Diodes Inc (DIOD) 2006 Q2 法說會逐字稿

Good morning. My name is Elizabeth and I will be your conference operator today. At this time I would like to welcome everyone to the Diodes Inc. second-quarter 2006 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) I will now turn the conference call over to Mr. Carl Wertz. You may now begin your conference, sir.

Good morning and welcome to Diodes second-quarter 2006 earnings call. I am Carl Wertz, Diodes' CFO. With us today are Diodes' President and CEO, Dr. Keh-Shew Lu, joining us from Taiwan; Mark King, Senior Vice President Sales and Marketing; and our new Senior Vice President of Finance, Richard White.

Before I turn the call over to Dr. Lu, may I 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. 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, therefore we refer you to a more detailed discussion of the risks and uncertainties in the Company's filings with the SEC. In addition, any projections as to the Company's future performance represents management's estimates as of today, August 2, 2006. 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 is time, a recording will be available via webcast for 60 days at the Investor Relations section of Diodes' website at www.Diodes.com.

Now it is my pleasure to turn the call over to Diodes' CEO, Dr. Keh-Shew Lu.

Thank you, Carl. Welcome, everyone, and thank you for joining us today. I am very proud to be able to report another quarter of outstanding performance. In the second quarter of 2006, Diodes achieved record sales in the results as we continue to outperform the discrete semiconductor segment and the overall semiconductor industry. It has been only a little over a year since we announced our strategy to move into adjacent market segments, but already in the second quarter our standard linear products made a substantial contribution to the growth of Diodes' revenues and profits.

Here are our second-quarter earnings highlights. Revenues increased 63% year-over-year and 12.4% sequentially to a record of $82.7 million. Gross profit increased 57% year-over-year and 13% sequentially. GAAP net income increased 32% sequentially to $11.4 million or $0.41 per share. Pro forma net income increased 68% year-over-year to a record $12.9 million or $0.45 per share. These outstanding numbers are the result of strong demand for our next generation discrete products and excellent customer acceptance of our standard linear products.

The strategy of moving into adjacent markets is clearly paying dividends. Following the acquisition of AnaChip, we are seeing excellent growth synergies across our combined customer base and we expect to harvest margin improvements as we internalize more of AnaChip's products to our world-class packaging facility in the quarters ahead. We are on track to complete the AnaChip brand conversion by the end of this coming September.

We made the fully solid progress in executing our business strategy, of innovation and profitable growth. We accomplished this by first, we maintained our focus on R&D for next generation technologies. For example in this quarter, Q2, we launched the PowerDI 323 power [press], one of the smallest power packages ever launched in that power rectifier market. In additional, to our growing R&D team, we promoted Francis Tang, to be Vice President of Product Development.

Second, we launched 63 products from 19 product families in the second quarter as we continued to capitalize on our strength in next generation multichip devices. We also earned multiple design wins which Mark will discuss in detail.

Third, we remain financially (indiscernible) by controlling operating costs, maximizing cash through effectively working capital management, and deploying capital in the best interests of our shareholders. Finally to strengthen our financial team, we appointed Richard White as Vice President or as Senior Vice President of Finance, a newly created executive position. Rick brings with him 30 years of senior financial experience including 20 years at Texas Instruments, where he served as Vice President of Finance and Production [Premium]. Rick and I previously worked together at TI's worldwide memory business, so I know that he brings the capability to run out our very strong financial department working with our CFO, Carl Wertz.

As Diodes grows to become a more sizable global company, we will benefit from Rick's experience in mergers and acquisitions, financial and production premium, and treasury management. Our (indiscernible) continued to be very strong in Q2. As of June 30, 2006, Diodes had $100 million in cash and short-term investments; $141 million in working capital; and $4 million in long-term debt. Our strong balance sheet will enable us to continue with our growth strategy both through organic growth and through acquisitions.

We continue to see a range of opportunities that fit within our strategic port of focus and manage our strength in manufacturing and distribution. While we are maintaining our strong pricing at this time, we believe we have a number of attractive candidates. We believe we already have one of the strongest and most cohesive management teams in our industry. And I expect to continue strengthening that team to be able to effectively manage our future growth.

The coalition by (indiscernible) Publication have funded our strategy and execution. For the second consecutive year, Diodes was selected by Business Week 2006 list of 100 hot growth companies, as well as for Business 2.0 Magazine's 100 fastest-growing tech companies. Though we head into the third quarter with solid financials and a strong management, that will enable Diodes to continue its strategy of innovation and profitable growth and pursue strategic acquisitions.

With that, I am going to turn it over to Carl for a discussion the financials in more detail.

