Diodes Inc (DIOD) 2007 Q4 法說會逐字稿

Good morning. My name is Katie and I will be the conference operator today. At this time I would like to welcome everyone to Diodes Inc. fourth quarter 2007 financial results conference call. (OPERATOR INSTRUCTIONS). I would like to now turn the call over to Ms. Leanne Sievers of Shelton Group Investor Relations. Please go ahead, ma'am.

Good morning and welcome to Diodes' fourth quarter and fiscal 2007 earnings conference call. I am Leanne Sievers, Executive Vice President of Shelton Group, Diodes' Investor Relations firm. With us today are Diodes' President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Carl Wertz; Senior Vice President of 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 forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today, and therefore we refer you to 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 represents management's estimates as of today, February 13, 2008. 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.

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

Welcome everyone and thank you for joining us today. We are pleased to again report record financial results for the quarter and the year. Our fourth quarter was highlighted by a sequential increase in gross margin by 110 basis points, and an increase in revenue of 14% over the same period in 2006.

Adjusted net income was also a record during the quarter, growing to $18.6 million or $0.43 per share, representing a 9% sequential increase. Gross quarterly results conclude another year of outstanding performance of Diodes, and further demonstrates our consistent track record of execution as well as strong growth and profitability.

2007 financial highlight were revenue increased 17% to a record of $401 million. This was 17% topline growth, again twice the semiconductor market growth of 3.2%, according to [U.S. PS] figures. Gross profit increased 14.5% to $130 million, and adjusted net income increased 22% to $65 million or $1.50 per share.

In terms of business highlights we achieved several key milestones during the year. We successfully (inaudible) manufacturing to our China facility for improved operation efficiencies. We significantly expanded capacity and improved utilization at both our manufacturing facilities. We started seeing over 15 billion units produced in 2007. And we invested to increase our fab capacity to reach 60,000 wafers per month, with the planned expansion of a 6 inch SBR-9.

We accelerated the path of new product introduction through an expanded research and development platform. We increased market share through our cross-selling synergy between our analog and the discrete segments. We integrated the APD acquisition, resulting in the release of our successful SBR productline. And Diodes grew revenue in Europe market by 50% in 2007.

Diodes' performance is a result of our ability to combine customer focused innovation in the discrete and analog markets with further up cost efficient packages. Our execution of this model have consistently delivered solid results for Diodes, our customers and our shareholders over the long term.

The best of our historical performance we believe 2008 will be another year of solid growth, and the profitability for Diodes that will once again substantially exceed the performance of the industry.

As many of you know, the first quarter would be more challenged due to the overall weakening of the economy, and in particular its potential effect on the consumer and computing market segment. Regarding profitability improvement our business continued to benefit from operational and manufacturing efficiency, as we realized the full benefit from our manufacturing consolidation effort in the coming quarters.

Most importantly, Diodes has delivered record top and bottom line results. In the past 12 out of the last 16 quarters we have successfully managed through challenging business environment in the past, and our proven track record of execution, combined with our broadened product focus addresses the new product introductions and again in our tuck-in markets will continue to deliver profitable results for shareholders.

Finally, I want to provide a brief update regarding our acquisition strategy, which is a key focus area. Over the past several months we have continued to evaluate acquisition targets that we believe are synergistic to our business by offering complementary technologies, expanded market position, and Hall manufacturing capacity and efficiency. Additionally, the acquisition must be accretive within 12 months. To date we have make significant progress in our evaluation process, while remaining very selective in order to achieve the maximum value for Diodes and for our shareholders.

Additionally, over the past year we have taken the right steps internally to improve operation efficiency and secure the adequate engineering staff to support our future expansion. We believe those efforts will help expedite the successful integration of our future acquisitions into our operations. And we will provide update to our shareholders as they become available. With that, I'm going to turn the call over to Carl to discuss our financial results in more detail.

Good morning everyone. As Dr. Lu mentioned, Diodes has again achieved record financial results in the fourth quarter and for the fiscal year 2007. Revenues for the fourth quarter were a record $107.6 million, an increase of 13.9% from the fourth quarter of 2006, and up 2.2% on a sequential basis. New product sales accounted for 40% of revenues as compared to 33.5% just one year ago.

Gross profit for the fourth quarter was $36 million or 33.5%, a 110 basis point sequential increase in margin. Gross margin was up primarily as a result of improved product mix and the realization of the benefits associated with internalizing the analog manufacturing.

Selling, general and administrative expenses for the quarter were $14.8 million or 13.7% of revenue, compared to 13.9% last quarter. Included in the fourth quarter SG&A was a $1.1 million in non-cash FAS 123R share-based compensation. In the earnings release we have included a table to reconcile the impact with share-based compensation expense to our reported results. For the full year 2007 SG&A was within our expected range of 13.8% of revenues compared to 14% for 2006.

