and sustained interest in the PowerDI 123 and the PowerDI 5. Distributor inventories edged slightly lower from last quarter and remain at two-year lows. Wafer selling prices were down 6% sequentially and 24% year-over-year.

In Europe, revenue was up modestly in a flat market. The ongoing trend of outsourcing to Asia continues to accelerate. Also pricing pressures here remain high as we have pushed to expand in the market and as product leadtimes remain short. We continue to make progress in positioning Diodes favorably with the OEM customers while expanding the Company's presence with our new distribution partnerships.

For Asia, sales were strong in the quarter as we continue to gain share. The computer and consumer sectors are driving the revenue growth, especially in the digital audio and notebook computer categories. Average selling prices were down 2% sequentially and 13% year-over-year. We maintained a strong marketshare increase in the notebook category during the quarter and expect further gains for Q4.

Commodity product leadtimes started to lengthen during the third quarter and we may see some transitory shortage in Q4. Hence the pricing for these products began to stabilize late in the third quarter and look relatively firm through the coming quarter.

In summary, we're pleased with the overall results of our key product development, marketing and sales initiatives for the third quarter. We are seeing a healthy level of customer demand for many of our new higher margin product offerings and anticipate similar levels of success going forward. We also continue to secure key design wins that position us favorably to take advantage of opportunities created as next-generation products go into mass production in the coming quarters. Based on these factors, we also feel that our marketing and sales channels are well-positioned to support our expansion into adjacent products such as standard analog and mixed signal products.

As Dr. Lu outlined, we continue to experience strong momentum in the discrete market and are extremely excited about the opportunities for incremental growth that will open up to us as we expand the range of products we can bring to new and existing customers. With that, I will open it to questions.

(OPERATOR INSTRUCTIONS). Rajesh Misra.

Good afternoon, guys and congratulations on another solid quarter. First thing was a little bit of a clarification. I think through Q2 you had previously talked about your CapEx being at about 6.8 million year-to-date. Am I missing something and maybe you could give me the Q1, Q2, Q3 CapEx numbers.

I think it was a little higher than 6.8 year-to-date. Part of the issue is how we account for it, whether it is on a cash-flow basis or an actual fixed asset. I think what we did the first quarter, maybe the first two quarters, we counted it on a cash-flow basis, where in reality, there's some accounts payable sitting there for us that we weren't subtracting. But in reality, it is currently sitting at 16 million. For now, 10 million year-to-date, second quarter plus the 6 million this quarter.

Now, in terms of the share guidance for Q4, what should we be looking at in that regard?

I'm sorry. What was the question?

The share count for Q4, should it be basically --?

The share count? The follow-on offering?

Yes.

1.75 million plus the 375 overlap. So it will be 2.1 and some change.

So that will be 18.5 then?

Pretty much, yes. Because we only had it for a few days in the third quarter. So it was only like 60,000 shares affected in the third quarter.

I see. So pretty much the whole thing comes out in Q4. In terms of gross margins, year-over-year, this year your margins are up 90 basis points. Last year, they were up about 800 basis points. Is there some sort of gross margin saturation occurring here?

Well I think probably a good part of that ramp into '04 was the new products were really kicking in and now we have got that margin dollar for the last two years. So it kind of stabilized that percentage of new product. But we are still squeezing a little bit more utilization, a little bit more of the -- the cost reduction is still a goal for us. Unfortunately, there's a couple of times we're not able to get the exact same cost reduction as the price erosion. It is pretty tough to keep balancing our revenue growth with the gross margin growth and everything else. So it's going to be complex but I believe 2004 was really geared more for the new product introduction from '03.

Ramesh, we still continue to believe we can continue to make progress as we continue to move in new products. But as we go up and around the new ones, as we grow at these speeds, the margin will creep up slower.

Got it. Your inventories in the quarter, they jumped up meaningfully. Any particular reasons for that?

Part of that reason was the Chinese New Year where we ramped up probably north of $1 million to $2 million additional inventory build for the increase in demand and the fact that in China, basically the customs office and transportation pretty much shuts down for the first week in October. That is part of it and then we had a little bit of inventory build over in Taiwan for some distribution areas. But we do expect to get that back down to a six times turns by the end of the year.

I presume you meant the Golden Week holidays?

Right. Yes. Yes.

Dr. Lu would not be happy with --.

You know that is the way because everywhere is shutting down but our capacities are full so we cannot really afford to shut a facility down for a whole week. That is why we start the material earlier and get the (indiscernible) in earlier.

