Diodes Inc (DIOD) 2007 Q3 法說會逐字稿

Good morning, my name is Tim and I'll be your conference operator today. At this time I would like to welcome you to the Diodes, Inc. third-quarter financial 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. Thank you. I would like to turn the call over to Ms. Leanne Sievers of the Shelton Group investor relations. Please go ahead, ma'am.

Good morning and welcome to Diodes' third-quarter 2007 earnings conference call. I'm Leanne Sievers, Executive Vice President of Diodes' new investor relations firm, Shelton Group. With us today are Diodes' President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Carl Wertz; Senior Vice President Sales and Marketing, Mark King; and Senior Vice President of Finance, Richard White.

Before I turn the call over to Dr. Lu I would like to remind our listeners that 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's contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the Company's filings with the Securities and Exchange Commission. In addition, any projections as to the Company's future performance represent management's estimates as of today, November 1, 2007. Diodes assumes no obligation to update these projections in the future as market conditions may or may not 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' website at www.Diodes.com. And now it's my pleasure to turn the call over to Diodes' President and CEO, Dr. Keh-Shew Lu.

Thank you, Leanne. Welcome, everyone, and thank you for joining us today. We are pleased to report another quarter of record financial results including record revenue and profit. Third-quarter revenue represents a 9.3% growth sequentially over last quarter. And nearly 14% year-over-year we also increased gross profit by 50 basis points sequentially. Our strategic initiatives regarding our (inaudible) as well as aggressive new product introductions that target high growth in electronics market continue to deliver results which have consistently outperformed the industry.

Additionally, market share of our product was at an all-time high during the quarter driven by continued gains in Asia and Europe. For the quarter adjusted net income grew 14% sequentially to a record of $17.1 million or $0.40 per share adjusted for the stock split. Diodes' performance is a result of our ability to command customer focused innovation in the discrete analog and hall sensor markets with sales of our cost efficient packaging that deliver greater value to our customers.

Design activity remained strong during the quarter as we capitalized on the synergy between those product families to create expanded opportunity with our customers. The consumer in the computer market segment which represents approximately 75% of our total revenues continued to be a key contributor to our growth during the quarter as we further increased our penetration of those higher growth markets. As planned, the consolidation of our (inaudible) manufacturing operation into our Shanghai facility is now completed.

We will continue to realize incremental operation efficiency that will benefit our results in the margins over time. All our manufacturing facilities are over 90% utilized. Our plant is producing over 53,000 wafers per month. And our packaging facilities in China are producing more than 1.3 billion units per month.

As we look into the first quarter we expect another record result which will continue to benefit from our manufacturing efficiencies and the cost (inaudible) synergies to deliver consistently profitable growth in the coming quarters. We plan to accelerate new product introduction during the fourth quarter and as we enter into 2008 and to further expand our market share. We continue to actively work on acquisition opportunities which have the potential to be accretive within the next -- the first 12 months.

With that I'm going to turn the call over to Carl to discuss more financial results and the first quarter outlook in more detail.

Thanks, Dr. Lu. Good morning, everyone. As Dr. Lu mentioned, in the third quarter Diodes continued to make solid progress in the execution of our strategy. Revenues for the third quarter set another record reaching $105.3 million, an increase of 13.7% from the third quarter of 2006.

On a sequential basis our revenues were up 9.3% which was at the upper end of our increased guidance range. New product sales accounted for 34.2% of revenue compared to 29.7% just one year ago. Gross profit for the third quarter was $34.2 million or 32.4%, a 50 basis point sequential increase over last quarter. Gross margin was up as a result of improved product mix and a benefit of internalizing our analog manufacturing.

As we have discussed on previous calls, we should see opportunities for continued market expansion as we begin to realize the full benefits of our transition of analog production to our state-of-the-art facilities in China. We also anticipate that a greater mix of new higher margin products and increase in units will help to offset future price erosion and contribute to margins in the coming year.

Selling, general and administrative expenses for the quarter were $14.6 million or 13.9% of revenue, in line with last quarter. Included in the third-quarter SG&A was $1.2 million of non-cash FAS 123(R) share based compensation. In the earnings release we have included a table to reconcile the impact of share based compensation expense to our reported results. Sequentially SG&A dollars increased due primarily to increased wages and incentives. For the fourth quarter we believe that SG&A as a percentage of revenue should be comparable to the third quarter.

Research and development investment in the quarter were $3.6 million or 3.4% of revenue. As expected, as a percentage of revenue, R&D investment has increased throughout the year as our R&D activities continue to increase in both the U.S. and Asia and is reflected in our increased new product activity. We continue to enhance our research development capabilities to support our broader market focus and anticipate the fourth-quarter R&D percentage to be comparable to the third quarter.

