Diodes Inc (DIOD) 2005 Q4 法說會逐字稿

Good afternoon. My name is Serena and I will be your conference operator today. At this time I would like to welcome everyone to the Diodes Incorporated fourth-quarter 2005 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). Thank you. Mr. Wertz, you may begin your conference.

Good afternoon and welcome to Diodes' fourth-quarter 2005 earnings conference call. I am Carl Wertz, Chief Financial Officer and I'm calling in from London today as NASDAQ is hosting its first-ever investor conference for Small Cap companies in London tomorrow and Thursday, of which I will be presenting Diodes'.

With me today are Diodes' President and CEO, Dr. Keh-Shew Lu and Mark King, Vice President of Sales and Marketing.

Before I turn the call over to them, may I remind our listeners that this call, as management's prepared remarks, contains 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 is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and therefore we refer you to the more detailed discussion for the risks and uncertainties in the Company's filings with the SEC. In addition, any projections to the Company's future performance represent management's estimates as of February 6, 2006. Diodes assumes no obligation to update its projections in the future as market conditions change.

For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 60 days at the investor relations section of Diodes' Web site at www.Diodes.com.

And now I'd like to turn the call over to Diodes' CEO, Dr. Keh-Shew Lu.

Thank you, Carl. Welcome, everyone, and thank you for joining us on the call today. I am excited about our outstanding performance in the fourth quarter and for the entire 2005 year. Diodes' market share again hit a new high in the quarter and we continue to outperform the discrete semiconductor group and the overall semiconductor industry.

Here are major earnings highlights we [expodit] but we published this afternoon. Fourth-quarter revenues increased by 28.1% over the year-ago quarter to $61.4 million. New product revenue reached 15.6% of total sales. Gross margin increased 100 basis points to 34.9%, [first] the same period a year ago.

Operating income increased 17% to $11.6 million and net income for the quarter rose 36.8% to a record of $10 million. I think we can all agree that those exceptional results and [the breadth] the combination of favorable demand environment with a proven vigilant strategy and the great execution by our team here at Diodes.

For the full year, we posted the following record results -- record revenue of $214.8 million, an increase of 15.6% from 2004; gross margins were 34.6% compared to 32.7% in 2004; record net income of $33.3 million, an increase of 30% compared to a year ago.

Our long-term strategic vision is to achieve substantive profitable growth by leveraging our innovative [great] component technology and take advantage of a [jettison of] product opportunities, including the standard linear and the mixed signal technology. We are putting our strategy into action by aggressively introducing new products, leveraging our strength in next generation multichip devices, distinguishing ourselves through our intense customer service, expanding our manufacturing capacity and persuading strategic applications. Those business strategies [it] means successfully executed.

We are continuing our investment in R&D of next generation technologies. With a number of important new packaging platforms introduced in June 2005, we have seen this translated into a strong design wins and a new [port] of revenues, enhancing our margin and profitability.

We also continue to [pursue] and achieving manufacturing excellence. Last month, two of our manufacturing facilities in China were awarded ISO's TS 16949 certification. This certification represents our automotive industry recognized level of quality and it provides customers with added confidence in their decision to partner with Diodes.

We [will then prevnet] in the financial [discipline] in maintaining operating costs, maximize cash through our working capital management and [deploying] capital in the best interests of our shareholders. [A week year] of 2005, we generated strong cash flow on robust revenues and improved profit margins. Our balance sheet is very strong with a total of $140 million in cash and short-term investments and total debt to equity of 28.4%. In addition to the $5 million we spent at the end of December, we have used another $25 million of our cash in the first quarter of 2006 to close the acquisition.

When we went out to meet with investors for our secondary offering, we make it clear that acquisition would be an important element of our strategy to expand our addressable market. We also said that our initial focus would be on standard linear products that would leverage our strength in cost efficient packaging and enable us to [readily] building share with our existing customer base.

The acquisition of Anachip, which closed on January 10 of this year, fits in the center of this strategy. Anachip's main product focus is in the power management IC. The [held of] devices they produce are used in LCDs, monitors or TVs. [Once them ell to die at evanescence point] for us it is DC [motor things], portable DVD players, datacom devices, ADSL modems, TV or satellite set-top box, and power supplies. They bring an excellent design team with strong capabilities in a range of target analog and power management technology.

This acquisition also shows our disciplined approach to making acquisitions. Diode paid approximately of $30 million to acquire Anachip which has revenue of approximately $35 million in the power management area in 2005. Again, this acquisition will be accretive for 2006.

