Diodes Inc (DIOD) 2007 Q2 法說會逐字稿

Good morning. My name is Vanessa and I will be your conference operator today. At this time, I would like to welcome everyone to the Diodes Inc. second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you. I would now like to turn the call over to Mr. Coulson. Please go ahead, served.

Thanks a lot, Vanessa. Good morning, everyone, and welcome to Diodes' second quarter 2007 earnings conference call. With us today on the call are Diodes' President and CEO, Dr. Keh-Shew Lu, who is calling in from Taiwan, as well as the Company's Chief Financial Officer, Carl Wertz, the Company's Senior VP of Sales and Marketing, Mark King, and the Senior Vice President of Finance, Richard White.

Before turn the call over to Dr. Lu, may I remind our listeners that in this call management's prepared remarks do contain forward-looking statements which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore we would like to refer you to a more detailed discussion of these risks and uncertainties contained in the Company's filings with the Securities and Exchange Commission. In addition, any projection as to the Company's future performance represent management's estimates as of today, August 2, 2007. Diodes assumes no obligation to update these projections in the future due to changing market conditions or other factors.

For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 60 days and you can find that at the Investor Relations section of Diodes Web site at www.Diodes.com. With those formalities now out of the way, it is my pleasure to turn this call over to Diodes' CEO, Dr. Keh-Shew Lu.

Thank you, Crocker. Welcome, everyone, and thank you for joining us today. We are very pleased to report another quarter of solid results, with Diodes continuing to outperform the overall industry. During the second quarter, we made progress on a number of important areas of our business strategy, as we restructured our analog manufacturing operations from Taiwan to China to improve efficiency, managed a number of new innovative products, target at high-growth end markets, and delivered solid results to our shareholders.

Second quarter highlights, including the (inaudible) result, revenue increased 16% year-over-year and 12.6% sequentially to a new record of $96.3 million. Adjusted net income increased 16% year-over-year to $15 million, or $0.53 per share, up from $12.9 million, or $0.45 per share, in the second quarter 2006 and $0.50 in the first quarter of 2007. And we announced another three-for-two stock split, which became effective two days ago. Our second quarter results demonstrate that Diodes has continued to outperform the overall market and continues to take share of our key market as market conditions improved and demand picked up in Asia following the seasonally slow first quarter.

During the quarter, we moved and consolidated our analog manufacturing operation from Hsinchu, Taiwan into our facility in China to drive operational efficiency and to leverage the infrastructure already in place at our high-volume Shanghai manufacturing facilities.

During the second quarter, we introduced several innovative new products, leveraging our Super Barrier Rectifier technology we call SBR technology, packaged in Diodes' proprietary high-performance PowerDI and in the ultraminiature DFN package. We also introduced new low voltage op-amp and [have prepared] a second-generation switch for the cellphone and portable consumer electronics market, in addition to new higher frequency DC to DC buck converter. Later Mark will discuss a new quarter LAN chip that will affirm our commitment to research and development for next generation technologies designed to meet the growing demand for higher efficiency in a smaller form factor in the fastest-growing end market.

We ended the quarter with over $350 million in cash and (inaudible) investment, which gives us enough financial flexibility to continue to pursue acquisition candidates within our target market segment that fit our criteria to accelerate our profitable growth. As we enter the third quarter, we expect to continue to view our strengths, as we benefit from synergies between our discrete and its adjacent analog segment and will continue to focus our customer-centric innovation and efficient manufacturing to deliver profitable growth.

With that, I am going to turn the call over to Carl to discuss our financial results in more details.

Thanks, Dr. Lu. Good morning, everyone. As Dr. Lu mentioned, in the second quarter Diodes continued to outperform the industry and to make solid progress in the execution of our strategy. In the second quarter of 2007, both revenue and profits were up on a year-over-year basis. Revenues for the second quarter reached an all-time high of $96.3 million, an increase of 16.4% from the second quarter of 2006. On a sequential basis, our revenues were up 4.6%, at the high end of our guidance range. New product sales accounted for 33.5% of revenue compared to 24.9% just one year ago.