Our effective income tax rate in the third quarter was 11.8% compared to 14.8% for the previous quarter. The lower effective tax rate reflects profit levels in lower tax rate jurisdictions as well as a year-to-date effective tax provision adjustment. In addition, as part of our tax strategy efforts we have established a holding company in the Netherlands which we believe will be lowering our effective tax rate. We are finalizing this phase of our tax strategy and expect our effective tax rate for the fourth quarter to be in the 11% to 14% range. This equates to an effective full-year tax rate of 13% to 15%.

Adjusted net income, which excludes $1.3 million in FAS 123(R) non-cash stock option expense increased 20.8% year-over-year to $17.1 million or $0.40 per share, up from $14.2 million or $0.33 per share on a stock split adjusted basis in the third quarter 2006 and $0.35 per share in the second quarter of 2007. Cash flow from operations for the quarter was $24.5 million, a 14% increase compared to $21.5 million for the same period last year.

Turning to the balance sheet, at the end of the quarter we had $363 million in total cash and short-term investments, $436 million in working capital and $238 million in long-term debt including a convertible bond. Inventories ended the third quarter at $48.4 million with inventory days improving to 61. We believe we are well positioned to support our revenue growth and have effective inventory control.

Accounts receivable days were 77 in the third quarter compared to 80 days in the prior quarter. Capital expenditures for the current quarter were $15.6 million or 14.9% of revenue. For the nine months ended September 30th CapEx was $43 million. This represents 14.6% of revenue which is above our full-year estimate as we continue to invest for expected growth by capitalizing on opportunities to gain market share.

We expect CapEx in the fourth quarter to be lower than the third quarter, our revised expansion plans now include a 6 inch SBR line in FabTech and additional analog capacity in China will put our full-year 2007 CapEx at between 14% and 15% of revenue. Depreciation expense for the third quarter and the first nine months of 2007 was $6.9 million and $18.8 million respectively.

Turning to our outlook, we currently expect revenue for the fourth quarter of 2007 to increase to a range of $106 million to $109 million with continued sequential gross profit margin improvement in the range of 60 to 110 basis points. We remain confident that Diodes' focus on application-specific standard products within the broad discrete and analog markets while leveraging our cost efficient manufacturing base positions us will continue to deliver profitable growth in the quarters ahead. With that said I will now turn the call over to Mark king, Senior Vice President of Sales and Marketing.

Thanks, Carl, and good morning. Let me begin with our segment breakout for the third quarter. Computing represented 37% of revenue, consumer 36%, communications 15%, industrial 10%, and automotive 2%. During the third quarter we continued to make notable progress with our new product roadmap in discrete analog and hall sensor devices. We released 64 products from 14 product families including 28 SBR devices, three analog and three hall devices. As Carl mentioned new products grew to 34.2% of revenue with products in our DFN product line, PowerDI and low threshold MOSFETs lines serving as key drivers along with continued gains in our analog product line.

In the quarter we expanded our portfolio of high-efficiency DC to DC Buck converters with the introduction of the AP1533. This converter is a solid example of our commitment to enhance our power management product portfolio and is well-suited for applications by LCD TV's and monitors, DVD and personal video recorders, set-top box and industrial control.

Also during the quarter we launched our breakthrough 300 volt super barrier rectifier. These devices are used in high-powered applications such as plasma and LCD monitors and industrial applications. Additionally, we expanded our SOT-223 line with the release of 19 medium power bipolar transistors which serve as an example of our ability to leverage our analog packaging capability in order to broaden our discrete product line.

Most recently we continued to make progress towards focusing on analog lines more towards mobility and affordability. The introduction of our first high-efficiency Charge Pump White LED driver for small size LCD displays will target cellular phones and PDAs as well as other portable electronic devices. This product is the first of a new series that will address the portable display market which complement our existing analog, hall sensor and discrete product solutions. We are very excited about the opportunities in this segment as we focus our future analog product introductions on mobile and portability markets.

In terms of overall design activity it was another strong quarter with multiple design wins at more than 80 accounts globally. Global design wins and in process design activity is centered around new products including switching regulators for set-top box and LCD TV's, super barrier rectifiers and PowerDI where we continue to see very broad end equipment appeal, QFN platforms for digital audio players, mobile phones, LCD displays for mobile phones and hall sensors for cell phones and notebooks. We expect to have our first Tier 1 handset design for hall sensor in Q4, and we recently won an [ASMIC] device on the next generation cell phone display.

In terms of geographic (inaudible) on component sales, our market share was at an all-time high driven by continued gains in Asia and Europe. In particular Asian sales volume increased 10% over the second quarter and represented 75% of total revenues in the quarter. OEM sales in Asia were strong pacifically in the consumer and computing segment.