Research and development investment in the quarter was $3.9 million at 3.6% of revenue. As expected, R&D investment as a percentage of revenue has increased throughout the year as our R&D and new product activities continued to increase in both the U.S. and Asia. For the full year of 2007 research and development was 3.4% of revenues.

Looking at the first quarter in 2008 we will continue to enhance our R&D capabilities in order to support our broader market focus and new product introductions. Our business model going forward will be 3.5% of revenue plus or minus 0.5%.

During the fourth quarter we had a onetime credit in restructuring charges in the amount of $700,000. You may recall, we had originally taken a restructuring charge of $1.8 million in the second quarter of 2007 as part of the consolidation of moving our Taiwan analog operations into our China manufacturing facilities. On completion of the integration we were able to keep more of the equipment and ship it to our China facilities at much lower cost and fees than originally estimated.

Our effective income tax rate in the fourth quarter was 11.8%, resulting in an effective tax rate for the year of 13.2%. We have made good progress on our tax planning initiative, and we expect our effective tax rate to be in the mid teens for the full year 2008.

Adjusted net income, which excludes $1.3 million in FAS 123R non-cash stock option expense, and the $700,000 restructuring credit, increased 18.1% over the prior year to a record $18.6 million or $0.43 per share, up from $15.8 million or $0.37 per share in the fourth quarter of 2006, and $0.40 per share in the third quarter 2007.

Cash flow from operations for the quarter were $38.2 million, a 54% quarter over quarter increase, and $90.6 million for the year, a 26% increase.

Turning to the balance sheet, at the end of the year we have $380 million in cash and short-term investments, $452 million in working capital, and $237 million long-term debt, including convertible bonds. The inventories ended the fourth quarter at $53.2 million. Inventory turns at year-end were 5.2 comparable to the same period last year. Accounts Receivable days were 75 in the fourth quarter compared to 77 days in the prior quarter.

Capital expenditures for the current quarter were $11.3 million. And for the full year CapEx was $54.2 million. This represents 13.5% of revenue as we invested for our growth by capitalizing on opportunities to gain market share and included the addition of a 6 inch SBR line at Diodes-FabTech, as well as expansion of analog capacity in China. Excluding the SBR line, CapEx was 12.2% of revenue. For 2008 we expect CapEx to be in our model range of approximately 12% of revenue. And we will continue to monitor this plan throughout the year.

Depreciation expense for the fourth quarter and for 2007 was $7.4 million and $26.2 million, respectively.

Turning to our outlook. We currently expect revenue for the first quarter of 2008 to be in the range of $95 million to $101 million. In terms of gross profit we believe that our gross profit margin will be comparable to the fourth quarter.

Our estimated first quarter performance reflects seasonality combined with the impact of an overall weakening economy. In particular on key targeted end equipment in the consumer and computing markets, as well as our foundry and subcontracting business, which is showing greater weakness than our core revenue drivers. Over the longer-term we believe that Diodes' history of execution in significantly outperforming the industry, combined with our focus on customer centric innovation and efficient manufacturing, will return us to the historical growth rates, and we will continue to deliver positive results for our shareholders.

With that said, I will now turn the call over to Mark King, Senior Vice President of Sales and Marketing.

Good morning. Let me begin with our segment breakout for the fourth quarter. Computing represented 37% of revenue, consumer 34%, communications 17, industrial 10, and automotive 2%.

During the fourth quarter we continued to make notable progress in our new product roadmap in discreet, analog and Hall sensor devices. We released 80 products from 15 different product families, including 10 analog devices, 2 Hall devices, 8 MOSFETs and 12 SBR devices. As Carl mentioned, new products grew to 40% of revenue, which was achieved with a corresponding increase in margins. Our new product revenue was driven by our DFN productline, our low threshold MOSFET line, also increases in our SBR productline. Also during the quarter we recorded initial new product revenue from our recently announced medium power Bipolar Transistors lines. And we received our first orders from a Tier 1 handset manufacturer for our Omnipolar Hall sensor devices.

The release of our medium power transistors serves as an example of our effort to expand our product offering beyond small signal devices and to further position Diodes as a complete analog and discreet solution provider.

During the quarter we also announced the expansion of our standard linear productline to better serve the needs of our diversified customer base as a broad supplier. This initiative is a continuation of our strategy to focus our expansion on commodity analog products and leverage the synergy between our high-volume packaging and our standard linear technology. As I had mentioned last quarter, we continue to make progress towards focusing our analog line more towards mobility and portability, which included the introduction of our first high-efficiency Charge Pump White LED driver for small size LCD displays.