Gross profit for the second quarter increased 11.8% to $30.7 million compared to the same period last year. On a sequential basis, gross profit dollars were up 3.9%, as demand picked up with a 7.2% increase in units. Gross margin was off 20 basis point sequentially at 31.9% as the ASP's declined 2.4%.

Over the course of 2007 we should the opportunities for margin expansion as we transition analog production from the currently outsourced packaging to our state-of-the-art facilities and as we benefit from consolidation of our analog manufacturing at our facilities in China and introduce newly-developed products.

Selling, general, administrative expenses for the quarter were 13.9% of revenue, or $13.4 million, compared to 14.2% of revenue, or $11.8 million, in the comparable quarter last year. Included in the second quarter 2007 SG&A was a $1.2 million in non-cash FAS 123(R) share-based compensation expense. In the earnings release, we have included a table to reconcile the impact of the share-based compensation expense to our reported results.

Research and development investment in the quarter was $3.2 million, or 3.3% of revenue, compared to $2.1 million, or 2.5% of revenue, in the second quarter last year. The R&D increase was primarily the result of the APD acquisition in the fourth quarter '06. We continue to enhance our research and development capabilities to support our broader market focus and position us for profitable growth objectives.

Restructuring charges were $1.8 million, as we consolidated and moved our Taiwan analog operations into our China manufacturing facilities. Our effective income tax rate in the second quarter was 14.8%, compared to 16.5% for the previous quarter and 19.8% for the same period last year. The lower effective tax rate reflects additional tax planning efforts aimed at lower planned foreign earnings repatriations in 2007. Going forward, we currently anticipate our consolidated tax rate to be in the mid-teens.

Adjusted net income, which excludes the one-time restructuring cost of $1.8 million and the $1.4 million in the FAS 123 stock option expense, increased 16.2% year-over-year to $15 million, or $0.53 per diluted share and $0.35 per split adjusted share, up from $12.9 million, or $0.45 and $0.30 split adjusted, in the second quarter 2006 and $0.50, or $0.33 split adjusted, last quarter. Cash flow from operations for the quarter was $21.5 million, a 19% increase compared to $18 million for the same period last year.

Turning to the balance sheet, at the end of the quarter we had $352 million in total cash and short-term investments, $420 million of working capital, $239 million in long-term debt, including the convertible bond. Our total debt-to-equity ratio was one for the same quarter, while our total debt-to-assets was 50%.

Inventories into the second quarter at $48.6 million, with inventory days at 63, compared to 61 days the previous quarter and we believe we are properly positioned to support our revenue growth in the third quarter. Accounts receivable days were 80 days in the second quarter, compared to 81 days in the prior quarter. Capital expenditures in the current quarter were $14.9 million and $27.3 million for the first half of 2007, representing 14.5% of revenue, ahead of our four-year estimate as we continue to invest for expected growth. Depreciation expense for the second quarter and first six months of 2007 were $6.2 million and $12 million, respectively.

We originally planned our 2007 CapEx to be at the upper end of our 10 to 12% model and frontloaded in the first half of the year to allow us to take advantage of projected second half growth prospects. Our first half actual at the 14.5% is in line with this plan. We are continuing to evaluate our second half CapEx plan in light of our original plan and developing second half market environment.

Turning to our outlook, with a backdrop of improved market conditions and as we move into a seasonally stronger part of the year, we remain confident that Diodes' focus on the application-specific standard products within the broad discrete and analog market, while leveraging our cost-efficient manufacturing base positions us well to continue to deliver probable profitable growth in the quarters ahead. Coming off a quarter where we saw expanding demand and with a book-to-bill ratio above one, we currently expect to see third quarter 2007 revenue grow another six to 9% sequentially, with slightly improved Gross profit margin.

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

Thanks, Carl, and good morning. During Q2 we made solid progress along our new product roadmap in discrete, analog, and the hall sensor category. Sales of new product reached 33.5 of the total, driven by products in our QFN and PowerDI line, as well as our analog and Zener line.