Additionally, there was broad-based advances in key end equipment of notebook computer, digital audio player, LCD TV's and set-top box. Design activity in Asia was very strong across all product lines including key wins in SBR, hall sensors, switching regulators and LDOs. Distributor point of sales increased in the quarter with distributor inventories remaining at healthy levels.

To further expand our global distribution network in Asia we entered into an agreement with Arrow Asia Pac, a business units of Arrow Electronics. Arrow is a highly sophisticated semiconductor distributor with over 50 supporting sales offices throughout the region with a particular emphasis and strength in mainland China. Their dedicated local team of customer applications engineers will assist with increasing customer access and knowledge as well as improve our competitive position and brand recognition in the region.

Now turning to North America, sales decreased 2% from the second quarter. We did see strength in cable and satellite set-top box and portable medical devices, but it was offset by continued movement of manufacturing to Asia. Coming off a low second quarter wafer sales increased 23% in Q3. In total we achieved 84 design wins in North America during the quarter with eight of these for analog, 72 discrete and four in SBR. We continued to gain momentum in our PowerDI line, SBR technology and our linear and switching regulators. Distributor point of sale was down 2% sequentially and inventory levels were down in line with sales.

Finally, in Europe sales accounted for 4% of revenues and increased 12.2% over the second quarter reaching a new record. OEM sales were up 21.6% driven by strong consumer demand and increased shipments to automotive customers. Our momentum in Europe continued to expand with 35 design wins and 20 accounts including one significant SBR win, nine in analog and three hall sensor wins.

Distributor point of sales continued to grow by 2% in the quarter to a new record despite the traditionally low summer months impacting sales in Southern Europe. We believe this market will continue to be a growth driver for Diodes going forward.

In summary, we are confident that our focus on high-growth, high-volume end markets will continue to drive growth in the future with increased upside for our analog business as we move towards mobility and portability. We have a strong pipeline of new products in the coming quarters as a result of our expanded R&D platform and dedication for product innovation. Diodes is well-positioned with our customers on next generation end devices and we continue to lever our core competencies around manufacturing excellence. With that I'll open the floor for questions.

(OPERATOR INSTRUCTIONS). Harsh Kumar, Morgan Keegan.

Good morning, it's Harsh Kumar, Morgan Keegan. A couple questions, Carl and Mark. Maybe you can help me out here. You said gross margin increases are being driven by mix and analog moving in-house. Within mix can you talk about what's working for you and what we can expect in the December quarter?

Okay, this is Dr. Lu. During the year we make two things. One is (inaudible) talking about move our (inaudible) production from the (inaudible) to our internal manufacturing in Shanghai. And that we have been talking about and it's completed, the portion we want to move we can now move 100% because some of the stuff we do not produce ourselves. So the one we wanted to move we completely move it by end of December -- end of September.

And then another thing is if you remember several months ago we shut down our Hsinchu operation which is the (inaudible) and final task in our -- into China, again, or some of them into the [subcom]. So we reduced our own operation there and that saved us some money. And so that's what order improvement is coming from when we're talking about analog manufacturing inside.

And if you move forward from the fourth quarter I think we give our guidance of continued improvement and we keep that range, 60 basis points to 110 basis points. So we believe with continued efficiency produced by ourselves, (inaudible) improvements and all those (inaudible) we can achieve between 60 basis points to 110 basis points improvement.

That's very helpful, Dr. Lu. Dr. Lu, can you just remind us what you're expecting on your analog business in terms of gross margins, would it be comparable to your core business or better or a little off? Can you just help us there?

I think that one of the reasons we moved from -- we entered into analog business is because analog business in general can give us higher gross margin. Okay? And so we expect we'll continue to improve the gross margin when our analog business gets more percent to our total business.

Got it. And next question on -- kind of looking at December and possibly looking at a little ahead of December into the March quarter. Dr. Lu, your business is very heavily focused on consumer and computing and that tends to be typically strong in the second half. Can you talk about just generally qualitatively what you're seeing in those markets? Whether you're still seeing some strength or you're seeing things fall off? Just anything would be helpful.

I think we keep the guidance for the fourth quarter from 106 to 109, so that shall continue growth, even the -- our growth will be slower but we will still show a continued growth. Okay? And we don't really give the guidance after the quarters. But typically you know the semiconductor market, the sequence is 1Q typically. I'm not talking myself, I'm just talking about the market, typically 1Q is a weak quarter. Okay.

Got it. That's always helpful. And last question I guess for Carl. Carl, you're bringing down tax rate for the fourth quarter, should we expect a lower tax rate for 2008 as we model out?