What is more, we see significant synergies to be over time as we integrate Anachip with our operations. This includes growth opportunity from offering their devices to our global customer base significant cost synergies as we integrate into our operations. This is the first of our acquisitions that will enable us to accelerate our organic growth while they are [reaching] our innovative discrete component technology, our world-class packaging capabilities and our sales and marketing channels.

Last quarter, I told you that you could expect to see our first analog product come to market in the first half of 2006 with meaningful revenues in the second half of this year. This acquisition of Anachip puts us significantly ahead of schedule and will generate significant analog revenue for Diodes in the first quarter of this year. I plan on providing more details about our existing product roadmap in the quarters to come.

In summary, Diodes had an outstanding year in 2005 and we see even greater horizons before us in 2006. We have an excellent, disciplined team in place and I'm very pleased to be able to match a contribution to the Company's success. With that, I'm going to turn it over to Carl to discuss the financials in more detail.

Thanks, Dr. Lu. As Dr. Lu mentioned, our record fourth-quarter revenues were significantly stronger than expected as Diodes continued to gain share in an improving market and our net income continued to set new records.

Revenue for the fourth quarter were $61.4 million, an increase of 28.1% in the same period last year. On a sequential basis, our revenues rose 13.2% from our record third-quarter sales to $54.2 million. Sales of new products were 15.6% of revenue compared to 14.1% in the previous quarter. Gross margins were 34.9% for the quarter and up 100 basis points from the fourth quarter of 2004. This was due primarily to an improved product mix.

For the quarter, selling, general and administrative expenses were $8.8 million or 14.4% of sales compared to $5.4 million or 11.4% of sales in last year's fourth quarter. The SG&A primarily reflects the share grant expense, performance-based incentives and sales commissions.

Research and development investment was slightly over $1 million or 1.7% of revenues for the quarter. On a percentage of sales basis, this was in line compared with the third quarter's 1.7% of $938,000 and down on a percentage of sales basis from a year ago when we reported $902,000 or 1.9% of revenues as our revenue growth outpaced R&D investment.

Operating income rose 17.2% to $11.6 million or 18.8% of sales from $9.9 million in the year-ago quarter. Depreciation was $4.3 million for the quarter and $16.2 million for the year. EBITDA for the quarter was 15.8 million and $56 million for the year. Our effective income tax rate for the fourth quarter was 16.5% compared to 15.7% last quarter.

In the fourth quarter of 2005, we repatriated $24 million from our foreign subsidiaries to the U.S. to take advantage of the tax incentives offered under the American Jobs Creation Act.

Net income for the fourth quarter reached a record $10 million or $0.36 per diluted share, up 37% from $7.3 million or $0.31 per share in the same period last year. This is adjusted for the three-for-two stock split effective December 1. On a sequential basis, net income increased 19.8% from $8.4 million or $0.34 per share in the third quarter of 2005.

Turning to the balance sheet, we had 114 million in cash and short-term investments and $150 million of working capital as of December 31, 2005.

Keep in mind, we used approximately $25 million in January to close the Anachip acquisition so this will have to be taken into account when projecting interest income going forward.

At the end of the quarter, we had $9.5 million in term debt as compared to $11.3 million at the beginning of the year. Our total debt balance is $12.5 million, down from 17.5 a year ago and our total debt to equity ratio improved to 28.4% from 49.6% a year ago.

Inventories were $24.6 million with inventory turns at an improved 6.4 times in the quarter compared to 5.5 times in the third quarter. Days sales outstanding was 83 days in the fourth quarter compared to 82 days in the prior quarter.

Capital expenditures were $8.4 million in the fourth quarter and $24.7 million for the full year. This was in line with our objective of meeting increased demand and investing in equipment to increase our manufacturing efficiencies.

As to our outlook, as Dr. Lu mentioned earlier, 2005 was an outstanding year highlighted by significant growth at Diodes based on the combination of relatively favorable market conditions, excellent customer reception to our next generation devices and our continued expansion into certain geographic regions and new customers.

Heading into 2006, we continue to experience a positive demand environment for our discrete semiconductor products as Diodes becomes increasingly recognized as an innovation leader for discretes. The Anachip acquisition is being integrated as planned and will enable us to accelerate our expansion into analog and mixed signal devices. The contributions from Anachip will be seen beginning in the first quarter of 2006. As a result, we expect that first-quarter revenues will increase 16 to 20% sequentially with a corresponding gross profit dollar increase of 8 to 11%. The analog margin is currently in the mid 20% range with the expectation to improve the margin above our discrete product lines as we execute our strategy and realize synergies going forward. SG&A as a percentage of revenue should improve compared to the fourth quarter of 2005, offsetting our increase investment in research and development to approximately 2.6% of revenue.