We had an exceptionally active period on new product introduction, releasing 54 products from 13 product families in the quarter, including 11 SBR, six analogs, and three hall sensor devices. Early in the quarter, we launched a new series of low threshold MOSFETs optimized for low voltage application common to ultraminiature electronic devices. We also made several new additions to our SBR product family, leveraging our proprietary high-performance PowerDI, as well as our ultraminiature [10006] package. The combination of our SBR technology with our advanced ultraminiature packaging capability has pushed the boundaries of innovation.

During Q2 we introduced to the new family of high-efficiency, ultra-low VF SBR rectifiers targeting the power PC supply market and more recently, we launched a breakthrough 300-volt SBR targeted at high-power applications in consumer electronics, industrial applications, Telecom, among others. We also launched a dual, quad low-voltage op-amp and comparator for providing critical circuit function targeted at rapidly expanding low-voltage product segments. And we launched the AH1884, the new hall sensor switch for small portable applications that offers greater performance than comparable products in the market today. In addition, we expanded our portfolio of high-efficiency DC-DC buck converters with the introduction of the AP1533, a 1.8-amp, asynchronous converter for use in a wide range of computing and consumer electronic applications.

With these product introductions, Diodes continues to drive technology forward, setting new industry standards, expanding our product breadth and positioning us to deliver on our profitable growth objectives.

Starting with a geographic breakout, market share for Diodes' products remained at all-time highs in the second quarter. Asia sales volume increased sequentially, driven by OEM sales in the consumer and computer segment, and contributed 75% of our second quarter sales. Core end equipment strategies categories, such as LCD TVs and monitors, notebooks, set-top box, and datacom, were up strongly in the quarter, whereas digital audio players and motherboards showed modest improvement.

Distributor point of purchase was down in Q2 with the rise in point of sales. Distributor inventories are at healthy levels. In North America, sales were down sequentially coming off a stronger than expected Q1. OEM sales, however, were up 2%, driven by set-top box, security, and portable medical devices. OEM strength in North America has been partially offset by continued movement towards Asian assembly. North American distributor POP and POS were down 5% in Q2, with inventory down in line with sales.

Design activity in the quarter was high, with 130 new our qualifications at 35 customers, with 16 of these being analog devices. Wafer sales were down 17% as we consume more wafers internally, while wafer AF fees were down 7%.

Finally, in Europe, the market was down slightly in Q2 coming off a record Q1, with OEM sales down 4% and distributor point of purchase down 3% sequentially. Distributor point of sales continue to climb, growing 21% to a new record. Europe accounted for 4% of sales in the quarter. Our momentum in Europe continued to expand with 38 design wins at 21 accounts in Q2, including one significant SBR win, 7 new analog design wins, one hall sensor win, and a key ASMC win. We are particularly pleased with our new distribution agreement with Silica, an Avnet company, one of the largest distributors of semiconductor products in Europe. Silica's highly specialize semiconductor focus and extensive local presence will improve our ability to service our customers' logistics requirements, enhance our competitiveness, and to strengthen Diodes' brand recognition.

Moving to market segments, for the second quarter, our segment breakout was 38% consumer, 36% computer and peripheral, 15% telecom, 10% industrial and 2% automotive.

Now I will go on to (inaudible) design wins. Design activity was very positive in Q2. We had multiple design wins at over 70 accounts globally. The activity around our SBR technology continues to be strong across all regions. We had significant design wins at five accounts in the quarter for the end-use applications ranging from printer to welding equipment. More importantly, the in-process design volume is quite high and the initial customer input continues to present new opportunities.

Design wins for our commodity analog products continued to gain traction in North America and in Europe. In Q2 we had wins in wireless LAN, Voice over IP, as well as cable modem and graphics cards. In Asia, standard analog design activity was strong in LCD TV, motherboards, set-top box, and portable DVD. We continue to see strong interest in our omnipolar hall sensor platform and pending design activity is quite high. We had wins in cell phone, notebook, industrial control, and personal hygiene devices. The product development on this line has been brisk in response to the specific customer requirements and we expect this line to become a key driver in the quarter sitcom.

On the discrete side, we had a strong quarter in our proprietary PowerDI line, with the wins in solar panel, LCD modules, DC fan, digital audio players, and industrial timing, to name a few. We also continue to see robust and expanded interest in our DFN leadless packages, especially our 0.4 ML this devices, our recently announced low-threshold MOSFETs line in our application-specific line. The synergy between the analog and discrete product line continues to present opportunities with our customer.