We indicated we're still finalizing the Netherlands holding company. I think going into the next year it's probably safe to say that it should be in that 13% to 15% range as we're predicting for the fourth. We may get a little betterment as we get more involved with it, but to give that kind of guidance I don't think we want to go there yet.

No, that's great. And one last if I can. Congratulations on your design win at Tier 1 in cell phones. I know you've been trying to get in for a little while. Should we expect revenues in the fourth quarter or should we expect a design win in the fourth quarter?

I think you should expect a design win and it ramping through 2008.

Got it. Thanks, guys.

Shawn Harrison, Longbow Research.

Good morning, just a quick clarification if I could get the end market breakdown again?

I think it's -- it was 37% computing, 36% consumer, 15% communication, 10% industrial, 2% automotive.

Okay. My second question just has to deal with the increase in operating expenses, I'm just wondering the increase in sales in Europe. Is there a higher cost to operate in Europe in terms of just selling expense in that region that aided in the sequential increase in operating expenses?

The European operation, we've been over there already, we have multiple sites. And basically by forming a holding company will not have a substantial cost. We're incurring some now from the legalization and establishment of the Company. But we should not experience a significant change.

I would say that sales expense in Europe is higher because of the value of the dollar versus the euro, but I don't think it's necessarily a big impact on the SG&A or the operational costs as we outlined them.

Okay. And then maybe just to break down the operating expenses further. Of the sequential increase, how much was just general wage inflation that you're seeing versus the other factors mentioned?

The overall wages have gone up, primarily it's due to improved performance of the Company and we're increasing incentives for the global distribution. We stay pretty much abreast with the normal inflation rate for wage increases.

But if you look at -- we have a very big sales force in China and in Taiwan. And China and Taiwan -- that's where our ratings are coming from. And you learn to accentuate in China and having gone against us, okay. And then the same thing in Taiwan. So if you look at those for the increase are SG&A, but salary increase is a portion of exchange rate is another change for us. And we try to maintain, at least percentage wise, try to maintain about the same and that our revenue grows to cover the salary increase and exchange rate increase.

Okay. And then just one final question. ASP's increased 2% sequentially, how much of that was product mix versus actual pricing increases you received?

Product mix is almost all that. We really don't see a price increase, okay? That's why we put the ASP average selling price, it's really due to the product mix.

We chose to squeeze some of our commodities in the last quarter.

Okay. And then just looking forward, new products as a percentage of sales, could that increase to maybe the mid 30% range given your focus on driving more new product development?

Well, I think it's asset mix (multiple speakers)

I guess maybe from 32.5 to say 35 to 36.

That's right.

You know, I think we're going to lose some products. I mean I think at a certain point you're always I think 33% to 35% is actually a pretty high rate. What we hope is that we develop longevity, long-term projects that are driving revenue for a long period of time before.

Especially you know the (inaudible) product, (inaudible) product lifecycle is much longer than other product. And (inaudible) product design, especially (inaudible), okay? Those the design cycle is long and the life is even much longer. And therefore is still in the ramp up mode even after roll outside of the new product definition range. New product definition range is three years and a lot of (inaudible) product is still in the rent mode after three years of the release production.

Meaning your mix should see maybe an improved benefit for a longer duration just because of the growth in analog products?

Yes, correct.

Okay. Thank you.

Kevin Rottinghaus, Cleveland Research.

Thanks. Mark, it sounded like you just said you squeezed out some of the commodities this quarter. Just interpret that, are you talking about walking away from some of the lower margin business at this point?

We expanded to a certain point, so as we regain getting very high utilization rates that we take we kind of shed bad business or our lowest commodity level business. Clearly if we had unlimited capacity we could have grown more. But we didn't choose to do it, we thought it was better to move forward. But we always play in those markets to keep our utilization high in softer periods. So, yes, we can move in and out of that business for best operational improvement as we go.

Okay. And Carl, with the CapEx that you're spending this year what kind of increase should we expect in capacity over 2008?

I think -- this is Dr. Lu -- this is a model still 12% of the revenue. And so move forward we're still looking at 12% of our revenue current year. And the reason this year we spent a little bit more was due to really two factors -- number one is we did add in a 6 inch line to support our SBR technology. And therefore we spent the money to go ahead, put 6 inch line in our 5 bench fab capacity locations. That's one.

Another thing is you know we bring in the product internally from (inaudible) for our (inaudible) product. Those will not generate additional revenue but is consumed additional capacities. Therefore we spent a little bit more money this year to sort those additional loading from (inaudible) product which was produced by (inaudible) before. And that's why those two something, 3% more than our plant, 3% more than our plant was expanded this year. And this we salute our M&A and we need additional capital. We feel our business plan at this model still target at 12% (inaudible) to be capital money.