Thanks, Dr. Lu. As Dr. Lu mentioned, Diodes again achieved record financial results in the second quarter of 2006. As Diodes continued expansion into the analog market and built its leadership position in the discrete semiconductor industry, second quarter revenues increased considerably on both a sequential and year-over-year basis, setting new records for Diodes.

Revenues for the second quarter were $82.7 million, an increase of 63.5% for the second quarter of 2005. On a sequential basis, our revenues grew 12.4%. New product sales advanced to a record 24.9% of revenue compared to 23.3% in the previous quarter. Gross profit for the second quarter increased 57% compared to the same period last year to $27.4 million. This increase in gross profit was due to improved product mix, increased sales volume, and efficient utilization of the Company's manufacturing capability as it progresses in moving production of analog products to its highly productive packaging facilities.

Gross margin increased sequentially from 32.9% to 33.2% in the current quarter. Selling, general, and administrative expenses for the quarter were $11.7 million and 14.2% of revenue versus $7.2 million and also 14.2% of revenue in the comparable quarter last year. Included in the second quarter SG&A expenses were $1.4 million in non-cash share-based compensation as per FAS 123(R). For comparable purposes, excluding the share-based compensation, SG&A for the second quarter of 2006 would have improved to 12.4% of sales. In the press release we have included a table to reconcile the impact of share-based compensation expense reported results.

Research and development was $2.1 million or 2.5% of revenue compared to $850,000 or 1.7% of revenue in the second quarter 2005. We continue to put resources in place to drive new product development across discrete and analog devices to bolster our new product pipeline and build on our existing platforms. Operating income increased 26% sequentially to $13.6 million or 16.5% of sales, compared to $10.8 million or 14.7% of sales for first quarter 2006.

Depreciation was $4.9 million for the quarter and $9.6 million year-to-date. EBITDA for the quarter was $20 million, an increase of 53% from the same period last year and $36.3 million year-to-date. Our effective income tax rate in the second quarter was 19.9% compared to 15% for the previous quarter and 15.6% for the same period last year. Our higher effective tax rate was a result of greater income in the U.S. at higher tax rates and accrued dividend related taxes. Going forward, we anticipate our tax rates to be in the mid to the upper teens.

Pro forma net income, which excludes the $1.5 million net stock option expense for the second quarter increased 68% year-over-year to $12.9 million or $0.45 per share, compared to $7.7 million or $0.32 per share last year. Our pro forma EPS of $0.45 is a 19% sequential increase over our $0.38 last quarter.

GAAP net income increased 22% sequentially to $11.4 million or $0.41 per share, up from $9.3 million or $0.34 in the first quarter this year. Cash flow from operations for the quarter was $18 million, an 80% increase compared to $10 million for the same period last year.

Turning to the balance sheet, we had $100 million in total cash and short-term investment; $141 million in working capital; and only $4 million in long-term debt. Our total debt balance of $10.8 million down from $11.3 million last quarter and down from $12.5 million at the end of 2005.

Our total debt to equity ratio is 33% for the quarter while our total debt to assets was 25%. Inventories were $43 million with inventory turns at 5.5 times. Accounts receivable were 68 days in the second-quarter compared to 74 days in the prior quarter. We still experienced tremendous pressure to extend terms, especially in Asia and now in Europe.

Capital expenditures for the current quarter were $17 million and $27 million year-to-date. To accommodate and consolidate our operations related to the tremendous growth in Asia as well as our newly acquired analog division, in the second quarter we purchased an office building in Taipei, Taiwan. Excluding this nonproduction related $6 million building purchase, year-to-date capital expenditures were approximately 13% of revenue, slightly ahead of our 10% to 12% full-year estimate.

As to our outlook, heading into the third quarter of 2006, we continue strong demand for the discrete and analog products as we aggressively proceed with innovative new products and strengthen our leadership position in the market. Coming off our fifth consecutive record revenue performance including our 12% sequential growth this quarter and based on our book to bill ratio above one, we currently expect to see sequential revenue growth in the 4% to 7% range in Q3. And we expect gross margin percentage for the third quarter to be comparable with last quarter.

Over time as we continue to introduce innovative new discrete and analog product and internalize packaging of our analog products, we expect to see gradual expansion in our gross margins. Therefore we feel confident that 2006 will continue to be another year of exceptional growth for Diodes as we continue to focus on innovation and profitable growth while fully leveraging synergies created by the AnaChip acquisition.

With that said, I am now going to turn the discussion over to Mark King, our Senior Vice President 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 morning everyone. In the second quarter, Diodes' marketing and sales activities included record sales, multiple design wins, an aggressive new product launch schedule and strong new product revenues generated by both internal development and the AnaChip acquisition. We are on track to complete the AnaChip brand conversion by the end of Q3 and continue to internalize the analog packaging.