In summary, Diodes made excellent progress in implementing our strategy of innovation and profitable growth with solid financial results, a record level of design wins, best-in-class product launches, and expanded distribution capability. Our high-volume new product launches and design wins provide us confidence we will sustained the positive momentum going into Q3.

In the second half of 2007, we expect to continue to expand our market share in both the discrete and standard analog market, realize further costs and cross-selling synergies from our prior acquisition, and accelerate the pace of product innovation through our expanded global R&D platform. In addition, we continue to actively evaluate acquisitions that can accelerate our growth by enhancing our product breadth, expanding our customer base, and broadening our geographic footprint.

With that, I will open the floor for questions.

(OPERATOR INSTRUCTIONS) Shawn Harrison, Longbow Research.

Two quick points of clarification. Mark, if you could just run through this is segment rate down again for me?

Okay. Let me get to my page there. 38% consumer, 36% computers, 15% telecom, 10% industrial, 2% automotive.

And other point of clarification was, Carl, I don't know if you mentioned cash flow from operations for the quarter.

It was about $21.5 million, about 19% increase over the last year periods.

My two real questions are just looking at the ASP decline quarter-over-quarter, it improved substantially. What are you anticipating for pricing pressure in the back half of the year and more so -- more importantly, the third quarter?

I think that we -- the third quarter is -- the market situation is better, so I would expect the ASP declines to be, or the ASP to be relatively stable in the quarter.

Okay, and then just the improved guidance, I guess, versus most of our expectations, was that more on the discrete side of the business or the analog? I guess if you could parse out of strength that you are seeing and maybe break it down to the market, as well.

I think it is across all product lines. All of our products sell quite well together, so generally our customer momentum, they fly together. So I think, again, the second half of the year is very computer and consumer-oriented, so we see a good percentage of this as what we expect in the third quarter.

Is there any, I guess, improving sales volume into the handset market baked into that, as well, given some of the new wins?

I do think so. I think this is more our traditional end equipment that is driving this number. Maybe some increase, but not dramatic increase from that volume.

If and when that happens, would that be more of an '08 phenomenon, then?

I think we are continuing to make progress in that market in some of our new products where we are focused, our hall sensor and so forth. So I would expect it to be back-end loaded or end of 2008.

Okay. Thank you.

Steve Smigie, Raymond James.

I was hoping you might be given to clarify a little bit more the gross margin pick up you might expect to see in Q3. Is that 20 basis points or more like 50 basis points?

Basically, we are indicating it is going to be up slightly. Again, I'm not sure what the definition of slightly is. It's better than zero and probably less than 100 basis points. I think the analysts actually have us about 100 basis points up in the third quarter. That is probably a little on the high-end.

Okay, and then Mark indicated that the pricing seems to be stabilizing a little bit. Would that allow you to potentially see another gross margin increase going into Q4, as well?

I think we have to continue to watch the market environment and the utilization of our competitors and how well our competitors perform to relate judge that. So I think we should just look at where we at right at this point.

We usually face about a 1.5 to 2% price erosion on a quarterly and annualized basis of five to 7%. So I think we still have been price erosion competitiveness in the third quarter. Hopefully the revenue pick-up will be from the units and a mix improvement, integration of the -- moving the test facility up to our facilities in China. Now, we will have the full quarter of using that. So we should be up slightly. We just don't know how much in the environment we are in right now.

R&D was 3.3% of revenue this quarter. I think you target had been about 3%. Was it just a one-time item with the acquisition here and it will drop back to less than 3% sort of short-term, or is the 3.3 more of a normal rate --

Let me answer that question. When we pick up the APD, we pick up the R&D dollar, but APD did not have that much of revenue. So from a percent point of view, we could get it higher. But as -- when our revenue continue growing, when we start (inaudible) from our six to 9% and then continue growing. That percent R&D would drop. We are not increasing our R&D dollar expense. So therefore, the percent could be higher in second quarter because the revenue is not increased from APD acquisition.