Is the 6 inch line -- is that online now or will it be by the end of the year or how far along are you in that project?

We didn't commence in -- but it would not be a production until probably 00 our hope in the (inaudible) until end of year, but I think most likely will be first next year -- first-quarter next year. But (inaudible) is already in and that we are doing the qualification.

Okay. What does that do to your incremental capacity in 2008? Is there a percentage increase that you could give us or something to help quantify how much more capacity you're adding in '08 versus (multiple speakers)?

This is a different line, this is the 6 inch line. Is the fall somewhere around 7,000 to 10,000 a month, and you know our 5 inch line is somewhere around -- I've said 53,000. And so you are talking about -- 5 inch versus 6 inch. So if you want to, I will tell you quickly by conversion rate then probably equipment to 15,000 to 20,000 5 inch equipment. It's about 7,000 to 10,000 wafer 6 inch, you convert to 5 inch it will be about say 15 to 20 5 inch equipment wafer versus our current 53,000.

Okay.

That's all you can say, okay?

Okay. One last one. On end markets, what are the expectations for 4Q? What do you expect to kind of lead growth in 4Q?

Oh, I thought we already gave the guidance.

No, he was talking about in the end markets. I think particularly -- I mean obviously in this time of the year it's a computer and consumer market that will continue to move and in Asia.

So the industrial, auto, comes probably down sequentially then?

It's too hard to say. I can't get it down to the product, but they could be more flattish.

Okay. And do you give percentage booked for the quarter and is there any change in that versus your guidance going into 3Q?

I think it's right on in range with our guidance and what we said we were up kind of at parity.

Thank you.

(OPERATOR INSTRUCTIONS). Steve Smigie, Raymond James.

Thank you. I was hoping you could talk and little bit about what OpEx is going to look like as we go into 2008 just generally? You had a little bit of extra spending here and does it continue at this sort of higher percentage? As you get into '08 obviously there will be some revenue growth, but maybe even a dollar wise comment on '08? Thanks.

Steve, we've given the guidance for the fourth quarter, we don't go too far out beyond the next quarter. But again, as we grow revenues as a percentage of revenue we should still continue to see some improvement next year. This year we've ramped for a substantial growth, okay? So I think we should be seeing a percentage improvement as we move into 2008.

Are you guys going to have to add another back end facility at some point? It seems like you're pretty highly utilized which is great, I think you've filled up most of the levels of that existing facility.

Well, if we need it we'll build another building. I should say I'm sorry -- (inaudible) another building and then we'll start to occupy. The more that we do in it is we talk to our vendor and they're building the facility building for us and then we occupy floor by floor whenever we need it. We do I have -- our vendor do have (inaudible) next to our Shanghai facility is a available to build in the building for us if we need it. And I believe sometime in the next year we probably would need to get into the new building.

Okay, great. Mark, I was hoping you could talk a little bit about the new Charge Pump product. It seems like that in general is a pretty competitive market. If I'm thinking about the same market it seems like your product is probably 20 to 30 and points lower in gross margin been some of the competitors there. I just wonder if I'm thinking about that correctly and what that ends up being for you?

We think -- you know, that's a portable market -- we think it -- when we talk about a margin expansion, mobility and portability being profit. So we think that in those markets is where our strength plays because most of the people that play in that market subcontract their packaging. And this is exactly the course part of our strategy, to be able to take higher value products and put it into packages that we sell all day long as commodity. So we think that we have an advantage in all of those markets to compete at a higher level that these other people do.

Okay. And I guess -- so that would also be basically a handset product, correct? Probably more than just handsets, but at least handsets. So now you have the hall sensors plus this and are there other products targeted at the handset feature?

Yes, I think as I kind of mentioned that we're really kind of -- when we bought Anachip, it was more of a communications type line; it was very focused on LCD and so forth. And we had a great switching regulator line to serve those markets. But Diodes Inc. has always been a portable type company and we focus in those end equipment. So obviously in any acquisition we want to bring them to our core customer.

So as I mentioned in here, as we're focusing on a lot of our new development -- although we're still doing development in the switching regulator's for communication and for LCD TV, we're focusing a lot of our development into the portables market space where we play all day long, things for notebook and cell phone and so forth.

So I think -- the load switch that we released in the last or a week ago or whatever, that's another example of product moving in that direction. I think you'll see more and more of our product releases mixed with portable versus our traditional product style going forward.

If you look at our vision it's very clear, we went to use our innovative cost-effective packaging technology to serve at high-growth markets. So portable consumer is the area, the market area we want to target at using our packaging capability. So those kinds of products really exactly meet our vision.