Adding to this, we also announced the release of our first ultra low dropout regulators, which represented the first in a family of new power management devices that we will be releasing to target the portable and battery-powered electronic device segment. Further we announced the release of a single channel smart load switch for use in notebooks, Bluetooth, headsets, smart phones and GPS devices. Each of these product introductions furthers our progress towards penetrating the mobile and portable markets, while also complementing our Hall sensor and discreet product solutions. We are very excited about the opportunities in this segment, and anticipate a meaningful contribution to revenues in the second half of 2008.

In terms of overall design activity, it was another strong quarter with multiple design wins at 65 accounts globally. Mobile design wins and in-process design activity is centered around new products, including Hall sensors for cell phones and notebooks, where we had five significant wins, including one Asian cell phone manufacturer and two notebook platforms. As I mentioned earlier, we secured a design win with a Tier 1 cell phone manufacturer for three of their current programs, with initial orders booked during the quarter. SBR's for end equipment ranging from cell phones to welding equipment, medium power bipolar transistors in motherboard, cable modem and set-top boxes, switching regulators and LDOs for set-top boxes and LCD TVs, as well as several industrial applications in North America and Europe. And DFN platform products in digital audio players and mobile phones.

In terms of geographic breakout, Asia sales volumes increased approximately 8% over the third quarter and represented 79% of total revenue. OEM sales were strong with solid demand in consumer and computing markets for LCD TVs and panels, as well as digital audio players, set-top box and notebooks computers.

Additionally, we saw strong demand in DC fans and increasing demand for our SBR products for the power supply and adapter markets. Design activity in Asia was strong across all productlines, including key wins in SBR, Hall sensors, switching regulators and LDOs.

Now turning to North America, sales decreased 2% sequentially on generally soft demand, and represented 21% of total revenue. Cable and satellite set-top box business remained consistent, but there continues to be movement of manufacturing to Asia. We did experience some uptick in industrial accounts in the quarter, but it was not enough to offset the movement to Asia. Coming off a strong third quarter, wafer sales decreased 23% in Q4. Although trade wafers were down, our internal utilization continued to increase.

In total we achieved 76 design wins in North America during the quarter; 7 of these for analog, 65 for discrete and 4 in SBR. We continue to make progress with our SBR lines in industrial and communication accounts, and also had design momentum in our power die, linear regulator and Omnipolar Hall lines. Distributor point of sale was down 2% sequentially, and inventory levels increased slightly.

Finally, sales in Europe accounted for 4% of revenue and decreased 12% over the third quarter due to weak distributor point of purchase. OEM sales were flat with distributor point of sales increasing 1% in the quarter due to stable demand from consumer and automotive customers.

Our design momentum in Europe continued to expand in the fourth quarter with 19 wins in 17 accounts, including 4 Hall sensors, 3 SBRs, and 4 analog design wins. Additionally, we won expanded contracts with three customers during the quarter.

Looking at Europe for the full year sales increased 50% over 2006, and distributor point of sales grew 83%. We have an established platform for future growth, and we continue to believe the European market will be a strong contributor to our results going forward.

In summary, we believe Diodes have taken all right steps towards becoming a complete analog and discrete solution provider, focusing on the right markets at the right time. We are dedicated to product innovation, and believe our pipeline of new products will further drive expanded market share. Additionally, we have made notable progress with focusing our analog business on mobility and portability, which we expect to provide increased upside in the later part of the year.

With that, I will open the floor to questions.

(OPERATOR INSTRUCTIONS). Harsh Kumar, Morgan Keegan.

I want to congratulate you guys. Despite a tough economy, I think your business model is pretty solid and you're managing the business well. Congratulations on that. I just want to ask a couple of quick questions. You talked about general environment and that things are worse clearly in the U.S. Could you give us some more color? Is there any one area that is a little bit worse than the other within consumer or computing? Possibly also maybe talk a little bit about geography, high-end versus low. Anything you could help us would be helpful.

Thank you for the comment. And I will get Mark to answer you those marketing questions.

I would say we have a traditional seasonality in the Asian market in computer and consumer. I would say the downturn is a little bit more severe this year and maybe just a little more unsure if people are being more cautious.

In North America I think we see generally a soft market, a very conservative distributor network and so forth being very cautious about where the demand is going. But overall we see the POS trend is relatively flat. It is more concerned with -- people are more concerned with inventory reduction and making sure that they have a lot of flexibility in that area.

Got it. So you're saying the end follow through is sort of pretty decent still?

I think it is reasonable. I don't think there's any significant fall off. I think it is more in that POP area and so forth. But I think we have a little bit more exaggerated seasonality due to the economic climate and a lot of uncertainty and people being risk evasive.