We also had a couple of new hubs we put in place or customer inventory for some strong specific ramps, so there was some extra inventory in that area to support our growth.

Okay, thanks very much.

One thing on the stock number of options -- or not options, the stock going out additional two million shares, we're also going to be able to record a substantial amount of interest income as you are aware. That is going be north of probably $500,000.

Right. Thanks very much.

Alex Guana.

Carl, I believe you mentioned the overlying softness in general for discretes in the marketplace. I was wondering if you could walk through specifically by end market and characterize some of the dynamics at play; computing, consumer, industrial, communication and let us know where you have perhaps more and less visibility.

Let me pass that one over to Mark. He has got a little bit more of a background than I do on that.

From an overall standpoint, depending on whose numbers you're looking at, the discrete area is relatively flat for the whole year. Some people are up slightly, some people are down and actually, we have seen some numbers that show it as much as down 4%. Clearly, in these recent quarters, the computer and the consumer market are driving any growth that is out there. I think if you look at the general industrial and communications areas, they are relatively stagnant in this area. So I think that we are relatively well-positioned and I think that is what's showing our growth in those higher volume and better performing segments of consumer and computer.

That is one of the things that we've done for the past several years is we target those higher growth areas and go after them. That is what Mark is saying. We have definitely taken some share there.

I know you have been taking share and intend to keep taking share. If you look at those end markets for the first half of next year which ones do you suspect will be your key contributors to potential growth and then if I look beyond as your analog product lines kick in, where do you think the key drivers are? Will they be consistent with your current positioning or does that open up new market opportunities?

I think our strategy is pretty consistent and I don't think it is going to change dramatically in the next two quarters. A key part of our analog and mixed signal strategy is to add new products to our present customers and our present end equipment. So we are going to be very targeted in developing products that we can sell into our present customer base and into the present markets and end and equipment that we focus on. So we're definitely not going to change our strategy a bit or change our customer strategy, our target customer or our target market to move into those markets.

Fair enough.

Remember, you remember at the end of the road show, we talked about adjacent technology. We are talking about the same customer set and the same application and then just pull through our spend at the end of the quarter when we come out together with our discrete component.

Can you describe perhaps the amount of turns business you did in the September quarter, those orders booked and shipped within the same quarter and what percentage, more or less, you expect to achieve to hit your December quarter guidance?

Yes. We don't have the specific data in front of us but generally we have been going into the quarter with about 50% of backlog for the quarter and that is hired (ph) orders and that doesn't take into consideration forecast orders that aren't firm. So I'd say it was probably pretty consistent. I think it has run pretty consistent for a long period of time. We did have, as Carl mentioned, our book-to-bill was above one and so we had a good position (indiscernible). So maybe a slight inventory build -- excuse me, a slight backlog build during the quarter.

Last question if I could, do you have any visibility in terms of your forward guidance and even thinking into the first half of next year about the percentage of revenues you expect to be contributed by new products? Will that be trending up from here, remain about level? What is your current outlook?

Alex, I think basically we're holding in at that, probably going to trend pretty close to where we are now, between the 15, 16% range. Most likely later part of the first half that may be changing but by definition, we're using that three-year life so we have lost some of that as well.

We are starting to lose -- categorize new products but not lose revenue in those product sectors. So sometimes that can be leading. Our lifecycles are much longer than some other IC lifecycles. So sometimes it takes as much as 18 months to 2 years for our new product to ramp and then by the time it has ramped to a level that we think is wonderful it has now expired as new product. But the margins and the product revenues remained the same and they are fortifying our overall product mix.

Thank you very much and congratulations on the solid results.

Thank you.

Thank you.

Gary Mobley.

Mark, I appreciate you giving us some insight into leadtimes in specific regions but could you give us your overall leadtime and how they compare to previous quarter?

You know I think our utilization is pretty high but we are continuing to add capacity. So I think our leadtimes have been relatively stable. Maybe they have pushed out a week and a half for general business. For specific business, we can accomplish anything that is required. We do see, as I mentioned, in Asia, we're starting to see the lowest priced commodity products start to be difficult for the customer base, which has stabilized some of the pricing. But we think that that could be a short-term cycle in that area. So I think general leadtimes have remained relatively stable on all but the most commodity devices.

With respect to the U.S. pricing environment, many of your competitors are also experiencing some increases. Could you talk about the behaviors of some of those competitors? Have you seen some of these broad-line companies start to deemphasize the discrete lineups and --?