In addition, we expect first-quarter non-cash stock option expense related to FAS 123(r) to be approximately $1.5 million. For the full year 2006, we expect to continue to outperform the growth of the discrete semiconductor market. As reflected in our guidance, we continue to foresee a positive demand environment heading into 2006 for Diodes' discrete semiconductor products and believe that our expansion in adjacent categories will be an important new element in delivering profitable growth to our shareholders.

With that, I'm now going to turn the discussion over to Mark King, our Vice President of Sales and Marketing. Mark will discuss our new products, market opportunities and give you a view of the direction of the general marketplace.

Thanks, Carl, and good afternoon, everyone. From a sales and marketing perspective, the fourth quarter was very active and successful with record sales, strong new product revenues and robust design win activities. We continue to broaden and deepen our product offering, employing our latest generation packaging, including PowerDI 5, PowerDI 123, SOT-523 and array lines with 21 new part numbers introduced during the quarter, spanning eight different product series.

Our new DFN platform introduced in the second quarter of 2005 has been highly successful with customers seeing strong benefits from the innovative quad, flat, leadless packaging that combines an ultra-miniature footprint with superior power dissipation. We're also seeing a heavy level of interest in our application-specific complex arrays, which combine multiple disparate discrete technologies into a single very cost-effective package. We're very excited about the new analog and power management devices we are able to offer following the acquisition of Anachip and are in the process of finalizing a new product roadmap that aligns these technologies with our highly efficient packaging capabilities.

Our customers and distributors are very receptive to the new products we are now able to offer them and see these standard linear devices as a great fit with Diodes' value proposition. We see lots of opportunities to grow our position on the board with these existing customers in adjacent technologies.

Geographically, our market share reached new highs across the globe during the quarter. Asia remains the strongest growth driver accounting for 65% of total revenues, followed by North America at 32% and 3% of the revenues coming from Europe.

In Asia, sales continued to be driven by the computer and consumer sector. We continued our strong share of increase in notebook during the quarter and we also showed gains in game console and mobile handset.

While ASPs for the fourth quarter declined 15% year-over-year, this was largely offset by declining costs on higher unit volumes. Leadtimes lengthened on commodity products in the quarter and we saw some leadtime -- some short-term shortage situation in commodity products and product pricings continued to stay stable heading into the first quarter of 2006.

In North America, both OEM and distributors' sales were stronger than expected during the quarter. These results were driven by strong OEM demand in the areas of TV set-top boxes and handheld medical devices. Pricing pressure on commodity product eased. Product leadtimes have increased for certain commodities and we even saw some transitory shortage on selected devices. ASPs were off only 3% year-over-year and actually increased from the third-quarter level. Sales from accounts designed in the United States and built in Asia remained brisk with overall design-win activity strong.

Our array designs remain very popular with heightened interest in customer arrays and a continuing strong uptake for devices employing our advanced proprietary PowerDI 123 and PowerDI 5 packaging.

Distributor inventory level for the fourth quarter remained at a very healthy two-year low, while distributor backlog was strong going into the new year. North American wafer sales were also strong during the fourth quarter, although we expect these trade sales to gradually trend down in the future quarters as we continue to transition more of our wafers to internal use.

In Europe, revenues were up 12% sequentially on record sales in a relatively flat market. We saw the first signs of price stabilization in the quarter on commodity products and some lengthening in leadtimes from traditional suppliers. Design activity was quite strong in the quarter and included wins on new cell phone platforms that should contribute to strengthening our position in Europe over 2006.

The expansion of our distributor network over the last year is really beginning to pay off in increased activity and revenues and we feel very confident about our potential to continue to build share in this area.

Moving onto market segments, the biggest driver of our sales was notebook in our computer and peripheral segment, while digital audio devices were the strongest contributor in our consumer market segment. For the fourth quarter, our segment breakout was 38% consumer, 34% computer and peripheral, 17% industrial, 7% at telecom and 4% automotive.

Design activity was very strong in the quarter on a broad base of products in all product categories. We continue to see excellent momentum in our PowerDI platform, our array and our new DFN platform. As a result, we had multiple wins at 58 new or existing accounts in the quarter. Notable design wins include -- PowerDI 5 wins for a DC fan, optical networking equipment and a tablet PC, PowerDI 123 win and portable GPS system, PDA, DC fan, LCD module and two different cell phone platforms. This included a PowerDI 123 Zener at a major branded European manufacturer. Multiple and broad-based wins on three different set-top box platforms and two different LCD TV platforms, multiple array wins in DSL and cable modem, notebook computer, and the latest game console, performance Schottky wins and a hard disk drive, a game console and notebook computer.