Then just as a follow-up to that, are you seeing any signs of return, possibly second quarter is better for you guys? Is there any encouragement that you're seeing from the end markets about the length of the downturn, or however you want to look at the soft spots?

I think in North America and Europe it is very hard to say which way it will go. We would expect some uptick in the Asian market in the computer and the consumer market, but that is still relatively uncertain based on macroeconomic conditions.

From the Diodes point of view, we have a great amount of new product, new design wins. We're ramping up the new models, which typically started in the second quarter. So we were affected by the [make-wholes], but at the same time the new product design wins [when viewed] in the last several quarters will help us.

I appreciate the color. Last question for me. Margins of 33.5 are pretty good. Is there any room from here on out as the year goes on and supposedly things get better, can the margin ramp up or is this the high we should be thinking about?

This is very difficult. We continue to do our best to improve our efficiency and our profitability. But unfortunately a lot of times the product mix will change that effort. Therefore, for us it is very difficult to predict in the future. But we continue putting effort on manufacturing efficiency, improving [EO], and reduce the cost. That is continuing. It just a lot of time was affected by the ASP and the product mix.

Shawn Harrison, Longbow Research.

First question just has to deal with the weakness in the foundry and the subcontracting business. If you could just remind me what percentage of sales those two pieces represent.

We have never really published that percentage.

We never break it out, but our wafer fabs in Kansas City produce the wafers for ourselves at the same time we do foundry (inaudible) for other people. Through the years our objective is gradually move -- reduce that foundry business to internal usage. So actually in just the fourth quarter, as Mark was talking about, if go down. While we have some growth in the first quarter, actually that foundry business it went down 23%. First quarter it went down significantly. We're not again -- but our objective is always try to, at the end, yield that capacity for ourselves.

Maybe just on the foundry business or the subcontracting business and the margin profile, is that -- is it lower than the corporate average, in line with the corporate average? I am just trying to get an idea of gross margins holding steady here in the first quarter in light of a greater than expected revenue fall off, or is maybe something else at work, such as an increasing contribution from the new product sales?

We did what we needed to know this caused these numbers, because this is custom business and we are just doing the packaging for some of our customers. We really do not disclosure the gross margin.

Then just as a follow-up, new products were 40% of sales this quarter. Was it 32% last quarter? Is that the correct number?

I believe right in there. I think it was 34. And I don't that figure right now.

33.5% a year ago.

33.5 a year ago.

Should we expect that number to increase further here in the March quarter and then into 2008, or kind of hold steady around this 40% range?

I think you'll start to see it drop some, because some of the product is starting to age in groups. We don't see any margin -- we don't see any negative affected, but we have a long lifecycles on our products and sometimes a long digestive period to get them into the line. I think you might actually see that new product revenue percentage decrease, but no major effect on the overall margin percentage and other things. These are long-lasting products. Some of them are just trying to mature at that time -- into big numbers at the time that they're going to expire are basically classification.

Then two quick follow-ups.

Clearly it is the classification only. For our standard product the gross margin decrease is not very significant from new quarter versus the old quarter. Just the way we decided three years from the time we release production we think that two years we call new product. After the two years we call [all] product.

Two quick follow-ups. ASP trends, have you seen any abnormal pricing pressure here in the first quarter? And then also just how much, since we are into the second week of February, how much backlog coverage do you have of the quarter? Is essentially the quarter covered right now in terms of what you're seeing in the backlog?

I think there is obviously in softer periods we are going to have more than normal ASP pressure. I think we're seeing more ASP pressure probably in North America right now than we have see in Asia, but it will be more than the normal rate.

Regarding backlog, it is very turns oriented environment. And actually it was a turns oriented environment in the fourth quarter also. So as people got more -- as people get more and more concerned about the economy, they're less willing to give long -- establish a long-term position. It is a very -- this is a marketplace what everyone needs to be very aggressive and very attentive to capturing every order.

What are leadtimes right now in just a general range sense for you?

I think it is very product dependent, but we're very capable -- we still maintain high utilization rates, but we're very capable of adjusting those utilization rates to capture business.

We always -- I think I mentioned to several investors before, the way we view our business, we view the (inaudible) inventory during the finished wafers in front of packaging. And best it can reduce the leadtimes, because most leadtimes is coming from the wafer process instead of packaging.

Fortunately, our wafer cost is much lower relative to other company's products. Therefore, we are able to [fill in] the wafer inventory, called die bank in front assembly to significantly reduce our leadtime. That is reason we have very detailed (inaudible) because we can turn the product very quickly, especially with our very big manufacturing packaging capacity.

I mentioned to several investors before, it is easy for us to the turn the product in a very short period oif time to meet our customers' demand. Therefore, typically customers don't give us very long leadtime orders. When they need it, they call us, we ship it.