I don't think we have seen any really new behavior. I think we have just seen the consistent behavior that we have seen for a couple of years. There is no -- in this quarter, there was no dramatic change in what we have seen. We still see inconsistent pricing structure depending on the strength of their business. And we see a continued lack of interest from the design level and really more of a focus on movement from a commodity base. So we really -- I don't think a tremendous amount has changed in that area.

(OPERATOR INSTRUCTIONS). Steve Smigie.

Congratulations on a good quarter. In terms of the new products, could you give us some sense of what gross margin would have been on those products during the quarter?

We really don't specify specifically but generally we've discussed that our new product margins generally run about 2X our standard product margin.

And you mentioned you had some new products for some handset applications and I was just wondering is that typical design in time that you just mentioned, 18 months to 2 years, to ramp to that? Would you expect that or do you think that maybe you can get a little quicker on these?

I think you put two things together. I think what I said was for new products to ramp to the volumes that we think are substantial revenue sometimes takes 18 months. Clearly a design cycle on a cellular phone is probably less than -- anywhere from three to six months. Okay? Those are generally pretty short design cycles. But most of the products that we are designing into cell phones and we're winning design wins on are then -- they tend to propagate through the next generation of the design. So if we get a new product like, I mentioned, a PowerDI 123 on this generation, hopefully and we believe that that will then propagate to multiple generations going forward.

Great. Could you talk about maybe how many actual handsets you're on currently with designs?

You know I don't really have an exact figure because there's a lot of ODM business in Asia and so forth. But I would say many.

One last question, just a little bit of SG&A guidance. It's up a little bit sequentially. Would you expect that to be up again sequentially in the fourth quarter and sort of going forward?

The overall SG&A?

Right. It's at 7.6. I was just asking if it's going to be sort of similar on a dollar amount in Q4.

It will probably trend along with our revenue in our selling expenses. It has been pretty close to 14% consistently, 13.8, 14.2, 14 --, somewhere in that range.

Art Sharon (ph).

I am wondering -- regarding the trading in the stock, I noted today that your short position again increased and the latest reporting periods were about 1.4 million shares. Given that I believe you have determined that this is not naked shorting, I am wondering if you have any take on where anybody is able to borrow that much stock. I mean you have got a fairly thin float out there.

That's a real good question. I don't know how to answer that one, Art. We could look into it.

Okay. I appreciate it if you would.

We will do that.

Yes, Dr. Lu, I believe you mentioned where you are in terms of capacity and I know there have been a number of reports in terms of -- and it's different markets I realize, but in terms of back-end limitations, front-end, excess capacity, what do you think the dynamic is out there with regard to the discrete space? Are there any dislocations in the current environment that you are able to take advantage of or that you have targeted and are taking advantage of?

I really don't see anything like this. What we do is we just kick out capacity fully diluted at about 90%. We talk about back-end, packaging capacity. We keep it around -- above 90% fully diluted. Then when we see -- when we see a crunch or a shortage then we spend the capital for it. But fortunately it is a short cycle, leadtime to put the back-end capacity. It's probably somewhere around three to six months very easily. We can quickly react to the market demand and put in the capacity for it. So I really don't see any thing like that.

And Mark, I believe you specifically mentioned the set-top box space is seeing some softness right now. You know speaking of ability to react, do you have any thoughts or insights into how long softness in that market might endure and do you have any visibility on new opportunities in terms of IPTV set-top boxes?

I don't have any specific on IPTV set-top boxes. Our product doesn't change a great deal between the different box types. Maybe there is some slight difference. We just saw some recent shifts, what I was kind of saying is traditional demand in North America that was then now built in Asia. We are seeing some indications of that wavering and some of that maybe coming back to the North American space. The third quarter in set-top box for our customer base seemed to be a little softer than normal.

I see. So it's universal across some of the other players that sell into that market. So that is why I asked. And then if I could in terms of -- can you maybe update us on your efforts or opportunities within the cell phone space?

Actually we continue to make progress in that area. You know we were pretty happy with a couple of design wins we have had this quarter. We continue to expand with some of the smaller European styles. We are doing more. We have made more progress in the Asian ODM, specifically China, and we have had some recent breakthroughs in the Korean space. So it is still not a revenue driver but we see it as a focus for us going forward and a future growth opportunity for us.

Great. Thank you.

At this time, there are no further questions.

We would like to thank everyone for joining us on the call this afternoon and look forward to coming back to you early part of next year with our fourth-quarter results. If you have any follow-on questions, feel free to call us offline.

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

Thank you.

Goodbye.