I appreciate that. And the last question and I'll get off, is if did the number right, it looks like SG&A also ticked up a few tenths of a point here. Does that stay at a higher level here, or does that drop back off?

SG&A at 13.9 in the second -- first quarter was 13.8. I would envision for the third quarter the percentage will drop down a little. We maintain a pretty good control of about.

Thanks a lot.

Gary Mobley, A. G. Edwards.

With ASP's having declined only 2% quarter-over-quarter, it appears as though most of the gross margin decline on a sequential basis was a function of the increase in depreciation. So with CapEx twice rate of depreciation, or twice the amount of depreciation, why should we not think that depreciation will grow at a much faster rate than sales and thus provide a much faster -- rather large headwind to the gross margin improvement?

I think, number one, we have been keeping our CapEx at the 12% -- 10 to 12% of our revenue. So while our revenue continued growing, our depreciation as a percent of the revenue should not increase because we have been keeping that kind of rate for awhile. And we -- when this time, the gross margin a little drop is really because when you put in the capacity, sometimes you are not fully diluted at the beginning. But then give a quarter or two, then you have loaded up that new capacity.

I'm coming up with a number here where your depreciation should grow about 30% this year versus sales growth of 17% or so. Is that going to be a long-term trend, where we have depreciation ramping up at a much faster rate?

Gary, you need to probably look at the 30%. That may be on the high-end. We grew at about, I think, 7% sequentially from the first quarter to the second, pretty much in line with the unit production and the increase in sales. So our depreciation for the quarter was $6.7 million and we were $6.3 million in the first.

Okay, moving on to a different topic, could you give us some update on what you guys are having to pay for wafer pricing? Have you seen reprive in the pricing trends there?

Are you talking about the pricing for the wafer we purchase?

That's correct.

Number one, for the (inaudible) about the wafer, we actually come in from our manufacturing (inaudible) and therefore, I don't see, other than the original wafer material at the beginning of this year, it is some increase. Other than that, we don't see a major price increasing.

For the (inaudible) majority of our wafer is coming from our sister company (inaudible). And when we purchased APD, we do -- not APD, Anachip we do have a purchase agreement, and the beginning of this year again due to the six inch wafer raw material increase, we pay a little more. But after that, the price is holding the same.

All right. Thanks, guys.

(multiple speakers) Okay.

Kevin Rottinghaus, Cleveland Research.

On R&D, just to clarify, will the percentage of revenues, you expect it to stabilize here or do you think it will go down second half of the year?

I think that I mentioned if we had room, we'd go to a higher level since our R&D will not be significant increase, then as a percent, could be slightly drop in the second half.

Okay and SG&A, you do expect to drop in 3Q and 4Q as a percentage of revenue?

It's the same situation.

Yes. Percentagewise, definitely.

Okay. The increase in gross margins that you are looking for this quarter, how much of that is attributable to mix versus just a higher utilization inside the fab?

The majority we are looking at it is like we moved our operation from Hsinchu, Taiwan to our facility in China. That will affect some improvement. Number two, when we start to move (inaudible) in quantity in the third quarter, we will finish whatever we want to transfer to our manufacturing, we will transport for energy. And therefore, it will give us another improvement. So based on that end, and we might need to offset some of the ASP due to the market -- traditionally every quarter, you look at a one to 2% ASP drop, but with the improvement of what I mentioned, then we should see some improvement.

The Anachip move, you will effectively be done by the end of Q3 with what you want to get done, moved in-house?

Yes, I mentioned before we are not 100% moved in. I think I talked about that before. We intend to do -- it is about 25% of the total usage. We either don't have that capability or it is not worth it to increase the capacity for it. So we will keep about 25%, but not move in. And then we will keep another probably 10% just keep a subaccount or continue producing for us in case we have a need to -- if our own capacity cannot catch up with the demand. So we took in somewhere around 65%, 50 to 65% of the total remaining going to be produced by our manufacturing. And in third quarter, by end of third quarter we should be done with all this.

And if I might add, just because we dumped in the production there doesn't mean on a profit comes right away. As we move products in, efficiencies will come over time and especially in some of the new packages we've got. So there should be a gradual improvement as the factory builds more and more of these devices and we balance those line centers.

Okay.