Kevin Rottinghaus, Cleveland Research.

On utilization is there any net change quarter over quarter or are you keeping it relatively flat?

Relatively flat.

What are your plans for internal inventory? Do you plan to build in the first half of the year then?

Yes. That is the way we do when the -- this is (inaudible) by building the wafer for the wafer bank. And when the uptick come in, we are in position to support a customer right away. That is always our biggest model. If you go back to history, 1Q typically we will be building up the wafer bank (inaudible).

Maybe for Mark. Weakness that you mentioned from the macroenvironment, are you seeing actually any order cuts or changes to forecasts, or is it just short visibility, increased customer caution? Are you actually seeing any changes in changes to forecasts?

Not really. We may have seen these forecasts coming, but I don't think we're seeing -- there's not like a dramatic cancellation hitting our fax machine all day long.

No.

I think you're saying again the pipeline orders from distributors being cut back. You might be seeing shorter windows on pipeline orders and so forth. But I don't think we're seeing any dramatic cutbacks. I think people are more cautious on their order in rather than what they have already got in place.

It is just the same when you're talking about the very short leadtime, typically people won't give you a double order. We won't have a double order problem, therefore we don't see the cancellation problem. That is one advantage of very short leadtimes.

Mark, I think you made a comment on channel inventories. Maybe you could give us any more color you have their.

I think actually the channel inventory is pretty clean. I did mention that it upticked slightly in North America in Q4. But I think it is negligible. I think Europe is very solid, and I think our Asia position -- our Asia -- our inventory always goes up at the end of Q4, because it goes down so dramatically in Q3. Because that is -- the mid part -- the last two months of Q3 and the first two months of -- or the first month of Q4 are the hottest periods, so we squeeze everybody's inventory down. It was natural for it to rise in Q4.

On the handset market, it sounds like -- you said you have initial orders into one customer and design wins at another. ARE you getting orders across all three platforms at this point or is there just one? And when do you expect the orders to start to come in for your new Asian customer there?

I think we're seeing some of the initial orders on some of these platforms. These are the newer -- some of these programs were on the newer platform so they haven't ramped to full production. And we're a new supplier, so we expect in the early stages to have minor shares. But it has been our history that we take minor shares and advance those into full shares over a period of time.

I really can't give a revenue flow on these yet. But these are very nice position wins for us, for our long-term development. The orders initially have been quite small, but we expect significant rollout as we approach the third and fourth quarter.

Last question on OpEx. Could you give us some direction on how we should expect OpEx for first quarter? And then he had a 3.5% for R&D. Is that on a quarterly basis or is that on an annual basis? How should we expect it to go for 1Q and then total OpEx for full year?

Actually (inaudible). It is 3.5 for -- our 4Q is the 3.6%, and so 3.5 is the average. Our 3Q is 3.4. But if you look at it, it is not really a significant increase from a percentage point of view. Now with 1Q for our R&D expense either will be spread or very slightly down. But because the revenue increase the percent will be increased. But from the total amount point of view it will be either flat or slightly down.

Then how about SG&A?

SG&A should be fairly consistent with the fourth quarter. We put some pretty good controls in place.

Our SG&A had been controlled quite steady. So it is somewhere like fourth quarter is 13.7%. You can see through the whole year it is quite steady. Then again we don't see a major increase. We will probably stay the same thing. Keep (inaudible), except some sales increase typically in the 1Q, you had some operations (inaudible) Taiwan in China. Their sales increase. U.S. it is the same. You would really. other than that, you won't see any increase.

No, there is no significant change. We will probably be in the 13.7 and maybe 14% range due to the lower revenues in the first quarter.

Steve Smigie, Raymond James.

The numbers you're quoting on the SG&A and R&D, is that including or excluding the option expense effects?

That is including.

You have a couple of large customers. If any one of those had somewhat mediocre performance in 2008 would you guys still be able to grow pretty healthfully despite that? I was just curious about the impact of significant customers on you in '08.

I think we should be able to continue to grow.

Yes. You know, our growth is -- a lot of them is due to the new order, new design wins, new customer. Yes, some are the old customer who continue to grow, but another a lot of our growth is going to be coming from new design wins. Not just back at that cell phone, Tier 1 cell phone, those will start ramping up in 2008, and that will be new revenue for us. And this is just one of examples, so the new design wins is what is helping us.

Also, we don't have a heavy concentration of any one customer. We don't have any customer greater than 10% of revenues too, so we're pretty diversified.

As I look at second quarter, I know you're not getting guidance for it, but can you give any sense at this point if there is any reason why you wouldn't have a seasonal recovery going into Q2? Is it unreasonable to think you would grow sequentially in Q2 relative to Q1, particularly given the lower Q1 numbers?