Favorable customer and distributor response to the AnaChip acquisition and analog strategy paved the way for our entry into the standard linear business, which has exceeded our positive expectations so far. We made great progress during Q2 in executing our new product roadmap, including new products in discrete, analog, and power management categories. Sales of new products reached a record 24.9% of total sales.

During the quarter, we launched 63 products from 19 different product families. Our recent launch of the new PowerDI 3.3 product platform builds on the innovative success of our popular PowerDI 5 and PowerDI 123 product lines. The PowerDI 323 platform is among the smallest power package ever introduced into the power rectifier market and provides best in class power performance. Our PowerDI 323 Schottky rectifiers are designed to improve efficiency and enable miniaturization of DC to DC converters in small portable electronics such as mobile phones, digital audio players, and digital camera. In addition, we extended the PowerDI 323 platform to the Zener market with a PD 3Z series.

Geographically, market share for Diodes discrete products reached all-time highs in the second quarter, driven by gains in all regions. Asia remained the largest contributor, accounting for 70% of Q2 sales. Sales to manufacturers of LCD monitors and TVs, wireless LANs and battery chargers led the way. Pricing of commodity products was relatively unchanged and commodity lead times stabilized. We expect this to continue through Q3. Design activity remains brisk on all product lines.

During the quarter, we experienced better-than-expected sales in the computer segment and strong growth in our analog product line. We have seen positive cross selling synergies, as Dr. Lu mentioned. Even though AnaChip had relationships with many key Asian accounts prior to the acquisition, the productline has captured additional market share since becoming affiliated with Diodes Inc.

North America contributed 26% of total revenue with sales exceeding expectations once again and distributor point of sales achieving record highs. Set-top box demand was low in Q2 due to new model product delays but is expected to ramp up in Q3. With the help of increased lead times and competitor shortages, broad-based distribution sales were solid.

Given the intensified design activity and new qualifications to second sourced long leadtime parts, sales for accounts designed in North America and built in Asia remain strong. Array designs continue to be more widely adopted to North America with custom [arrays] gaining tractions at accounts requiring small form factors. There is heavy interest in our performance packages such as PowerDI 123, PowerDI 323 and [VFM]. Distributor inventory rose from its two-year lows in Q2 due to strong customers demand and it has remained in line with sales.

For the second consecutive quarter, wafer sales decreased as we continued converting more wafers for internal purposes. However our wafer average selling price was up over 4% sequentially. ASPs for discrete components were down slightly this quarter.

In Europe, revenue reached new record sales levels up 38% sequentially and 138% from last year. This region contributed 4% of sales. Point of sales revenues was up approximately 33% over the first quarter while OEM sales increased approximately 12%. Our sales growth was driven mainly by new distributors we added last year, but we were also pleased with the significant sales increases from our longer-term channel partner.

During the quarter we started shipments of our first new hall sensor design wins both directly and through our distributors. We saw significant interest in both hall and analog product families. Going forward we will continue to build on our distribution momentum as we work toward increasing our market share in Europe over the next several quarters.

Moving to market segments, for the second quarter our segment breakout was 36% computer and peripheral; 35% consumer; 14% telecom; 13% industrial; and 2% automotive.

Now I will go on to design wins. Design activity remained strong in the quarter. On the discrete side we saw significant interest in our PowerDI, array, both standard and customers specific, and subminiature platforms. On the analog side we saw similar interest in our switchers and LDOs. We had multiple design wins in over 50 accounts worldwide from a broad list of end equipments.

Most notable wins, a design win on our recently announced PowerDI 323 Schottky device on the most recent digital audio platform. PowerDI 5 wins in multiple notebook platforms, two DC to DC converters, DC band and a battery pack. PowerDI 123 wins in DC to DC converter, a handheld PC, and a network EDGE switch. Array wins in portable PoS terminal, mobile handset, ADSL, battery pack, and graphics cards. Notable wins on the analog side includes switcher wins in multiple LCD TV and set-top box designs, portable and combo DVD, as well as wireless LAN. DC-to-DC converter wins in set-top box, ADSL, and power adapter. Low dropout regulator wins in ADSL, cable modems, server, LCD TV, and module. Finally Hall Effect IC wins in D.C. fan, automotive, and three the different D.C. motor applications.

The bottom line was that we now have more products to sell our customers. Our discrete product lines complement the power management product lines at AnaChip and the result is synergistic growth that should persist well into the future.

In summary, we are pleased with our record second quarter results. Overall, Diodes made excellent progress in implementing its strategy of innovation and profitable growth, as evidenced by our record financial results, multiple design wins, best in class product launches and recognition by top business publications. We are confident of continued success going into Q3.