That is another thing I forgot to mention. We picked up a new package like a [TR220] package and like other, when you transfer from outside to inside and you need then incur some extra yield higher. So with all this stuff, it takes time to be efficient, as good as other product line. Therefore, you continue to see some improvement.

Ramesh Misra, C.E. Unterberg, Towbin.

Good morning, and good evening, gentlemen. Good to see you hitting records again. My first question was in regards to your decline in wafer sales from your Kansas facility fab. So can you talk about what factory utilization of your Kansas City facility was?

Our realization is still somewhere around 80 to 85%

Okay, so was that up or down in the quarter?

Actually, it is up.

Okay. And so --

But we used more and that is why we reduced the sale to outside.

Okay.

-- eventually.

So are wafer costs over there better than what you are getting from your external suppliers?

Sure.

Is it significantly greater? Can you quantify that, Dr. Lu?

I won't say significantly, no, but our operation should -- it is lower than we could get from outside, even if you're talking about U.S. operation versus the Asia operation. We still -- one thing you know our capacity in the wafer fab is quite large. And that capacity and that efficiency, especially the yield, all this will cost edge. Therefore, even our overhead is a bit higher. Our other is actually higher, but the efficiency, the volume, and the (inaudible). So we still -- this method making money from that operation.

So why would you not pull in more of the wafer production that you're doing outside into this facility and run it at pretty much 100% or 95%?

Well (multiple speakers) typically for the wafer fab 85% -- 80 to 85% is computer. It depends on how you define. I know some of the companies, they decline. There always talking about 100 or 5%. They decline. How do you define 100%? What I can tell you is our output is about 5x of about six, seven years ago when we bought this wafer fab. Our output is now -- monthly output is about five times.

Actually, we've been producing around 50,000 wafers per month and I think part of the revenue decrease was the fact that we moved a lot of that internally and we are using -- consuming more than internally in China. And I think when Dr. Lu is saying we're at 85% approximate, we are also looking at a theoretical of about 55,000 wafers a month. So we are probably in the 85 to 90% bracket on a theoretical 55. We've never hit 55 yet, but we put some CapEx in there to try and give them some opportunity to continue to grow that wafer opportunities.

Is any of the analog products being manufactured in Kansas or any plan on doing so?

No.

Okay.

No and no because most of the analog we moved from the bipolar to CMOS. So today, most -- or almost 90, 80, 90% of our analog is in bipolar. But we moved from bipolar for the future on the boards of CMOS and our Kansas City facility is a bipolar facility. Second thing is for analog, currently, we (inaudible) at the (inaudible) six inch. Our (inaudible) is only five inch. So I don't think it is cost-effective. For the screen, five inch may be enough and 6 inch will be more cost-effective. So we might try to convert it to six inch, but at this moment, we do not intend to move any bipolar analog to our (inaudible) operation and we are continually develop a new product based on the CMOS technology.

Okay (multiple speakers). Thanks, Dr. Lu. How much of the CapEx in the first half was allocated to fab tech?

Actually, very small.

The majority is going into the packaging in China.

Okay.

You know our back-end capacity, again, we don't call 100% because we see the capability for changing the product from one to the other one. But we are running above 95% and therefore, we -- the revenue continue going up. If you look at it, we kept asserting that record revenue and with most of the analog product from (inaudible) to internal, we actually spent a lot of money in China facilities for packaging.

Got it. Okay, shifting gears a little then it, would you say that it is reasonable to expect to complete the acquisition before the year end?

You're talking about another acquisition?

Yes.

I don't think so.

Okay.

We might, we might, but not at this moment, I cannot tell you I have complete acquisition by end of the year. We continue to talk to different companies. We continue evaluating the new opportunities. But today, I do not have anyone agreed with the price I'm willing to offer.

Okay. And will this acquisition be purely financed through cash or would there be a stock component, as well?

Well, as I said, so far we don't have any. But the one did pay so far is all-cash. We have several of them we are evaluating right now and all of them will be (inaudible) it's all 100% cash.

Okay. And one final question and then I will get off. Is this potential acquisition in the analog space or is it discrete. Can you provide a little more details about what kind of product types are you focusing on to complement your portfolio?