My answer to that would be that I think it would be bold to make too many estimates based on what is going on around us. But that we do expect normal seasonality shifts going into the second quarter. There's nothing that has told us that that would not happen yet.

Nothing tell us that won't happen yet. That is really the best way to answer.

Similarly on gross margin, looking out to Q2 I see your revenues dropped here, so I have to imagine there might be some utilization impact, unless you're running more product at lower margin. But as we go into Q2 it would seem that gross margin might also move up sequentially as well. Would that be the right way to think about that?

I think we really don't do quarter by quarter, and we don't really go out beyond the next quarter. But for the whole year we have a lot of opportunities. We have brought a lot of internalization of the analog in-house. We're doing more internalization of our wafer internally being packaged in China. We're looking for all efficiency betterment. If the market holds solid then we should continue to outperform the market.

The key thing really is ASPs. If the market holds, but the problem is typically started to have the new model -- new model year for another consumer market, and they always like to negotiate the price. And you just need to make sure your cost reduction effort can exceed the ASP drop. Then you're okay. Or the product mix give you gross margin improvements. But at this moment since there are so many factors going on, and you know we are very conservative, but we really don't want to tell you anything -- say one way or the other.

We've got a pretty good, solid track record in utilization of our expansion. We have given you some guidance for the year. We will continue to monitor that. We will try and do our best to keep utilization rates as high as we can. So like Dr. Lu said, if the market holds good, it is all based on pricing, our cost reductions should stay ahead or are equal to the curve in ASP. All indications are we should be able to squeeze a little bit by the end of the year.

The last question is just sometimes when things slow down a little bit, you guys will either be a little bit more proactive about going in and getting some extra business. Maybe you just take in a better environment, but have you done any of that? Is any of that in Q1 guidance, or is that something that you might do throughout the quarter that might maybe help revenue a little bit?

We take all strategies into consideration. We constantly are managing the requirements of our revenue versus our utilization and our customer opportunity.

Remember, we're focused on gross profit dollar improvement. And if we have to sacrifice a little margin percent we will do that if they're getting new additional gross profit.

Chris Chaney, Stanford Group.

Nice quarter guys for Q4. I have a couple of questions here. First, on -- could you remind as on how you define new products? Are devices introduced in the past year or two?

Three years from release.

When I look at your R&D, or your R&D budget for 2008 versus 2007, basically what portion of R&D do you allocate to the development of new products, one-third, two-thirds, any idea there?

Actually if you go to look at it, the R&D has three portions. One is R&D for wafer. Then it is R&D for packaging. And then R&D for product, and that product is separated into discrete and analog. Obviously, for analog it take a [little bit] R&D money from design point of view than discrete. The majority of R&D money is in the product. Now because I think I mentioned that to some investors before, to do the R&D for the packaging it will not take that much money, because it was done in China, and so the cost is fairly easy to control. Now we don't really spend a lot of money for process because that is not where our daily competition is, therefore most R&D money will be in product design, in the product area.

I understand. Now in the utilization I had a question about utilization between your -- both in the fab and in the packaging facility. What would your utilization be in those two? I am just curious?

Again, our fab capacity typically is somewhere around 80 something.

We are in the high 80s percent in the fab and --.

And the packaging typically we keep very, very full. I think we mentioned that before. We are very careful to add in the capacity in the packaging, because the money -- I mean the installation you don't need to put a big chunk. You can put a small line [by nine] and therefore you can increase that capacity whenever you see you need. Since we continue to grow, if you continue to grow then whatever you put in, you're going to be fully utilized. Then we predict how much we needed for next quarter, then we decide -- the leadtime for put in the nine typically is not that lot either, and therefore we want get into that capacity issue for the packaging.

Now you produced about 15 billion units in 2007. So that is about what 1.25 billion per month. I think earlier in the year you said that your goal by year-end would be around 1.2 billion. So you seem to have actually slightly exceeded that. I'm wondering do you have a goal for mid or maybe year-end '08 in terms of units per month runrate? And how will not be affected if you do an acquisition? Can you effectively or quickly put on new capacity in that packaging facility to take advantage of that?

Number one, all our assumptions is -- we don't put into the capacity assumption for acquisitions. Because until we really nail on to the one we really nail down, we stop. Now after we announce the acquisition then the capital -- the leadtime to extend that capacity won't be that long. We had enough time to react. And so typically you don't need to worry about it until -- we don't really need to worry about the capacity to support our M&A targets until we get agreement and make announcement. Then you give me two, three months or three, four months to install the capacity, and depending on what kind of capacity is needed to support it.

Execution has been grade so far, so thanks so much. That is all I have. Thanks.