Orders were strong with a book to bill ratio above 1. In the discrete segment, we believe that we are well-positioned with the innovative products that satisfy the increasing demand for affordability and miniaturization from the computing and consumer electronics markets. The acquisition of AnaChip continues to pay off with contributions to profitability and product offering, thus underlying its ideal fit with our existing product portfolio, manufacturing strength, and customer base.

We see dynamic growth in innovation for Diodes going into the third quarter and beyond that will continue to add shareholder value.

With that, I will open the floor to questions. Operator?

(OPERATOR INSTRUCTIONS) Steve Smigie, Raymond James.

Congratulations on another great quarter. The first questions are just related to the SG&A and R&D. It seems like you guys did a great job of keeping those costs under control. I was hoping you could just on a say next quarter basis give us what that might look like sequentially in terms of percentage of revenue? Then if you could give maybe a little bit of guidance going forward after that, you had originally indicated maybe R&D might get up to 3% of revenue. Is it just a question of you guys are growing revenue so fast here that R&D spending can't keep up?

Thank you for your comment. This is Dr. Lu calling from Taiwan. I'm in midnight right now. I think our [business] (indiscernible) is very clear. We tried to get our SG&A and R&D together for pro forma basis about 15% to 16% from pro forma basis excluding stock options. This quarter I think you already said it, our R&D is about 2.5% and our SG&A excluding stock options is about 12.4%. So it is about 15%. That is within our model and we continue the strength of our R&D, but we will not (indiscernible) our R&D like people thinking about an analog company go to 10%. I think we can tell everybody our big to small R&D will be 2.5% to 3% and so we will still go into that action, control our costs for and command R&D and SG&A to maintain about the same [rate].

Okay. I was hoping you could comment a little bit more on gross margin. You said you expect to be comparable in Q3. Is that comparable in terms of its growth or just in terms of percentage of revenue?

I think we are talking about as a percent.

Percentage, Steve.

Okay, thanks. The last question is if you could just comment a little bit on any progress you might have made in handsets. I did not hear too many design win announcements in what Mark went through but just curious of any progress there. Thank you.

I think I they can -- our revenue is pretty consistent with where it has been in the previous quarters. We are getting more active, continue to get more active in handsets, but there hasn't been any significant changes over the last two quarters. But it does continue to be an opportunity to drive growth in the future.

Okay, great. Thanks again.

Ramesh Misra, C.E. Unterberg.

Congratulations on the solid report. My first question was related to inventory. I think you did allude that you are increasing it, but in the quarter it was up fairly significantly. So my question was if you could go into the reasons for that? And also where do you see inventory going in subsequent quarters?

This is Carl. Inventory went up a little bit as we added some raw materials in our manufacturing facilities, so we did a little bit more build in product in Asia. And if Dr. Lu wants to add a little bit, that would be fine too.

I think we tried to -- when we tried to move our portal from our subcontractor to internalize, you always need to start to give us some inventory -- okay, some raw materials, so it's just some contribution we tried to quantify our internal capability of quantified energy products for our internal capability or our internal packaging. So that is just normal. And then down the road when we finish these kind of internalization, then it will go back to normal.

I see. Can you talk about how much as a percentage of sales did analog account for in the quarter?

You know, we really don't like to separate our revenue between analog and the discrete. There are reasons behind this. The reason is we are getting to this multipackaging and system strategy and when you get into the [SMCC] strategy you are going to put the analog chip die, analog die together with the discrete die. Then it is very difficult to separate if this is analog business or discrete business. It is going to be hybrid business and what we try to do is encourage our people to increase the sale for both sides. We do not really want to emphasize one from the other one. That is why we intentionally do not want to separate.

Another reason is because some of the product is very difficult to say if it's discrete or its analog. For example, our hall senor business you can classify as a discrete but you can classify as the analog because later on our strategy will be some kind of a digital function or some kind of analog function together with the hall sensor function to make it a (indiscernible) solution. So difficult or we try to prevent, try to separate between analog and discrete.

Okay, and then finally in terms of -- this question is probably for you, Mark -- all these multiple design wins that you have perceived, were they relatively broad-based or were there particular areas that stood out in terms of design activity?

It is pretty broad-based. The one thing about our productline is it very -- so I try to give a highlight a different type there. The one thing that's clear is that there is a great deal of overlap in our success on our new product with our standard discrete products. But really we are very active in the broad-based customer business and broad-based end of market, so we're seeing a lot of activity everywhere.

Okay, and then just one last one. Do you have products out there already which are these hybrid kind of parts, Dr. Lu? So basically a single chip module including both discretes and analog? And what would the timeline of the sales ramp on those be?

