Diodes Inc (DIOD) 2008 Q2 法說會逐字稿

Good morning and welcome to the Diodes, Incorporated second-quarter 2008 financial results conference call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded today, Thursday, August 7, 2008. I would now like to turn the call over to Shelton Group, the Investor Relations agency for Diodes, Incorporated. Leanne, please go ahead.

Good morning and welcome to Diodes' second-quarter 2008 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 and make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today, and therefore we refer you to a more detailed discussion of the risks and uncertainties in the Company's filings with the Securities and Exchange Commission.

In addition, any projection as to the Company's future performance represents management's estimates as of today, August 7, 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.

I now will 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. I am pleased to report another strong quarter for Diodes in which we reported record revenue at the high end of our guidance range and a gross profit that increased 24% over the first quarter, exceeding the high end of our guidance.

As previously announced, our second-quarter results include one month of financial results from our June acquisition of Zetex. As we have stated previously, the acquisition of Zetex offers substantial synergies that we believe will further enhance Diodes' global leadership in discrete and analog semiconductor solutions.

We have been analyzing Zetex's basic model for several years prior to announcing the acquisition, so we are prepared to capture the synergies of the combined companies, which we expect to reunite over the next several quarters. To note, Zetex was accretive on an operational basis for the month of June.

In terms of timing, this acquisition occurred at the time of strength in Diodes' [deployment] and growth, and it will only enhance what we have accomplished today. As all of our shareholders know, we have consistently achieved growth rates that have exceeded those of the industry in addition to delivering profitable results quarter after quarter.

Although the overall market economy is weak, we believe that our continued growth will be complemented by the addition of Zetex to our business by enhancing Diodes' market position, expanding our product portfolio, and increasing exposure to the automotive and industrial markets, as well as broaden our presence in Europe.

Since closing in June, we have made significant progress in aligning and integrating the sales and distribution channels across all geographies, which Mark King will discuss with you in great detail. And although we will continue to analyze the cost, manufacturing, and operational synergies between our two companies in the coming quarters, our immediate focus is on capture of revenue and the gross synergies that are offered through this acquisition.

We have a very experienced management team that has a proven track record of quickly and effectively integrating companies for maximum return for our shareholders. And I look forward to reporting to you our progress in the coming quarters.

With that, I will turn the call over to Carl to discuss our second-quarter financial results in more detail.

Thanks, Dr. Lu. Good morning, everyone. As Dr. Lu mentioned, our second-quarter financials include one month of the results from the Zetex acquisition. Revenue for the second quarter was $116 million, which was at the high end of our increased guidance range, representing an increase of 21%, both sequentially and over the prior year period, and set an all-time record for the Company. New product sales account for 30% of revenue and does not include the one month of Zetex.

Gross profit for the second quarter of 2008 was $39.6 million, an improvement of 24% sequentially and 29% over the same period last year. Gross margin improved 70 basis points sequentially to 34.1% of revenue and 220 basis points from the year-ago quarter. Our gross profit results were above our increased guidance range and was driven by solid average selling prices, continued operational efficiencies, and improved product mix.

Selling, general, and administrative expenses for the quarter were $17.1 million, or 14.8% of revenue, which was an improvement from the first quarter on a percent of revenue basis. Absolute dollar increases were primarily due to Zetex operations. Included in the second-quarter SG&A was $1.1 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. Looking at the third quarter and with a full quarter of Zetex results, we expect SG&A to range between 15% and 15.5% of revenues.

Research and development investment in the quarter was $5 million, or 4.3% of revenue. The increase as a percentage of revenue reflects Zetex's greater focus on wafer process technology, as well as their depth of engineering resources, as we have stated previously. Looking at the third quarter, we believe that the R&D will be approximately 5% to 5.5% of revenue as Zetex is fully factored into our quarterly results.

Other expense amounted to approximately $900,000 for the quarter, consisting of $2.6 million of interest income, primarily related to our auction-rate security investments, offset by $1.9 million of interest expense, primarily related to our convertible bonds and a non-cash loss of $1.5 million related to a foreign currency hedge required by the Zetex acquisition.

Although the hedge was an expense related to the Zetex acquisition purchase price, US GAAP does not permit this hedge to be booked in the purchase price accounting. Thus, the P&L loss is recorded. However, even when considering the one-time charge, our operational performance was strong enough to cover the hedge loss. Net other expense in the third quarter is expected to range between $2 million to $2.8 million.