You are asking about end of year. Our target is somewhere around 1.7 billion units.

1.7 billion. Wow. Okay.

That's the runrate at the end of the year.

Yes, that is end of the year. So the total year won't be that, but the end of the year is 1.7 billion units. Yes. Remember, I kept telling everybody the value of our Company and the value proposition of our Company is the packaging. And the reason we are able to gain the market share is we have a very, very big capacity and very, very easy flexible, can turn around to support a customer. And we don't put the customer on [our] location because we have enough capacity to support everybody's needs.

We did mention that we expect to have about a 12% of CapEx of revenue. And that is pretty much in line with what we did in '07 as well. We tried to show you where we will be.

Now if we get acquisition, you know it would a different story. Because then we need to look at addition need and then put additional money in there.

Ramesh Misra, Collins Stewart.

My first question was in regards to the acquisitions. Can you give us an indication of what size of acquisitions are you looking for? Are you looking for multiple small acquisitions or maybe just one larger acquisition?

I don't know how you define large or small, but I think somewhere I tell everybody I'm looking at somewhere about revenue-wise $100 million to $400 million. It is $300 million maybe. We don't look for bigger than our revenue. But we really don't want to look at look at (inaudible) [$20 million, $30 million]. That is too small. So if you want to look at it, it was somewhere around say $100 million to $200 million or $300 million.

Definitely sizable.

It is sizable. That is what we're looking for.

Got it. (inaudible) chip, Dr. Lu, that was -- you were able to get away with, I think, one time sales of probably even less than 1 times sales. I mean just looking at the analog portion of it.

You still remember that number. That's good.

Are evaluations in the market out there today comparable to where they were at that point, or do you think you might have to pay a little premium for that?

That was a good deal for Diodes. I'm not sure valuations are reflecting less of one times revenue. So there would definitely be a little bit of a premium paid.

It depends on the company. The reason we, in a chip, we are able to do that is don't forget that company, the past 12 months before we negotiated they actually [reduce the money]. Now after we take over we put a lot of effort, turn around the company, and making a profit. But before we take over the past 12 months of that company is actually negative.

We brought a lot of synergies to that company that they couldn't have gotten on their own.

So now depending on the company we buy, if that company is making profit then I don't think you can put that investment there [than] revenue to buy it. You need to probably pay higher. It depend on the company. If they're making more growth, they're making profit, more profit, (inaudible).

The key, again as Dr. Lu's statement, whatever we do it must be accretive to earnings within 12 months.

Yes, it needs to be that. So that requirement makes me a little bit tough to find the right target. Because we do have acquisition criteria. I think I mentioned -- I shared with you on those before. Those criteria met our acquisition tough, but we want to make sure it is really the best, best benefit for our shareholders. We will not -- you can rest easy. I'm not going to spend the money just for the acquisition. Just because we have money, so we want to acquisition. Let's spend it. I watch it to make sure it is accretive within 12 months.

In terms of your China facilities, specifically the one in Shanghai, if I remember correctly what about -- are you running out of physical space over there? Do you --?

You're right. But our landlord is going to build the next building next to our building, and even put a bridge between these two buildings. So you have a good memory.

That is all part of our CapEx too. As we need more space, we will go out and lease more building. And while we are ordering equipment they're building the building.

Remember when I say -- I said we (inaudible) after the floor is full, then we go to next floor. And virtually we already used the last floor. So now our landlord is already in agreement. We already have an agreement with them. (inaudible) is going to construct the next building, just next to one we have in Shanghai -- the one. And actually going to be much bigger. Right now I think we're talking about four (inaudible) floor and two extra sides. And then we're going to even build some bridge between these two buildings, so people can walk between the building without going off the floor.

For the decade we have been expanding over there, additional buildings, additional equipment has not been an issue. (multiple speakers).

Carl, in regards to the tax rate, I know that there is some plans under way to actually start raising taxes in China. But I think you have some benefits of tax holidays. Are there are any concerns about being able to maintain the current tax rates for the foreseeable future?

I think we indicated that we expect the 2008 tax rate to be in the mid teens, which is a little bit higher than our current 2007 tax rate. And I think our actual tax rate in the fourth quarter is like 10.2 or 10.8%. I may have said 11 when I was talking earlier. But overall we did put a little cushion in there that we do feel that there is some potential for greater taxes in China. That is a given. They are restructuring. We probably won't see the same type of tax holidays and benefits we have had in the past. However, we are doing tax planning initiatives worldwide, so we will do our best to keep that number as low as we can possibly do.

(multiple speakers) in 2008.

I'm sorry. Say that again, Dr. Lu.

I said in 2008 our tax holidays is not expiring.

It is grandfathered in as far as we know.