I can probably answer that for you. We don't have any end products done yet and we have been dealing with some initial stage on a customer specific basis and we have had a lot of interest and we have done some work with specific customers in that area. We have not completed anything or introduced a product yet.

Ramesh, the only couple of investments [comforts] I'm talking about step by step approach to this adjacent technology, I think I mentioned we will start with a chip set kind of concept, bring in our discrete component together with our analog device and then present it to our customer as kind of chip set concept. After we build confidence with our customer, then we will bring in a proprietary solution of SMCC solution and during the last six months after we acquired AnaChip, we spent a lot of effort to upgrade that analog design because we want to make sure those analog design is good into -- at our Diodes standard. So we spent a lot of time to characterize those products to upgrade, to make sure it meets our Diodes requirement because we want to sell it together with our Diodes chip, our Diodes product to the customer. So therefore we are busy on that area and that is why Mark is talking about brand conversion and that brand conversion is trying to make sure when we come out Diodes brand on those products it is as good as our Diodes discrete product.

Okay. Thanks very much and congratulations again.

Christopher Longiaru, Sidoti.

Congratulations. My first question is a simple one, Carl. This one is for you. The tax rate seemed to increase a little bit this quarter, about 20%. What was the reason for that?

Chris, we mentioned that the U.S. market was pretty strong. We had better-than-expected profits in North America and those have substantially greater overall tax rates than Asia counterparts. Then also we are still developing our dividend strategy and we have accrued some taxes on dividend related items.

So going forward we can expect it to trend a little bit downward from the 20% I think it was this quarter?

We've kind of always tried to maintain somewhere in between the 15% and 20% range. It's just the last couple quarters we were able to keep it in the 15, 16. So yes, we are in the high teens.

High teens would be what we're looking for.

Got it. Okay. Just another one with respect acquisitions. Now that Richard has joined the team, there's probably going to be more of a focus on that I would imagine. Is there any specific area that you're looking at, an adjacent market that you're focusing on or a geographical location that you might be interested in?

Our target, actually we are quite open-minded, but we do have some principle when we look at acquisition. Number one it needs to have a lot of synergy. If we find a company from let's say Asia, then we want to make sure we are able to get those products to sell to U.S. and Europe markets. We need to make sure those products can be adapted by the major global customers. If we are buying a company, say, in Europe, then it needs to be able to helping us to get into the Euromarket at the same time we need to be able to have the manufacturing synergies, which means we should be able to bring the value, bring their costs down. And if we buy a company in U.S., it would be able -- it should be the same thing. Bring us the technology, the new market, and new equipment.

So number one, we're looking for a company who can help us both discrete and analog. If they can bring both to us, it is even better. Secondly to be very good synergy with our either customer, our customer synergy or manufacturing synergy or both. And those are what we're looking for.

Great. Thanks. That's all I have. Congratulations again.

Sean Harrison, Longbow Research.

This is Yibin Yang calling for Sean. My first question is regarding your sales trend. Could you refresh us what was your typical seasonal growth trend pattern for the third quarter?

Mark, do you want to answer this?

Yes. I've got to look at some numbers. In our industry nothing is ever typical. Last year our sequential growth from second quarter to third quarter was roughly 7%. Okay? And roughly in the prior year it was roughly 5%. So generally the third quarter is a growth quarter. Some years more than others depending on the performance of the second quarter. Seasonality has a tendency to move in our business to some degree, but the third quarter should be in line with what our estimate for growth was this quarter.

Yes, but I do need to remind you if typically historically it's a growth quarter, but when we come out from five consecutive growth quarters on new record quarter, perhaps a 12%, a 12.4% sequential growth, we need to do another effort to get to the 4% to 7%. But we are willing to give that guidance. But it is a challenge, but we are willing to accept that challenge.

I see. Dr. Lu, could you give more color regarding the main drivers, the primary drivers behind your 4% to 7% sequential sales growth forecast?

Well, I think we actually see both growth in our analog, in our acquisition, our analog acquisition and our discrete business. I think we see a little bit more from percentagewise. Analog is a little bit more than discrete, but we see both growth quite a bit and especially for this quarter when we see 12%, it is I am sure it is contributing from our analog acquisition.

Right, okay. Your new product sales went up 160 basis points for the quarter, reaching 25% of total sales. Could you break out a little bit how much was the contribution from analog products, how much from discrete?

Well, since our definition or industrial definition for the new product revenue is defined as the new product announced in the last three years, since AnaChip is a quite brand-new company, they have allowed a new portal which was released during the last three years. Therefore most AnaChip product is considered by definition as a new product. Therefore when AnaChip grows much faster, it give us the benefit of the new product revenue growth.