With the addition of Anachip Corporation, we look forward to reporting next quarter on the design progress of standard analog and power management lines. Our investment in R&D continues to grow and more importantly, we are seeing a tremendous yield from this investment in the form of new products, design wins and new product revenue, all which adds up to improving margins and profitability.

In summary, we're pleased with the fourth-quarter results which clearly exceeded our initial expectations. Orders were stronger in the fourth quarter with a book-to-bill ratio remaining above one. Pricing trends on commodity products have improved. In the discrete segment, we believe that we are positioned in the right markets with the right products in order to fully exploit the growth opportunities created by ongoing miniaturization of computing and consumer electronic devices.

We are very well situated with our key accounts in Asia and see opportunities to grow our share in the European market. Despite a healthy level of investment during 2005, our facilities in China are running at near capacity and it may be sometime before we see a reverse to this trend. The acquisition of Anachip is a great fit with our existing product portfolio, manufacturing strength and customer base. It puts us ahead of our schedule in our plan to enter the analog market and we look forward to reporting meaningful revenue and design win activity for our standard products in the first half of 2006.

As Dr. Lu mentioned, we expect to realize synergies on both the revenues and cost side over the next several quarters, which will make this acquisition even more beneficial to our shareholders. As we integrate Anachip's existing product line into our packaging facilities, we continue to see a better mix of sales by moving towards higher margin products.

In summary, we see another exciting and growth-oriented year for Diodes in 2006.

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

(OPERATOR INSTRUCTIONS). Alex Gauna, UBS.

I was wondering within the outlook if you could give a little color on what you expect to be happening with your organic business plus breaking out a little bit more detail the Anachip contribution. And also, on core gross margins, what the trend is here in the near-term?

Okay. This is Dr. Lu. Let me just answer. We really don't point to a separate -- the revenue from our organic growth and from the Anachip because due to -- we're going to have more than just Anachip. And so therefore, you really don't [expense]. Later on, we might start [flip reck] the revenue between the discrete and analog. But we would not like to separate from our [obijinous], our organic growth from the Anachip.

You know we put our growth for the next -- for this quarter, first Q 2006, we put it like we said 16 to 20% growth. And I can tell you our organic growth, our own discrete portion is probably comparable with our last quarter. But don't forget we have what 7% and then 13% continued two quarters of growth. And so you expect this -- our own organic growth will be pretty comparable, will be pretty good. And then add on that, our Anachip growth, then give us a total of 16 to 20% revenue growth in 1Q from 4Q.

So, if I understood you correctly, despite what would otherwise be seasonal softness, you're seeing organic growth continue sequentially into the March quarter; is that correct?

I think we would say it's comparable to the fourth quarter.

I got it.

Okay, and because we're coming off of a little bit stronger growth than the industry experienced over the last two quarters. So traditionally the first quarter is slightly softer than the fourth quarter but we expect it to be right around parity.

And I'm wondering, you mentioned major wins in Europe I believe specifically with the cell phone platforms. How far along are you in terms of securing new design wins in cell phones? What kind of contribution is that making to revenues overall at this point?

I think the overall contribution is still pretty low but the opportunity and the progress is quite good. We're putting more and more focus on this marketplace and with the emergence of China as a key design area for this product line, that plays into our strategy quite well. But we're making continued progress but it's slow-moving and so forth. So it's still not a significant part of our revenue.

Remember, those revenue may not show in the European revenue. A lot of design wins down in Europe many times will be procured. The procurement will be in Asia. And therefore, you may not necessarily see a major revenue growth in Europe but you're going to see a major design win activity in the cell phones by the European manufacturers.

I got it. Very good. I was wondering also with regard to Dr. Lu, you mentioned clearly that you are ahead of schedule in your move to analog mixed signal with the Anachip acquisition. But could you give us an update, I didn't understand clearly, are you still on track with your core analog developments for product releases in the first half of the year and ramp in the second?

The answer is yes. We're taking some of the Anachip analog sales and then try to -- built in our factory in China. At the same time, we try to make sure all of the quality met our requirements and those are on schedule. And you're going to see a series of new products, analog products announced in the first half of this year.

There was some overlap in the developments we were working on and some of the areas they were. And we're also researching some of the product areas that they are not really -- weren't focused on. Because of their scale and their ability to compete in those marketplaces, we plan to bring those up very rapidly. So we have a two-pronged approach with that product line.