Ideally (inaudible). So currently, the majority of the one (inaudible) and focus on is all analog plus discrete.

Okay. Thank you very much, gentlemen.

Harsh Kumar.

Harsh Kumar, Morgan Keegan. Good evening, Dr. Lu, and good morning Carl and Mark. A couple of housekeeping questions. Should we assume tax rates to be around 15% going forward?

We said mid-teens, so 14, 16, 15, it is a pretty complex environment.

Fair enough. And that I think this question was asked earlier and Dr. Lu had given some clarification on R&D that it won't grow too much on absolute dollars. Can you give us some sense of SG&A? You said it would come down as a percentage a little bit. Is that pretty fair to assume, so this would be the high percentagewise?

Pretty safe to say that 13.9 is the high side. You should see improvement in a percentage.

Next question, Anachip, I think you had said publicly that 34% -- after you move everything in that gross margins could go up to 34% exiting the year. Is that optimistic at this point in time?

For this year, it is probably because, like I mentioned earlier, because the yield, the lending curve, we do need some time to build our efficiency, our yield.

I believed by the end of the year exiting it, we should be very close to that. We are already in the 32% range for analog.

So you'll be somewhere in that zone. That's helpful, Carl. And then last question, your cell phone revenues I believe are not a whole lot, one, 2% call it. Can you give us a sense, Dr. Lu, can you give me a sense of what kind of products outside of a hall sensor you have addressing the cell phone market, either Mark or Dr. Lu?

Well, I think we use the whole set as a vehicle to bring us into the cell phone company. So originally when we in the discrete only, I do not think any cell phone company really want to use our product. But right now with our analog product, especially now that we have a hall sensor provider need, we open up the door to get into the cell phone market. So we do have several of (inaudible) design win, but it is not finalized yet, but we cannot really disclose about it. And we don't know when they are going to be granted.

Okay. I guess, Dr. Lu, are there other products in your company portfolio that going to cell phone or that could go into cell phones?

Power management is one because cell phones do use a lot of power management (inaudible) and we hope some of the LCD -- somewhat the LCD driver and the majority is hall sensor.

Fair enough. Thank you, that's helpful. Thank you.

Christopher Longiaru, Sidoti & Co.

I guess my main question is you said that as percentage of sales, research and development and SG&A will be coming down a little bit. Stripping out that one-time charge, it looks like you had operating margin of about 14.7%. What kind of improvement can we expect in Q3?

I just don't have data right in front of me. I think --

Could you repeat the question?

Just talking about sequential improvement, you said that as a percentage of sales, both the R&D and SG&A were going to come down in the quarter, and excluding that one-time charge you have this quarter, your operating margin was about 14.7%. It was actually down slightly sequentially. I wanted to know what kind of an operating margin improvement we could expect based on the fact that you're going to have efficiencies going forward from the combination of the movement of the analog productline, as well as a sales increase, making SG&A and R&D a smaller percentage of sales going forward.

Okay, let me try to answer this one. As I said, the SG&A and the R&D dollarwise probably won't decrease, but due to the (inaudible) increase and as a percent, profit will be a going down, that's number one. Number two, we do see our entities, we could have a gross margin improvement because the ASP is going to be move to the wrong direction. But we believe our effort to improve the gross margin should be over ASPs. And that is why we put a slight improvement on the gross margin. Now, exactly what will be the number would be very difficult at this moment to predict, because we cannot really predict too much of ASP. I don't know if that answers your question.

I was thinking more on the operating side, but that kind of give me an idea.

I think we've given the guidance on the gross margin. We've talked about the SG&A as a relatively slight improvement on a percentage of revenue. Likewise, we're going to control the R&D, that should be back in the lower 3% range instead of 3.3, and there will not be restructuring costs flowing through the income statement of the third quarter. And if you take the six to 9% revenue growth, the should pretty much get you operating margins.

Got that. And just Europe was down slightly sequentially from 4.5% of sales to 4%, was that just mainly because Asia was so strong?

Yes.

And what kind of growth do you see in Asia -- in Europe going forward?