Okay. I guess my third question is regarding inventory levels at your distribution. Could you give us a little bit of color on the inventory levels at your distributors? Is there any inventory buildup? Do you have any concerns there?

I don't think we have any concerns. Actually we have been touting for several quarters how actually low our distributor inventory levels were. We were actually running at at least two-year lows over the last several quarters. And actually our inventory was quite clean and possibly too low. So we did have some inventory build in this quarter, but we feel it is in line with the record PoS sales we have seen, so we continue to watch it very closely, but we think we are in a healthy position.

Okay, I see. I guess my final question is regarding your capacity utilization. What is your overall capacity utilization for analog and discrete products?

I don't separate from analog or discrete. I am more talking about our fabs and our assembly, because our analog -- the wafers are not produced by our fab. We just source from foundry. And the packaging we are on the way to bring into our inside, but the majority of it is still outsourcing so I probably won't address that.

I'm going to address the utilization. I think from Mark's speech already said we do reduce our wafers sales and convert more capacity to support our internal usage. I think during several of investment conference, we are all talking about our strategy is very simple. We feel the capacity with foundry business. Then when we need it we will move out some of our foundry business and convert it for internal usage and we are successful to doing that. I think our capacity utilization on our wafer fab is above 90%. I think it has increased from 85% last year to about 90% or a little bit north of 90%.

Our assembly side and like I mentioned in the past again, we [add in] the capacity when we see the need. We always try to maintain about 95% utilization and use and in our standard (indiscernible) port at the squeeze point and then when we see we need more then we add in the capital to it. We try to maintain our capital expenditure between 10% to 12% to support our growth and we are successfully doing that in the past several years and we continue doing that way. And so our assembly side is still maintained above 95%. So you can say we are fully utilized.

Right. Then going forward, do you guys have any plans to add capacity at your assembly?

Yes, we continue. We are going to continue adding the capacity. That's what our capital expenditure is doing. Remember we're talking about 10% to 12% and right now the first six months, I think Carl mentioned we did a little more than 12%. We have 13% because our growth. When we see a 12% growth we spend a little bit more to deal with the capacity, and therefore we are a little bit of our capital expenditure curve. But we continue every quarter when we see the need, we continue adding the capacity.

It is nice, like I mentioned to several investors, it is nice to have the capacity in the assembly, because it only takes a very short time to add the capacity second. You can chunk by chunk add in it instead of at the time you -- like we said anytime you spend a lot of money it is adding capacity. For the assembly you don't do that. You just a small chunk by chunk. You're adding one construction line, if that's through, then you adding another one. If all floors through, then add another floor. Then if you fill all the floors, then you add another building. So you can add in chunk by chunk by adding small amounts of money each time.

Okay, thank you so much. Congratulations on a great quarter.

Bob Buettner, Elm Ridge Capital.

A couple of questions. First on accounts receivable, the sequential increase was substantially less than the increase in sales. Just wondering, Carl, are you doing any factoring of receivables? Do you have kind of the same terms from your nonaffiliated customers as you do from the related parties on A/R? And I think you mentioned in your earlier comments that you saw some pressure to extend A/R terms but in fact the DSO has been very well controlled. Maybe you could just sort of reconcile those two statements. And then I've got a few other questions.

Bob, nice analysis of that. We did a pretty good job in reducing our A/R, but we are constantly under pressure from our customers in Asia and Europe to allow them to have longer terms. That has been one of our primary goals of our salespeople to continue to provide quality products and service and not give away the A/R. Every now and then we do lose a little bit, but we are constantly fighting it. Dr. Lu has driven us to focus on our inventory, A/R and Apparently.

I think we can say that he did a good job by the resist pressure. But that doesn't mean we don't have pressure. We feel a lot of pressure.

We do all of our related party A/R and AP are market-driven. They are very consistent with the market in general, so there is no out of balance conditions in that area as well. They are all complete transactions.

Okay. No factoring then?

No, we don't do factoring.

Another question is just can you give us -- in the 10-Q give us units and ASPs for discrete and wafer and you touched on that a little bit in your comments. Can you give us those figures now?

Give us a couple of seconds. The discrete ASP, if I recall, was just slightly negative, about 1% to 2% overall ASP -- I'm sorry -- down while units were substantially up. They were a little bit north of our 12.5% sequential growth.

Okay, so maybe like 14, 15?

Pretty close.

Okay. Then on wafer?

The wafer ASP is actually as Dr. Lu said, we are running that factory pretty full out and they were actually up about 3% to 5%.

Yes, but the revenue from the wafer sale -- (multiple speakers)

So units must have been down then, the units?

Yes, the output, because we convert.

We use a more internally consumed assembly (multiple speakers) just for purposes --

If we can defend that, then our growth would be even more, but we use that side in converting to internal usage.