Okay, could you talk a little bit about the industrial opportunity for the super barrier rectifier product?

Yes, (inaudible) it's pretty exciting. We have on here the nice thing about that product line, again, that lends itself all the way very up to high voltage and high-power all the way down to the smallest die you can put into the smallest device. The range in that product is good. We've seen a lot of applications in high-power and welding, we're seeing a lot of interest in solar, we're seeing a lot of industrial controls and so forth that have more and more interest, communication segment, so forth.

So I think that that is -- clearly it's a power product, so the industrial market is power supply where we really didn't play very much. So we're really focusing ourselves back into some of those markets going forward. It will give us good support for North America and European sales.

Okay. And my last question is just on the Arrow relationship. Would you expect that to drive some higher gross margin for you because they're typically pretty profitable lines and how can that sort of help out growth? I know it takes a little while to get that stuff going, but how does that help the growth profile?

Yes, I don't know that you could actually say you're going to make more money off of Arrow. But I think what they're going to do is help us expand our customer base. And I think that they'll help us sell our specialty products in the Asian marketplace. And it's a good extension to our European agreement and it's a good extension to our North American agreement. And overall Arrow is a very, very important partner to Diodes Inc. globally. So I think that they'll give us some good sophistication on the semiconductor cell in some of the Asian market. And we're specifically interested in them and what they can do and they're programmed in mainland China which is quite -- they're doing quite a good job there.

Okay, great. Thanks a lot.

Ramesh Misra, Collins Stewart.

Good morning, gentlemen. My first question was in regard to handsets. Congratulation, Mark, on that first Tier 1 win. In terms of all the products that you have catering to that market, can you give us an idea of your dollar content per handset in terms of your TAM?

No, I can't. We really don't try to get it. But we're seeing more and more opportunity within our discrete product line for our QFN devices. We're focusing a lot in the display area, whether it be directly to the handset manufacturer -- and clearly the hall sensor product area is a growth area for us in those markets. But the overall content, quite honestly they all use different types of product and the key thing is if we win any of them it should be good revenue growth.

Not to kind of press you too much on that, but can you at least provide some kind of a ballpark? Are we talking about overall less than $1, are we talking $2?

Clearly less than $1.

That's our product -- remember our product, we (inaudible) the product (inaudible) -- ASP.

Great, okay. In regards to FabTech, so with the addition of the 6 inch line and clearly it sounds like you're able to get most of it as used equipment at a very low price point. Any thoughts of beginning to transition some of that 5 inch -- rest of the 5 inch capacity over to 6 inch?

Well, if it's needed then we will, okay. But at this moment we (inaudible). But we are already up to very high-capacity and then if our business continued to grow which for sure, then when we need it then we'll convert. We will convert some of our 5 inch to 6 inch. But today we do not have plans in the near future because by 18 -- like I said, 7,000 to 10,000 per month 6 inch, that's already a significant increase. Probably you are talking about -- probably you're talking about a 30% increase in one shot.

So, why did you not do that SBR line also in 5 inch rather than --

Like I said, because we have capacity instead of adding another 5 inch line we're to just go ahead and expand it into 6 inch now.

I see. So this capacity addition is not just for the SBR line, it would potentially before it --?

No, what we said is we will use that 6 inch line for SBR, because SBR is a new technology we acquired about a year ago. And currently they're sourcing from other fabs outside, not from FabTech. And that business continues growing and so we decided to put the SBR process into our own fab so we can in time when we need it we can continue to produce it ourselves in addition to sourcing from our (inaudible) our (inaudible). And to bring the cost down -- and to bring the cost down because if you produce it -- you produce it yourself you can bring the cost down.

And then since we are the capacity, instead of letting them come in and then take the capacity of out of somewhere else. I just say, okay, we need to add some more capacity and it's not right to put the 5 inch capacity. So we say, okay, if we want to do it go ahead, install 6 inch capacity for SBR.

Now like I say, if our other -- our discrete business continued to grow and if someday we need more capacity -- if -- then we'll buy another 6 inch line or another -- 6 inch -- yes, 6 inch line and put in there. For us it's just you expand it when you need it, no sense to put the capacity there if you cannot fully utilize it.

Okay. Now and regards to CapEx, recognizing that you're capacity constrained, especially in the Shanghai facility, and the fact that you actually spent some money on this new equipment for FabTech, why not really let loose on your CapEx? I know it's up to 14%, but clearly you're operating in a capacity constrained mode. What are your thoughts in that regard?

Well, our business model always, adding the capacity fully loaded with commodity and then squeeze the commodity used for the really value added product. Then after you fully utilize it you add more capacity and then grow the commodity and then squeeze the commodity and use them for value added. That's the way we have been operating.