In regards to tax rate in Europe, I presume that would be -- that is significantly higher than what you have out in China, or maybe even in --?

Europe is definitely greater than Asia, the China tax rate in particular. I think you just need to take a look at the mid teen range, and you have known us for years, and that is always the most difficult one to forecast for us.

My final question was in regards to some of these integrated devices -- Mark, this may be for you. You had talked in the past about potentially introducing integrated, almost system and package kind of devices which include both analog and discrete devices on the same package. Can you give us an idea of what you current thoughts are as to when that starts happening, and what is a gross margin profile over there and --?

We do that regularly on the discrete side by mixing multiple technologies into certain packs and to create circuits. We have actually had recently had some opportunities to work in that with mixing up amps with discretes and various things. I think it is just -- the idea is just writing to mature at the customer. And we are seeing more an opportunity. We have integrated the units so now the discrete side is working closer with the analog side to work on these issues. I think that we will seek some more and more opportunities on that going forward as the year goes forward and as the time goes on.

They're very selective. You're basically looking for high-volume repeatable circuits. And convincing people in those areas to isolate themselves down to one vendor it sometimes takes a longer period. But we see a lot of opportunity in that area.

Christopher Longiaru, Sidoti & Co.

Congratulations on the quarter. When I wanted to just get some color on here is it seems like despite the guidance for the first quarter, sales are coming down. Your gross margins are staying the same. What that leads me to believe is that your analog business is becoming more than of an ingrained part of your business. Even though it is new business, it seems like as far as product mix, whether your sales go up or down, that is staying relatively consistent as a percentage of sales. Is that correct?

Since we don't separate, I don't know. We don't separate.

That is very logical. Our focus is on analog. We are saying comparable margins. We have improved our mix. We're putting more design and R&D into analog end products.

It could be a balance between the wafers being down and certain things being up too. It is a very complex -- our margin profile is very complex. So we have to work through it. And I would say that there is also good improvements in some of the discrete areas too. Some of the newer SPRs, small profile SPR devices are also adding to our margin profile. Obviously when we introduce a new product we're focusing on changing the margin profile of our productline. I think there's a lot of contributors to the consistent change.

What would be the difference between your average -- just talk about new product here -- between your average analog and average discrete component with respect to your gross margins? What is the difference in the sense of just basis points of gross margin?

I don't think we really want to isolate that. But your assumption can be that the analog gross margin will always be higher than the discrete margin. The problem with the discrete margin it might fall faster. In certain cases in small die stuff our margins on discrete could be much higher than a new product in analog. It depends on the ASPs. It depends on the package. It depends on the market. It depends on a lot of different things. I don't think -- really I think I would be misleading to try to -- I could mislead you by trying to profile that for you.

The only thing that really hasn't been asked was do give a share count, Carl?

Share is -- one second, we will do you the exact number. About 42.7 on a GAAP basis.

Due to time we only have time for one question. Kevin Cassidy, Thomas Weisel Partners.

Speaking of your acquisitions, are there any technologies in particular that you see as a hole in your product lineup that you might be considering?

No, remember I have mentioned that in our acquisition we are really looking for synergy. So as long as there is synergy, that is what I consider. And I'm not really particularly looking for one technology spot on the pie. We look at a company typically half discrete, have analog, because that is our productline. And (inaudible) that their product using our packaging capability. Those are very important because our value is in the packaging. So their product -- for majority of their product need to be able to utilize our packaging capability. And then helping the channel, helping the sales, those are the synergies. We take order synergy into consideration, and then try to make sure it is accretive within a year. That is our acquisition strategy.

I guess I can ask another question. You had mentioned strength in power supplies and adapters in Asia. Were those mostly due to your new products or was it just the strong market for the power supplies and adapters?

Definitely because of our new product. And this is a new segment for us. Really if you look at our segments we have always been relatively weak in the industrial area. The SBR productline really focuses -- it is a power product. We should see expansion over the coming years in our industrial product range based on our focus into our SPR productline. I can't -- our share or our numbers in those markets grew. I can't profess to what those markets -- we have a very small share in those products because these are newer products for us, or a newer focus for us. And so this is our expansion, and new revenue in those markets for us.

At this time I'm showing we have no further questions. I would now like to turn the call over to management for closing remarks.

Thank you everybody for participating in this conference call. We had a great 2007. And we believe 2008 is going to be another great year for us. We are committed and we want to focus on our execution, and get another outstanding year in 2008 for us.

And you know our target always 2X, more than 2X of market growth, and that is our challenge. We always accomplish that goal, the past several years. And we will continue using that as our target. And we believe we can [get] there. And thank you everybody to join the call.

We look forward to the same conference 90 days from now. Take care.

Ladies and gentlemen, thank you for your patience. You may now disconnect.