Our effective income tax rate in the second quarter was 16.8%, which was slightly higher than our expected range due to the earnings contribution from Zetex. For the full year of 2008, we expect the tax rate to range between 16% and 17%, which takes into consideration Zetex combined with our operations in lower tax jurisdictions, as well as our preferential tax treatment in Asia.

Adjusted net income was $15 million, or $0.35 per share. Fully-diluted shares used to calculate adjusted earnings per share were 43.4 million shares. For the third quarter, we expect the fully-diluted share count for GAAP earnings to be 43 million to 43.4 million shares. Adjusted net income for the second quarter excludes $1.2 million of non-cash stock option expense, as well as the one-time non-cash hedge loss related to the Zetex acquisition.

Cash flow from operations for the quarter was $13 million and $23 million year-to-date.

Turning to the balance sheet, as of June 30, we had $86 million in cash and short-term investments, with $197 million in working capital. Long-term debt, including the convertible bonds and the loan related to the Zetex acquisition, was $400 million.

As discussed last quarter, we had $320 million invested in auction-rate securities as part of our cash management program. The securities are currently valued using a third-party valuation methodology and are classified on our balance sheet as a noncurrent long-term investment in the amount of $295 million.

We review impairments in accordance with FAS 115, as well as related guidance issued by FASB and SEC, in order to determine the classification of impairment as temporary or other-than-temporary. In evaluating the ARS portfolio, we classified the 8% decline in value as temporary, and recorded unrealized loss in our other comprehensive loss on the balance sheet.

As we have stated previously, we consider the liquidity issue to be temporary and currently intend to hold these securities until a recovery of the auction process. We believe our cash flow should be sufficient for all our operational requirements. We will continue to monitor the auction-rate market and evaluate the securities at each quarter end to determine the valuation required.

Inventory increased during the second quarter to $102 million, primarily as a result of the $30 million of Zetex inventory acquired. Without Zetex, inventory days increased slightly to 91 from 88 last quarter.

Accounts receivable increased to $112 million, with the inclusion of $18 million acquired from Zetex. Without Zetex, AR days improved from 82 to 80.

Capital expenditures were $12 million for the quarter and $26 million year-to-date. The majority of the investment was for manufacturing equipment in China, as well as a $5 million land purchase for our Dallas headquarters. Going forward, as part of our wafer fab review plan, approximately $6.5 million of capital is authorized for Zetex to expand its 6-inch line, and we are also qualifying their 4-inch bipolar process and our 6-inch line at Diodes' FabTech in order to increase capacity and reduce costs. For the year, we continue to expect to invest 10% to 12% of our revenues in CapEx.

Depreciation for the quarter was $9 million and $16.5 million for the year.

Turning to our outlook, as we look to the third quarter of '08, we expect revenue to increase to between $134 million and $142 million. Included in the total revenue guidance is expectation of approximately $27 million to $33 million of revenue associated with the Zetex acquisition. Additionally, we expect the overall gross profit to grow 13% to 20% from the second quarter.

Because of the one-month contribution of the acquisition of Zetex in the second quarter, we are providing a more detailed guidance for the third quarter only. The table is included in the earnings release. Any future guidance will not include the same level of detail or break out Zetex's results, since its operations will become an integrated part of our business.

We are in the process of obtaining third-party evaluations as per FAS 141 for many of Zetex's assets and liabilities acquired, and as such, the fair market value adjustments and the corresponding depreciation and amortization expenses are not provided in today's guidance. These purchase accounting rules should have no impact on the ongoing free cash flow of Diodes, but will affect US GAAP gross margin and net income in the future periods.

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

Thank you, Carl, and good morning. As Dr. Lu mentioned, we made significant progress during the quarter in aligning and integrating the sales and distribution channels across all geographies. Our marketing units have been combined and consolidated and we are in the process of consolidating our rep organization and cross-training on both product lines.

And although the distribution channel and integration requirements vary with each region, we have taken the appropriate steps to fortify many areas of the business in order to quickly combine our two organizations into one cohesive operation.

From an overall business perspective, I believe that Zetex's infrastructure combined with its process, knowledge, strong applications team, and solid technology will greatly benefit our Company. Additionally, Zetex brings analog and applications-centric exposure in categories where Diodes does not currently participate in areas of power management and LED lighting. With limited portfolio overlap, we believe in the coming quarters we will be able to fully capitalize on the established sales organizations, cross-selling synergies and expanded product offerings provided by the combined companies.

Since Zetex was only one month of revenue, let me begin the discussion with a segment breakout for Diodes only. Computing represented 37% of our revenue; consumer 34%; communications 15%; industrial 12%; and automotive 2%. In terms of segment breakout, we expect with the Zetex impact an increase in the industrial and automotive segments, which will add more balance to our industry distribution.