The total outcome is --

The revenue from wafer sale.

Sure. I understand what you're doing. Just for purposes of modeling, though, your wafer units were down probably then at that point, 15%

No. The wafer units were actually up. Our trade revenues are down because we're moving those units over into the assembly house. We are using more and more internally.

Okay.

So the actual revenue flow was less but the units were up because many of those units were used in our other, in our products that were classified in product revenue rather than wafer revenue.

The actual wafer trade revenue is down a little bit.

Okay, I understand. A couple other quick questions then. The product breakdown I got 36% computer, 14% telecom, 2% automotive. I missed the other one.

I think 13% industrial. Let me find it. It's in here. Yes, it was 36% computer and peripherals, 35% consumer, 14% telecom, 13% industrial, 2% automotive.

Okay. And then you had also mentioned that there were some competitor shortages in the quarter. Could you go into that in a little bit more detail?

Yes, what we've seen is for the last two quarters is some transitory shortages in some of the commodity products and some of the certain packages like SOX 23 and so forth. So we always use that. We see the strategy of the broad line competitors is to outsource their packaging, so their reaction to increased demand is generally not very quick. So we find those as opportunities to gain market share and get design wins that a customer would typically not go back and source a product that they had multiple sources on.

So we see that -- we continue to see more and more of the trend that less investments from the broad line semiconductors in the packages that we play in, so quarter in and quarter out we see more and more transitory shortages in certain packages.

Are you still seeing those conditions now?

Yes, we are. It seems to have eased slightly but I think we will continue to see them through the third quarter and frankly, I think every time the market ramps a little bit we bump up against the capacity window on certain packages. Broad line semiconductors might put higher value products into these packages, which open up discrete. So it is just a clear part of our strategy and has been a clear part of our strategy. It is to support in product areas where other people are less interested.

If for whatever reason you saw some weakness on the analog side, do you anticipate that some of these competitors that have shifted capacity over to analog would shift it back to discretes, where the market clearly has some strength? Or have they made these shifts permanent?

Frankly right now I think I would say that the analog growth is higher than the discrete growth in general. But this is a trend that we go through -- we have been going through through our whole existence. Yes, the broad liners go in and out of marketplaces, but the more this happens and it has been happening more and more, the less interested the customer is in accepting them back. So yes, we always will see -- if markets crash, if markets soften, you will definitely see some ASP pressure and you'll see other things, but we don't expect to see a big change. As the units go up, the units continue to rise, so there will be continual -- as long as there is lack of investment from their side, there will be continued issues in this area.

Okay. A last question then I'll hop off. This one is for you, Dr. Lu, and you may or may not be able to speak to it. But Lite-On Semiconductor continues to own about 23% of the company. From your talks with them, are they interested in retaining that type of position in the company? Or should we look at some point for them to further reduce their investment as the Diodes valuation has risen?

I can tell you that customers don't want to sell their shares. It is a great investment for them and last time I talked to them out for them to sell some shares when we do the secondary offering and they agreed to do that. Since them I talked to them again. They do not want to reduce any of them. It is a great investment. I think on the other hand, in other words we did a good job to sell them from the bottom line. Therefore they do not have any intention to sell any of their shares.

Okay. Thank you for your answers. I appreciate it.

Gary Mobley, A.G. Edwards.

It's Actually Bob Betz for Gary. On the AnaChip side of the business, I know you commented a little bit and you don't want to give too much specifics, but can you qualitatively give some indication of how it did in the quarter? So you said positive growth and I think I have inferred from your comments that the growth was higher, sequentially higher than the discrete business. Is that accurate?

Yes. Our total is 12.4% sequentially and I can tell you with the AnaChip growth it is a little bit higher than discrete growth. Not much higher, but it is higher.

Okay, so it may be like mid teens-ish? Like around 15%?

That is a good estimate.

Somewhere.

I think as Dr. Lu and Mark had mentioned, this is Carl, we are gaining the synergies and I think a lot of our customers are seeing that Diodes now owns AnaChip and they are a lot more comfortable with placing those orders. I think that's allowing our sales team to work together with our discrete sales and take some more share there.

Okay, excellent. Just in a quick one. I hope I'm not making you repeat something you talked about earlier. On the interest income line, that bumped up a fair amount this quarter. Just wondering if you could give some quick color on where that comes from and is that sustainable going forward?

We mentioned we got the $100 million in cash and short-term investments, and that is driving a substantial number of that income. We also had an improvement in foreign currency transactions this quarter. So last quarter we had about $700,000 interest income. This quarter we had just a tad over $1 million in interest, about $200,000, $250,000 improvement in currency effects.