Michael Bertz, WR Hambrecht.

Listen, quick question. The increase in R&D into the first quarter here, is it pretty much primarily going to come from adding the Anachip guys or is there some other expense increase that you're seeing from your own efforts, like [Inialog]?

The answer is yes. It's coming from Anachip. But again, if we look at what we said is, SG&A -- as a percent, [extra the deals] and now offsets the increase of the R&D. So some of that could be how do you tell in a category the R&D versus SG&A. But the total, you know, we still target our model. We want to be somewhere above 2% to 3%. So even we show our R&D now is higher than last quarter, which is not really where it's at. Because that's still within our basis model. And then, with the key growth after we acquired Anachip, it was Anachip and then our new products come out. That growth of the revenue will be able to, as a percent of R&D will be able to reduce it. Therefore, it's still within our business model of 2 to 3% R&D.

Fair enough, thanks, Keh-Shew. As we look in the quarters ahead, maybe Mark is the right person to answer this question. As we look at the European business, which seems to be improving pretty well, any thoughts about a target for a percentage of revenue that you might get from your customers over there or businesses to [ride] through there?

You know, we were striving to get it to be about 5% of our revenue but I'm looking now between 4 and 5% of our revenue. When we throw on the acquisition and we throw on a little bit higher growth than expected in the fourth quarter, it may change. So I guess between 4 and 5. I think we are running about 3% now. Our progress is good. Hopefully we continue to have this problem because we're growing the other regions much faster. But I think that things are going very well there.

Okay, fair enough. And then I know we touched on this a little bit and you kind of gave us a sense about -- if you want to think about the core business basically being flat into the first quarter -- but if we could look back at Anachip just for our purposes modeling wise, do you have an estimate of about what they did in the fourth quarter in terms of revenue?

I don't have it but you know, I need to put a couple points here. Number one, most of the Anachip customers, before we acquired synergy and before we used it for our major customers is all centralized in Asia and China. And typically, 1Q for them, for those Asian markets, typically will be [red] or going down, ok? But right now I do not have the numbers in front of me to answer that but I think they're probably comparable too.

Great. In thinking about in terms of -- gross margins, obviously, you talked about them being a little bit softer than the corporate average right now but over time becoming higher. How should we think about that in terms of your plans for on a quarterly basis increasing gross margins for the analog side of the business?

We can't model it exactly because we have been only been in there since January 10. But in all reality, we have packaging synergies. We have customer synergies and so forth. They're very focused on -- they only have Asian customers, which is the most competitive market in the world. So the global customer base will help them. The packaging synergies will help a great deal. And frankly at $35 million a year, they just had no scale. So we can add some scale in there. So we see significant opportunity going forward to achieve margins higher than our present run rate.

If you look at our announcement, we actually said up till we finish the integration and we apply most of the synergies, we are able to [get in] gross margin higher than our own discrete gross margin. And no doubt, if you look at most what today, they have no packaging capability themselves. So they are outsourcing their package.

Number two, their scales. With that kind of scale, you know, they cannot get the good price mostly in the wafer and the packaging costs. Therefore, if we apply our synergy from the [making] function and apply our market, in a global market instead of just Asia market, you're going to see the gross margin should be improved significantly.

Okay, fair enough. Let me ask if I could be a little more direct about it then. You guys have run almost 35% the last couple of quarters here. Obviously, it's going to be down probably reading your numbers that you gave in your release, somewhere in the maybe 32 something percent range for the next quarter here, Q1. At what point might we think we would be accretive with around 35% range? What would that be, maybe 3Q or 4Q of this year?

I think it's really difficult for us to forecast that, but I think you can be comfortable that I think it should start to come back towards that figure starting in the second quarter and advancing throughout the year. Remember, we're very focused on gross margin dollars versus gross margin percent. We think it's very dangerous for us to get concerned about the percent.

We have got some product lines that we need to roll out and we need to roll out in volume that in the initial stages might be less profitable but over time become very, very profitable to our overall cost structure. So, I think it's just too complex right now for us to model it that clear for you at this time.

(multiple speakers) see the appropriate dollars going to be continually improved. Because that's what we really focus on.

Great. One last question, in terms of where you're seeing better traction with analog, I mean I guess it's more about your go-to-market strategy. Are you seeing more uptake in design activity with things that are going to distributors or things you're doing directly with OEMs?