Let's move on to new products. During the second quarter, we released 53 new products, including six analog, 13 discrete, 2 hall, 22 MOSFET, and 10 SBR devices. As Carl mentioned, new products accounted for 30% of revenue.

Our new product revenue was driven by our continued expansion of our MOSFET product offering, and particularly our newly released MOSFETs used for load switches, DC to DC switching, and inverter applications for notebook PC, GPS, digital camera, inverter, and DC fans.

Additionally during the quarter, we released a custom array product for an automotive keyless entry system and a custom 3-amp SBR ZFN device that is being used in a DC-to-DC converter for ultrathin LCD TVs. Both of these products resulted in design wins in the quarter.

Also during the quarter, we released our first SBR product in our patent-pending TO-220S package, and further expanded our Omni-Polar Hall sensor line with our 0.4 mm slim-bodied package targeting cell phones and portable devices.

In terms of overall design activity, it was another strong quarter, with broad-based design wins across all regions at over 100 accounts globally. Design win and in-process design activities were highlighted by AP2280 load switch wins in digital camera and digital picture frame, Omni-Polar Hall Sensor wins in cell phone and multiple notebook platforms, including our recently announced AH1822, LDO wins for our AP7217 and DVD read/write and our AP7173 in set-top box.

We won our first two design wins in a recently announced SBR product for a solar panel application, as well as in a notebook platform. And multiple MOSFET wins in portable GPS, Bluetooth headsets, notebook computers, and battery packs.

In regards to geographic breakout, Asia sales increased approximately 10% over the prior quarter and represented 80% of total revenue. After a weak first quarter, we experienced a seasonal recovery in the computer and consumer industry, specifically in [enquipments] of notebook, set-top box, LCD TV and DC fans, coupled with improvements and increased demand in our subcontract packaging business.

OEM sales were up 16%, while distributor point-of-purchase was down 3% and distributor point of sales was up 7% over the first quarter. Distributor inventory was down in the quarter.

In terms of design activity in Asia, we had a strong quarter with 128 design wins and 57 customers, including 38 wins in analog, 47 in SBR, and 43 in discrete.

Now turning to North America, discrete and analog sales remained flat compared to the prior quarter and represented 15% of total sales. Direct sales were up slightly due to continued strength in set-top box and small increases in the industrial market. Distributor point-of-purchase decreased 1%, and distributor inventory was up slightly. Distributors continued to have a very conservative outlook on the economy. Distributor point of sale was down 4% sequentially.

In total, we achieved 59 design wins in North America during the quarter, had 18 customers. 12 of these were for analog, 4 discrete, and 3 in SBR. In terms of wafer sales, we were off 6% in the second quarter.

Sales in Europe were down 12% over the record first quarter as European demand softened and in total accounted for 5% of revenues. Distributor point of sales decreased 3% in the quarter. Our design win momentum in Europe continued to expand in the second quarter with 36 wins at 31 accounts, including 31 discrete and five analog design wins. Specifically, our high-powered SBR products received strong interest from the European customer base, and we believe these products have the potential to become a major contributor for our future growth in this region.

Zetex worldwide sales performance trended positively in the quarter, with strong design win momentum. Regarding the Zetex integration efforts, we have consolidated the combined sales organizations globally. In North America, we realigned the rep network and trained 80% of them. We have also added the Zetex line into Arrow and Avnet, who has signed and placed initial stocking quarters. This is a major step for the Zetex product line, as it really expands the product reach. We estimate that better than 60% of the North American distributor serviceable market for semiconductors goes through Arrow and Avnet.

In Europe, combining resources of the direct sales teams supplemented by the rep organization in the outer regions has greatly expanded the reach of the combined companies. Moving forward, we will be combining the lines in the distributor network by moving Zetex's line into Avnet and Rutronik, and Diodes' product into some strong regional distributors. We expect to complete the remaining consolidation by the beginning of the fourth quarter. In Asia, Zetex has the least distributor overlap with Diodes, so we expect to consolidate the channel over the next three to six months.

In summary, we believe Diodes is taking all the right steps towards becoming a global leading provider of complete analog and discrete solutions, and the acquisition of Zetex is an important component of that process. We continue to execute on our growth objectives and we are well-positioned to accelerate our growth through the extensive synergies at the combined company. Our primary focus in the coming quarters will be on expanding sales while capitalizing on the cost savings and other operational synergies provided through this acquisition.