Okay, so going forward around $1 million mark is better for modeling probably?

That's probably a good assumption.

Until we have an acquisition.

I was going to add that. But hoping you did. Help me spend some of that cash.

Got you.

We don't want that cash sitting there idle. Right? The purpose of secondary offering is for acquisitions, so.

Okay, so should I not bother putting in the model for Q3? Do you think it will be used up?

Not that fast. (multiple speakers)

Come on. You can't blame me for taking that shot. Then last, just a clarification on the CapEx you said year-to-date is $27 million. I have in our model and I'm too lazy to go look here --.

Year-to-date?

I thought you said for the first six months it was $27 million.

That's about right.

I have $11.8 million for Q1. Am I off? Which would make it closer to $29 million?

Do you excluding the $6 million? We have $6 million for buying the building. That -- I don't account. You need to get those math. I know one thing is when he said the number we said there's 13% of our revenue and excluding the $6 million for the building, which is nonproduction related.

Okay, maybe that is where it is. I will go back and check. All right. That is all I have got. Thanks.

Alex Guana, UBS.

This is Steven Chin calling on behalf of Alex. First question I had s related to your analog products. Can you give us some more color on what the current ASP environment is like for the analog products, especially the power managing ICs? And moving forward, do you expect more fierce competition from some of your competitors in that space?

Probably it is a little bit more competitive than we are seeing in discrete. The discrete is a little stable. In the raw commodity area in the analog products, we are seeing a little bit more pressure, but not significant pressure. They are a little higher ASPs than in the discrete so we see slightly more room for a continual decrease, but we don't expect anything dramatic.

And once you guys do have the majority or all of the analog products converted over to your internal capacity from a packaging and back-end testing point of view, is that sort of a onetime benefit to margins or are you able to continually extract more cost savings from the back end?

I should say we cannot really move in a majority into our facility yet. Now our first six months we tried to upgrade the product, qualify the product, and gradually [outflow] into our own facility. So in the field today we do not have a majority of products moving yet. That is a future synergy.

Okay. Remind me if I -- can you please remind us what was the timeframe for I guess maybe hitting 50% or more of conversion target?

What is the question again?

What was the question of timeframes for converting let's say half of the analog products to your internal ad resources?

It depend on the time, because we add in the capacity but our priority is to support, to support our new business. That is the number one priority. Then we have business capacity excess capacity, we will move in. Because all of the product today can support it by our subcontract subcom. And so if we are hitting capacity, our number one priority is support new business, new design wins, especially all the energy products when they do the brand conversion and then start to qualify by our facility. Those new business is going to be a priority to support from our own facility and so if we have the room to move in, we will, but that moving in will be based on availability of the capacity.

Okay, understand. My last question is regarding your book to bill. Understanding that it is still above one this quarter, but compared to last quarter looking at your direct versus distie customers, can you give us a sense as which of this you showed potentially more of a strength entering this quarter and how you expect that to progress this quarter into next?

Mark, do you want to take this?

I don't have the exact figures in front of me but I think they are pretty much parity to last quarter's. Maybe OEM is slightly stronger this quarter than distie but I don't think there's any significant differences.

Yes, but don't put the 12% for us. Mark, when you answered that I worry about they say okay, the same, so 12%. We said 4% to 7%

Remember it's not the same on a equivalent base. We are up, so there is a different thing. But in relative terms to the size, the book to bill and who is booking it, I think it is in relative parity.

Okay, I understand. I guess a related question to that is is computing expected to still be the big driver for the current quarter or are you seeing more of a shift back to consumer electronics tech products?

Well, I think we should see some -- the third quarter is generally a computer segment and a consumer quarter, so I would expect to see growth coming from both of those segments. The computer segment anybody says anywhere from 8% to 10% should be up in notebook and motherboard, but then there's some questions about the release of Microsoft programs, some other different things. We see some softening slightly in the LCD monitor and TV marketplace. But we should see some increase in maybe digital audio players and some of the more consumer based things in this quarter, so I think between the two of them those should be where the drivers are.

Okay, great. Thank you. Again congratulations on a great quarter.

At this time I do show there are no other audio questions in queue. Do you have any closing remarks, sir?

Dr. Lu, do you have any closing remarks?

Well, I think number one thank you for participating in the conference call. I think come out a very strong second quarter. I believe our strategy is working and I believe our AnaChip acquisition is successful. Moving forward I think we're going to continue our growth path and continue to put in more effort in the customer support and the capacity expansion and continue our effort of M&A. So thank you for joining the conference call.

Thank you, everyone.

Thank you. This concludes today's Diodes Inc. second-quarter 2006 earnings results conference call. All participants may now disconnect and speakers, please hold one moment.