Again, we're still new at seeing where they are. Really the design activity until very recently was all in Asia, ok? And it's basically been key OEM. Okay? And many -- there is already a significant overlap in our customer base, okay, with their key OEMs and in our core end equipment. But we have some other areas where we focus more that we can add value very rapidly in that marketplace. But it will take us some time to generate the design wins at the global customer base.

Ramesh Misra, C.E. Unterberg.

On Anachip, what foundry are they using?

They're using a different foundry. You're talking about wafer fab, right?

Yes, correct.

They are using a different one. They're using Charter before and they're using LSC, [down semi]. And they even tried to go to TSMC. So they're using different kinds of foundries.

So would you be able to pull that into your Kansas City facility or do you expect to maintain that at those locations at this time?

No, we could not have any plan at this moment to put in a [fab test.] One thing I think you remember when I was on the roadshow, I was talking about in my mind, silicon is not really where the value is. (multiple speakers) is where the value is, right? And so my first priority is try to see how soon we can roll over those into our manufacturing sites. Those are really more important and giving a better synergy.

And wafer fab, as we mentioned, you are talking about a couple of thousand die [per] 16-inch wafers. Those in my mind I think is not, priority wise, is not critical for me. Therefore, I probably don't intend to [disturb] our manufacturing in fab tests at this moment.

In terms of your capacity at (indiscernible), that seems to be running pretty full. How do you see capacity ramping up over there in terms of being able to accommodate Anachip? I suppose right now Anachip has also been using an external back end or some other back end facility, right?

You are right. You are correct. Right now, they're all outsourced. There is no internal packaging capability. Therefore, they're outsourcing their packaging. But don't forget our last quarter, 4Q, you know, every quarter, we are putting capital equipment in [SK] in our channel fab, [from anachannel packaging facility]. Therefore, let me put it this way, [all or not] that capacity limited our integrations. We will continue putting our CapEx into channels to support this wafer or these consolidations. And if you look at it, even last year, we continue to put in the money. And we will [help you] do that this year.

Many of these packages that Anachip uses in their product lines we already have. And then in the fourth quarter of last year, we mentioned that we were adding two. Because if we bought them or we didn't buy them, we needed those two packages. So we added SOIC and .223 in the fourth quarter into our line. So we are well --

We put in the development. The development is SO 8, which is the linear type of -- analog type of packaging, [18 SO] package. So last December, or last year fourth quarter, we kicked off that development. And we will try to qualify probably first-half, not probably, for sure try to qualify first half of this year. Then we will be able to support Anachip's integrations.

So Dr. Lu, is it safe to assume that most of the back end packaging of Anachip will get transferred over to SKE in the next two quarters or so?

No.

No?

We're going to do our best to integrate it into our China packaging facility. But again, we're going to be pretty focused on where the most cost savings are going to be. And if there are certain lines that we want to move over, that is where we will put the capital expenditures and we will move it over. Currently, we have no issues on getting it to a subcontractor right now. But the goal is to bring the manufacturing profit into diodes just like we have done with our expansion into China to begin with.

And then one last -- sorry, go ahead.

[Not] all the packages Anachip used we have the capability.

But the majority of it, though, our attempt is to bring over into China. But we don't know if it's going to be a third, fourth or which quarter it's going to ultimately end up being.

We'll take our time and do it right.

Got it. And then just one final very quick question. Your R&D increased in Q1. Is that mostly because of Anachip or is that also a part of the original plan within the rest of Diodes?

If the majority is really, all I can say it's coming from Anachip.

Gary Mobley, A.G. Edwards.

How should we think about the growth rate of Anachip versus the linear analog market. looking back and then looking forward as well?

I think, Gary, you're going to have to give us a couple more quarters to analyze that.

Okay, well at least you may know what it was looking back in time. Was it at par to the overall market?

The last half of 2005 was pretty strong for them.

Well, don't forget, if you go to [decka] -- Anachip history, Anachip has not really performed very well in the past. And they just gradually improved their performance last year. So like Carl said, second half of last year, they did pretty good, (multiple speakers) pretty good performance. And we [believe] that's the reason we wanted to buy it is we believe we can add a lot of value to it. Their problem is they were all cornered in channel market, in Taiwan market, in the Asia market. And we believe with our global customer base and with our capability of supporting, we should be able to help them to grow their revenue rapidly. So I'm more looking back to the -- looking in the future. I'm not worried too much about in the past because we all know their problems and we all know those problems is right at our advantage to solve that problem. And that's the reason we purchased this company. It's a synergy.

Sure. Now would it be foolish to simply extrapolate out the $11 million in potential quarterly preferred contribution from Anachip out to the full year?