With that, we will open the floor to questions.

(OPERATOR INSTRUCTIONS) Shawn Harrison, Longbow Research.

Good morning. Just a number of modeling questions first off. Carl, I missed the CapEx in the quarter.

It was $4 million.

Okay. And then getting back to the operating expenses, what do you expect options expense to be in the third quarter?

Hang on for one second.

Then just kind of following on that, what should we see in terms of operating expense dollars move, kind of going forward, as you take cost out of the Zetex model?

The -- SG&A expense, op expense --

Yes.

We expect to range between 15% and 15.5%. Then the R&D percent also is 5% to 5.5%.

And options are included in that 15% to 15.5% -- or stock-based compensation, excuse me, correct?

Correct.

And how much would you expect that to be?

Probably similar to this quarter. Maybe slightly more.

Okay. And I guess looking at the operating expenses of 15% to 15.5% of sales, slightly greater than I expected and probably most street models had included. So how should we expect that to trend over time on both a dollar and a percentage basis?

Okay, this is Dr. Lu. Let me answer. The reason we acquired Zetex is we know they have a very good results over there. Their engineering is very strong and they are very good in their resources. So our plan is not really trim down or deduce the R&D and SG&A. Okay?

Our strategy is very simple. We want to be grow the revenue either by cross-selling, by bringing in each other's product line. By our past history, we are able to grow CAGR above 20% a year if the market is decent. Now, we don't know what will be the market next year, but assume the market is reasonable, then we should be able to grow above 20% CAGR.

So if you look at -- if we grow the [rate] menu by 20%, let's say, just as an assumption, okay -- then our SG&A are currently 8. But we forecast third quarter 15% to 15.5%. It's probably very reasonable if you said, no increase the headcount, no increase the expense. But just that's the [rate] will grow 20%. Then you can very reasonably thinking this should be go back to our model or even better than our model.

And if you look at R&D, we use the same approach. We should be able to drop now 20%. Because if the revenue grows 20%, okay? So then you go back to our old models. So today, our model, by adding Zetex, which we all knew at the beginning from when we purchased this company, we know their R&D is very high and their SG&A is high. But consolidated, two companies together, give us 12 months of the growth. I think we should be able to bring that model back to Diodes' old models.

Okay. So the key takeaway is you think you can deliver substantial revenue upside with essentially the same cost structure at Zetex?

That is what I say.

Okay. Then just --

If the market is reasonable. We really don't know what will be the market next year. But if the market is reasonable, then we should be able to do it.

Okay. Just a quick follow-up. The Zetex revenue contribution in the second quarter, was that about $12 million?

We don't separate it, but we give the guidance on -- end of that -- based last quarter, we said 10% to 13% -- I'm sorry, $10 million to $13 million. So you can pick somewhere there.

Okay. Then Mark, maybe just a little bit of commentary on what you are seeing in the legacy business as we move into the third quarter. Distribution seems like it is weak in a few geographies for you, but what maybe you are seeing by end market.

Yes, I think we are seeing pretty much everything in what everybody else is seeing out there. It is a pretty short -- short-term market. North America is remaining relatively flat. Europe is softening somewhat. Asia is in a growth pattern in the third quarter, but maybe not as robust as it has been in previous years. So I think it is a pretty -- quite cautious in all market areas.

But by our past history, our growth is not just coming on the market growth. Our growth should be more than the market growth. And so by looking at the number we turn in, we focus -- the revenue growth 15% to 22%. Yet some of that was due to one month -- to one quarter of the Zetex numbers. But it still can be an organic growth, too.

Okay, thank you very much, and congratulations on closing the acquisition.

Ramesh Misra, Collins Stewart.

Good morning, gentlemen. My first question was in regards to the gross margin improvement sequentially of 70 basis points. Since this is the last time that you will be talking a little more about Zetex separately, can you give us a sense of how much of that was organic and how much was Zetex contribution?

Right now, we really do not separate, and it would be difficult for us to separate from the future because we are going to sell each other and we start to quantify Zetex products to our SKE side, and then we transport the product from -- some of the wafer capability from Zetex fab to our Kansas fab, at the same time we are expanding Zetex six-inch line.

We have a lot of working between the Diodes and Zetex working together. For example, they have people now from Zetex today is in our Kansas City helping us to transform some of their 4-inch byproducts technology into our fab. And so I really don't like to separate. We are back to treating as one company, and we help each other to improve the gross margin, bringing their product to our assembly site and bringing their 4-inch line that, some of their products to our FabTech. (Inaudible) 6-inch line, maybe we'll bring some of our 6-inch product to their line.