So I need to be clear of just adding so much capacity and then you go after (inaudible) very low profit and low gross margin product. That really is not the right way to use our cash. And therefore we do what we're doing and we try to limit it to 12% and that's just the way our business model goes. Now, yes, sure, we can just add in a lot of capital, but I don't -- (inaudible) need to do in that.

Okay. Now in the past you've hesitated to provide a breakdown of discrete versus analog. But let me ask you in the sense of when you had acquired Anachip -- or you had over time anticipated to introduce synergistic products so basically products with sophisticated packaging which included an analog components and a discrete component. Can you give us an idea of what the timeline on that is or at what pace is that happening?

I think we already through the mutual sales, like handhelds -- I won't name the name but some of the cell phone companies we originally have very limited stuff in there. But with analog (inaudible) product we can start again to some cell phone companies and that domestically brings us the discrete and other analog product into the market -- into that customer.

At the first stage we've really been mixing the integration of adding the two products to the customer, getting back to the application-specific devices. To be honest, we've had quite a few opportunities and we viewed a mixing analog technology and discrete technology in the same package. And it's moving along, but I think really getting the customer acceptance of that maybe another year out.

But as I mention this, the device for the cell phone, that was actually an [ASMIC] device we did for a cell phone display where we put complementary pair low threshold MOSFETs in two different SBR chips into one circuit and supplied it. So we're still -- our platform, our [ASMIC] platform is being pushed quite high. We haven't seen as many opportunities to put analog with discrete at this point yet, but I think it's starting to become more interesting to the competitor -- I mean to the customer as size further becomes a constraint.

Okay, got it. And then just finally, on R&D, clearly you're moving along your goal of nudging that up higher. Do you anticipate R&D at any time I don't know in the next year, two years or whatever to cross the 5% threshold or do you still expect it to be kind of lingering around the 3% mark, maybe 4% mark?

My business model -- I think we have been talking about that, right? The discrete is somewhere around 3%. And if you look at analog it's probably somewhere around 5. And then when you start to combine them together we are running about 3.5%. And this you can (inaudible) mix between the granules or this percent won't be changed that much. Now if analog grows much, much faster than discrete, then that percent will go up. But I think somewhere around 3.5 and then you gradually and going up some. But I will not see 5% for a long, long time because I've seen the 5% probably will be the R&D model for analog.

Okay. On the acquisition front, I know you've said in the past that you expect it to be accretive almost right away. Can you kind of give us an update as to what's happening over there? And are you looking primarily at new products, new markets or new technologies?

Okay for R&D, M&A, I don't think (inaudible) to be accretive (inaudible) -- I always say to be accretive within the first 12 months, within the first year, okay? So I need to correct that. That's what I've been saying. It will need to be accretive within the first 12 months, okay. 1. Number two, so far I do give some (inaudible) out, but unfortunately most of the companies, they all view their -- they're stuck with undervalue, who (inaudible) that, right?

So most of the company I've tried to working with, they all will tell me they're stuck, it's undervalued and I need to give them a much higher premium. And so I cannot get -- so far get anyone really to sell to us yet. That's where -- it's not we are not working on it. We are actually very aggressively working on different opportunities and I give different (inaudible) up. It's just nobody wants to accept my (inaudible) yet, okay?

Then you're talking about -- we've really -- it's not just look at (inaudible) and I think I mentioned that before. Depending on where the company is located and what kind of synergy we can (inaudible) from the company, then we try to put the value and then from there go up the (inaudible), okay? It's we're looking at different companies, some in Asia, some in Europe, some in U.S. And different companies bring us different synergies.

Okay, all right thanks, Dr. Lu. Thanks Mark and Carl.

Christopher Longiaru, Sidoti.

Hi, gentlemen. A lot of my questions have been answered, I just have a couple. First of all, it sounds like what you were saying was you would have had to add capacity no matter what, whether it was 5 inches or 6 inches so you just went with the 6 inches. Am I correct in saying that?

Yes.

Okay. The other thing is that it sounds like you said that the movement of the analog product line is brought in-house, whatever you're going to bring and is done. So I'm assuming the uptick in margins you said 60 basis points to 110, that's really just from product mix, is that correct?

No, no, no. It would continue, and, yes, some of them from product mix but some of them was still from continued improvement. Don't forget, we don't have any expense to handle like testing, I'm talking about analog testing, analog manufacturing inside our SKE, okay? So it will be -- you're going to have more new improvement and more of the productivity improvement. And so it will continue. Like I said, this is the first wave. You move in, you save some money, but that's not -- you won't be (inaudible) since from the day one. And give us some time, we'll continue to improve.

Okay, got it. Did you give a share count, Carl, for the fourth quarter?