I'm sorry, what's the question?

No, your implied Anachip guidance is roughly $11 million for the quarter and would it be foolish just to simply extrapolate that out for the balance of the year?

Hopefully, we can continue to get some sequential growth out of it. But more important, even if it stays relatively constant, we want to get some more of the manufacturing margin. We have talked manufacture or margin dollars. And Gary, you've noticed for a long time, you know that we go after the most aggressive revenue we can get and we've outperformed the discretes 2X. I have a feeling Dr. Lu is not going to let us sit down and just let us do 1 times X.

So I'm going to tell you, number one, we are not looking at gross margin percent. But from a gross dollar point of view, our [expense] may continue to contribute due to two. Once could be the growth from the revenue and one could be growth from the synergies. So I would not [pack it that I'm] holding the same 10 to 11 -- 8 to 10% and then just stay there, no way. We will continue driving that gross margin dollar increase.

Mark, the pricing resilience that you guys have seen in the past few months, how sustainable do you think that is and when would you expect it to trend downward, at the normal 5 to 6% annual rate?

I kind of have a philosophy on it. We believe that quite honestly that there has been an underinvestment in packaging for some time now. And every time we see just a little bit of growth in the marketplace, we hit the ceiling of the packaging. So I'm not sure how long it can be sustained but we are seeing -- at the end of the year, we did see some people running into some difficultly supporting their customer base in these areas. And I think if you look at the CapEx expenditures for these type of devices and packages throughout the world, I think you'll see that it could go on for some period of time. People are very careful about investing in these areas. So if you can look at our growth in units, you can see that I think we have corrected our strategy so far. So I expect it to continue.

Carl, last question for you, what would you expect your GAAP tax rate to be for the first quarter and for the balance of the year?

That's always a tough one to forecast. It's fluctuating between the 17 to 16 to 15 range, up and down. I think for modeling, it's somewhere in the 16% range, is probably a safe estimate.

But with FAS 123(r) in there, it should go up, right?

It will go up some, yes. And quite frankly, we're in the process of having that model done by an outside consulting firm. So we're not exactly sure what the tax effect will be on that.

Okay, but think of the pro forma rate around high teen percent?

Yes, I would figure 16 to 18% range.

Steve Smigie, Raymond James.

Congratulations on a very nice quarter. My first question is how far are you in the integration process and how long till you get everything integrated? I guess sort of a follow-on to that is do you do another acquisition in 2006 or does it take you awhile to digest the existing one?

Number one, how far for the integration? You know me. I don't have much patience. The integration for sales and marketing is already done. After we announce it or after we close it in the next couple of days, we [are going] to move all the sales and marketing people, integrate with our sales and marketing people before the Chinese new year, okay? And then, we are start working on the packaging disk or Joseph is already in Anachip before the Chinese new year, probably two days after the closing, to look at their packaging requirements and see what we can do, okay? And Mark is always talking to their guys, trying to see how do we pick those products to sell in our global market customer base. So integration is already started.

Now, when they are going to complete it really depends on, if you're talking about packaging, it takes awhile, okay? If you're talking about announced new products, again, we are on the way to announce the new products. And so I don't know what do you want to do [going to] complete, but I can tell you, you want to see those -- we already said, we're going to see those synergies-- majority of synergy contribution before the end of the year, we should see most of the synergy. But it's -- don't forget, it's not -- this is not one kind of thing. This is continued improvement. So very difficult to say when it will be completed but it's already started.

Let's just say January has been very busy.

You know me, okay? And what is your next question?

How quickly can you get through another acquisition? Is that sort of how you're thinking -- I'm not trying to push you; it just seems, as you have pointed out, you're not willing to rest. So is there another one coming or --?

Let me put it this way, I still want to be careful because our resource -- it's more in the our resource because to get it acquired and then to integrate and to get it stabilized, it takes time. So, it depends on how big the next deal is. I probably [won't ready] to make a big deal at the first quarter, I mean first this year. The first half this year, if I will do it, it will be a small one.

Now any major one is probably second half or maybe 2007. Depends on opportunity. We don't want to rush into making a big deal. I continually open my eyes, open my mind, looking at different opportunities and then whenever you get the right deal, right opportunity, meet with our strategy, meet with our synergy requirements, meet with our criteria, then we will not hesitate to take the action.

Great. A question on option expense. The guidance that you gave, I assume it's a pro forma guidance and then the option expense then that you gave would take earnings down separate from that?