I think we just continued to grow our share there. As I mentioned, our POS, we have a record -- most of our European business goes through distribution channels like North America. And we came off a record first quarter in POS and we were up another 21% in POS this quarter. So I -- third quarter is generally soft because of the European holidays, but I think our progress there is quite good. I think it will continue to be. Now Asia continues to grow and to work the growth we can do entities other territories. But I think Europe is definitely going to be a revenue driver going forward.

Okay, great. That's all I had, gentlemen. Thank you.

We're going to continue to set new records revenue. I think all the region is gaining market share. That's for sure.

(OPERATOR INSTRUCTIONS) Ray Rund, Shaker Investments.

My questions have been answered. Thank you.

Steve Smigie, Raymond James.

Thanks for letting me do the follow-up here. Mark, on the order trends with the customers, you mentioned 70 customers. If I remember correctly, it has been more 50 customers in the past if I'm remembering that right. Is that marking a pretty significant jump here in the number of customers you are addressing and you're seeing pretty significant expansion with all the new products? Is that the way to read that?

Yes, there is just a lot of activity. The design activity is quite good. The product acceptance is quite good. We have a lot of new products. These SBRs are new to the customer, so it may take a little longer and so forth, but the interest levels are quite high, on the hall sensor the interest levels are quite high. So we are seeing an enormous amount of activity at the design cycle. And we feel we are pretty well positioned to win designs because of our previous customer positions. So I think it is going quite well, yes.

So would it be fair to say that as I try to look out to Q4 revenue that I might expect that to be potentially even a little bit better than seasonally normal?

We have pretty aggressive third quarter revenue. I don't want to focus on the third quarter (multiple speakers) start talking about the fourth quarter a little later. I kind of go a week, a day, a month, a quarter at a time.

Fair enough. I think you mentioned a European handset customer, I'm not sure if one you mentioned in the past, but wouldn't be fair to say that European customer is a major OEM?

I don't think I mentioned a European handset -- yes, not a major OEM, secondary.

And you had the 2% ASP decline in the quarter. But you also saw pretty decent revenue here and decent revenue outlook. Is the ASP decline partly as you were making the decision maybe to sacrifice a little bit on the margin side to try to get that extra revenue growth, or is that just pick up more wins?

I think that we live in a competitive environment on all of our products and there is always going to be ASP decline. So it is important that we manage our mix. It is important that we manage our mix geographically. And it is important that we work our costs down. So ASP erosion and price declines are a part of our business.

So last year was a softer year because it was just a more solid year from a growth perspective and so on. We just had a little bit more pressure. So I think we do live in a competitive environment, so there will be price erosion and there will be price pressure all the time.

But the profit of growth, since we said a profitable growth is our reason (inaudible) in making money.

Still focus on growing the gross profit dollars.

Okay, and along those lines, you guys have had a significant number of new product announcements here in the past quarter. Would you say that the gross margin percentage that you get on those new products is somewhat higher than products you have introduced in the past?

Yes.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) Ramesh Misra, C.E. Unterberg, Towbin.

Just a quick follow-up. In the past you've supplied pretty much across the board into Apple. Is there any reason to believe that you are in the Apple iPhone?

We don't really get into specific programs, but I think we are pretty consistent in our saying, and we I think we participate in all their platforms.

Any rough gauge what the dollar content?

We've never -- going back all the way to the beginning we've never really discussed contents and amounting each.

I try to push my luck. Thanks, Mark.

Okay.

At this time, there are no further questions.

I think we would really like to thank everyone for the questions and the strong participation. Dr. Lu, you have any closing remarks?

Well, I think we had a great quarter in second quarter and looking forward even the market -- another company announced their third quarter going to be tough, but I think we still look at six to 9% growth. So we believe we going to be still gaining market share. Now, we believe we going to be seeing some improvement due to -- like I mentioned earlier, about several actions we're taking to improve the gross margin. So I think we will have another good quarter in front of us.

That was quite an elegant summary. We're going to be participating in a number of conferences this fall and look forward to seeing many of you there. If anyone has any follow-up questions, feel free to give myself or Carl Wertz a call at the conclusion of this call and we will do our best to get your answers. Thank you.

Thank you for participating in today's conference call. You may now disconnect.