Share count?

Yes.

Share count, yes.

Approximately 43.6 million shares, I believe, somewhere in that range.

43.6.

43.3.

43.3. Thanks, guys.

Harsh Kumar, Morgan Keegan.

Dr. Lu, I think in the comments that you had said that you would expect percentage improvements in your operating expense, and then I think somewhere later in an answer to a question, you had said that we should be thinking about R&D at 3.5%. It's already at, I believe, 3.3%. Should we be, therefore, turning R&D up because it obviously doesn't change that much as you hire people, perhaps go up as opposed to come down? But then we should be thinking about maybe OpEx coming down as a percentage of sales; is that the correct way to think about it, Carl and Dr. Lu?

That is a pretty fair estimation. SG&A should be coming down as a percent. R&D, Dr. Lu mentioned, will probably be in the 3%, maybe 4% range -- somewhere in the mid 3s.

3.

Fair enough. And then kind of diving into that coming from the top, gross margin, how should we -- now that everything is done, you've got analog in-house and you're relatively stable from a go-forward basis, how should we think about your longer-term gross margin maybe a year out, maybe a year and a half out? And then also, how should we think about your financial model?

Okay, I think if you took a product mix, you should continue to see some improvement, okay? Especially second half of next year when the market will be up again and the mix will be have a change, then you probably see continued improvement.

In gross margin, Dr. Lu?

Yes, you are talking about gross margin.

Okay, yes, yes.

Yes.

And then I guess pretty fair to assume that your OpEx should go back to maybe 12% -- the 12.3% range; is that correct? I'm sorry, the SG&A.

We didn't give a percentage. We're in the 13, which still compared to the industry and peers, that is still a relatively low number, a lower number.

Okay, fair enough. Then lastly, maybe a question for Mark and Dr. Lu. A lot of talk in the consumer space and maybe even more so in the computing space about potential double ordering. Have you seen any of that, or qualitatively, how would you describe your customers? Are they fairly optimistic about things being somewhat normal?

You know our leadtime is not that long. Our customers really don't need to double order, okay? And since we really never put our customer in our location, there's no reason for them to double order.

Fair enough. Thank you, that is very helpful.

Steve Smigie, Raymond James.

Great, thank you. As far as Q1 typical seasonality, I know it's typically down. Do you guys view your typical seasonality for Q1 as sort of like a down, say, 2%, or do you think seasonality is more like a down 4%?

Well, I don't have that visibility to say 2% or 4%. We don't have that kind of visibility in that far away. Like I mentioned to most of the analysts before, our leadtime is so short and we react to the market actually (inaudible). And therefore, it is very difficult for us to see our market too far away.

Today we can see the fourth quarter. We really don't have visibility in the first quarter. But like I mentioned to you, the semiconductor business, typically 1Q, is the low quarters.

Okay. In terms of the Q4 revenue guidance, Mark sort of answered this question earlier, but would you say there is some element of being conservative in terms of revenue guidance there?

I don't think we'll give the guidance on conservative. The best we know today is 106 to 109. Now, the market could be changed. Today the market is so unstable. It could be one day jump up, it could be one day going down, okay? So very difficult for us to nail down what will be the number. See, while we are running on the long leadtime, we have the backlog. Then we can -- by looking at backlog, we know exactly what we -- but I mentioned that to some of the analysts before. We don't really go by the backlog. So we react to the market almost simultaneous, and that is why we have difficult to nail down the exact number.

Okay. And last question was, do you now or do you anticipate doing any chip-scale packaging?

You know, we've invested a lot this year in our DFN QFN package, which is kind of where we see the marketplace or where we want to be now. Clearly, there is chip-scale opportunities and there is some products and packages that are chip-scale like that we're working on. So our goal will be to keep pace with the industry with the smallest and thinnest devices out there.

Okay, thanks a lot.

Ladies and gentlemen, we have exhausted the time set aside for Q&A. I would now like to turn the call back over to Mr. Carl Wertz for closing remarks.

Thank you. I'd like to make one additional comment before we conclude. We are scheduled to participate in several financial conferences in the coming months. Dr. Lu and myself will be participating and presenting at the AeA Monterey next Monday and Tuesday. Management will be presenting at the UBS Global Technology Conference in New York November 14th, followed by the Thomas Weisel Power Conference in New York on November 15th. December 12th, we will be participating in the Raymond James Conference in New York.

And then moving into the first quarter on January 8th, we will be participating at the Needham's Tenth Annual Growth Conference in New York. And January 22nd, we will be participating in Sidoti & Company's Fifth Annual Conference in Palm Beach, Florida. So with that, I believe we'd like to conclude, and thank you very much for your time and interest.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.