Correct. Well it's going to be [slightly all] FASB earnings come the first quarter. But there will be, for the first time in Diodes' history, a pro forma statement that will show you the breakout between what that was before and after.

Okay. And the last question is just, in terms, if I'm going back to the acquisition, in terms of the synergies, obviously there's the gross margins and the revenue synergies you talked about. I think you already talked a little bit about what's happening with R&D but is there something else that happens with SG&A there? I mean are there certain redundant capacities, just other stuff to come out yet? How does that work?

Steve, there's definitely going to be some SG&A synergies there too. As we mentioned, they are the same sales -- we're merging the sales teams together with the same customer base. But we're not looking to necessarily cut people. As we grow, we're going to need more people anyway. Let me let Mark or Dr. Lu (multiple speakers).

Let me answer this one, we buy that company not just for their revenue. We are buying that company because they have a design engineer, their product engineer, they have a team, engineering team. So from that point of view, we're not going to pay off anybody, right? We might need to upgrade the people's capability but we are not going to cut down those R&D, okay? From that aspect, that's not --

Now sales and marketing, Mark can answer you on that because we already consolidated.

In all reality, in the expensive markets, we did not have a significant amount of overlaps. We were able to consolidate that easily. In the Asian marketplace, we've been trying to expand our salesforce dramatically. So we're going to look at it that we just have more opportunities to call on more customers. In the acquisition, we gained a sales and applications very small group in Korea. We've been trying to put that in place for years. So, we just think we're going to be able to spread our wings a little bit more and move.

And actually now in the sales area, between sales and application in China now, we have 60 people on the street. We should be able to really be able to broaden the accounts that we can call on. We think that's the better approach. Rather than cutting people, we just need to grow sales more.

And [we said,] we might need to get a bigger space. Actually, in Shanghai, we are looking for -- we want to consolidate altogether into the same buildings. So we might need to come out, get a bigger space. So, anyway we are on the expansion mode, so we're not really going to [dip in] and just lay off the people, scale down; that's not our strategy anyway.

Okay, thank you very much.

But as a percent, it would be improved. Because when revenues start growing as a percent, it will be improved.

Okay.

Next?

Andrew Root, OTA Assets.

Just a couple of quick questions. Do you have CapEx and depreciation estimates for 2006?

Well, I can give you some CapEx guidance, what we tried to do. Since we are continued expanding our assembly capability and capacity in China, okay, and to support Anachip and come up more new capacity for the [analog] type of products, we are still holding our CapEx expenditure somewhere around 10 to 12% of our revenue. Now, really, these depend on the market. If for example, second half this year, all of a sudden the market is not as good as what we are looking at, then we're sure we will cut it back. But we spend it but when we see the capacity [in].

I think in the roadshow, I talked to everybody, I said, for assembly capacity, it's very easy and very short lead time to put in place. All you really need to do is go one more floor and then buy some equipment. In a couple of months, you should be able to get the capacity you needed. So therefore, we can easily adjust our CapEx expenditure, okay, according to the market requirement. Right now, we tried to do with somewhere around 10 to 12% of our revenues.

Asian is running around 6% of revenue right now?

No, no, no, running about the same, [top]. Depreciation?

Yes.

I don't know, let me see about 7%. About 7%.

Is that a good number to use for next year or is that more of a fixed number?

I'm sorry, what was the question?

What's the depreciation forecast for '06?

Well we had a little over 16 for the whole year so probably somewhere between 18 to 18.5, I would estimate. It's hard to tell -- I don't have all the numbers in front of me being over in London, because there is some that will become fully depreciated during that year too, so I'm not sure exactly what that amount is.

It's not precise, that's fine. The second question is, I know you mentioned that seasonally, you said growth would be down, but if I look at your last ten years, you've only ever had one March quarter where you were down 1% and the average increase is actually 5.4%. So the flat guidance -- and The Street was actually modeling up 3 for organic. So I'm just wondering, the flat guidance seems to be a few points softer than what I was guessing. Is it conservativism or can you give a little more color on that?

I think we just had a pretty exceptional second half of the year. And we're coming off of six out of eight record quarters, okay? And so we are up -- if you look at the industry and you look at what people have said, we're anywhere between 2 to 3X our first quarter is projected over what their growth is over their first quarter of last year. So I think we might just be a little bit ahead of ourselves. So we want to 00 I think we just need to be careful and conservative on guiding out.

That makes complete sense. I appreciate it.

At this time, there are no further questions.

Okay, thank you very much. That will be the conclusion of today's conference call. Thank you.

Thanks, everybody. Talk to you next quarter.

Bye.

You may now disconnect.