We have a lot of things going, try to make into one company instead of two separate companies. So I really don't like to -- don't prefer to separate the gross margin differently from one company to the other.

All I can say is the total margin from -- we are very comparable to each other, okay? We are comparable to each other. Their ASP is higher, but unfortunately, their manufacturing cost is higher. And our ASP is lower, but our manufacturing cost is lower. So I think the gross margin is not that far away from each other. Therefore, it is not a meaningful for me to separate those two.

All right. That makes sense. Dr. Lu, as you bring in some of the manufacturing efficiencies and operating efficiencies that Diodes has developed, do you expect a meaningful improvement on the margin side at the former Zetex operation?

Yes, there will be, but don't forget this kind of thing won't be quickly resolved, okay? Especially their market is in industrial and automotive. Their customers typically do not want to change their sourcing quickly. They are more slowly to adapt force in change.

So we are not really counting on that portion. We really count on is this. Cross-selling the new product to each other gets the growth -- (inaudible) growth quickly such that you load in the fab. And when you load in the fab, you bring the cost down. I'm more looking at that direction instead of just taking their product from their (inaudible) to our SKE, do this, move their fab load into FabTech's load. And that is not what I am looking at, especially from short-term point of view. Okay?

Short-term is growth the revenue as fast as we can -- are hoping -- if we can grow to 20% or more, then R&D as a percent will go down. SG&A as a percent will go down to our (inaudible) models, at the same time the loading in their fab will be increased and the loading in our fab will be increased, too. And that will help so much, and that is the synergy I've been talking about.

Okay, got it. Then a final question, in terms of, again, Zetex's revenue in the month of June, and your expectation of it in the September quarter. It seems that that number will be going down, and I wanted to get an understanding of that. Is that because Europe slows down in the September quarter or are there other factors?

Well, I will put it -- it's two factors. One is yes, the third quarter, typically July and August is very slow months. And the (inaudible) we start to pick it up in September. But another reason is they are very uneven. Typically, when you run your semiconductor, the [rating] is not coming out evenly. You have April, May typically will be slow. And then June, end of quarter, you pick it up strong.

And that's always the case, because even your customers the same way. They don't ship in (inaudible). So just by taking one month, June, yes, in Zetex is much bigger than their three-month average. But that is just that. It is not really their business is up or down so much.

I see.

I hope I answered your question.

Yes, that does. So I will stop there and let others get on. Thank you.

Steve Smigie, Raymond James.

Thank you. Just as a follow-on to that last call, so what might the Zetex revenue look like as we enter the December quarter? Is that --?

Well, I don't -- we don't look at the forecast on the fourth quarter right now. (Inaudible) to get in the third quarter is, so I'm sorry. We don't really give the guidance on the fourth quarter, but you know --.

Steve, it is going to take us a little time to learn their cycles and learn the consistency of the things and the way their distributors work and so forth. So I just don't think we have that nailed down yet.

Yes, because they are more in -- they are very strong in Europe. You know, Europe cycle is different from Asia cycles. We're typically very strong in the third quarter from Diodes' point of view, but they are a little bit weak in the third quarter.

Okay, so it is not inconceivable to think that you could potentially have a stronger fourth quarter out of Zetex than in the third quarter?

We are certainly hoping we'll get some synergies from the cross-selling and so forth going into the fourth quarter and into next year. So we hope to have had an opportunity to build some momentum. But remember, we kind of closed this deal right in the middle of summer. So in some of the excitement, it's like, okay, we are trying to get people together and so forth, but there's a vacation season and everything else.

So we think we can really be rolling and all over the customers starting the beginning of September in, say, the European market and so forth. But we have done an enormous amount of work to be prepared to make that happen.

Right. Was there any currency impact, translating euros generated over back to dollars, or anything that might have made Zetex's revenue look lower in terms of what you are maybe projecting for Q3 or anything like that, or is it --?

Steve, I don't think there's anything significant in the currency other than the hedge loss that we talked about (multiple speakers). One time where we had a -- hedged the whole 160 some odd million dollars, and the dollar strengthened against the British pound.

This hedge for purchase to Zetex is really something we cannot really prevent. When we buy that Zetex, we announced we are going to pay certain dollar, US dollars. So we announced in US dollars. Unfortunately, UK government said you need to put all the money in the pound. Okay? And -- at the time when you announced acquisition.

So we needed to go ahead, hedge at that time. One way or the other, even you know the exchange rate are going to be changing one (inaudible), you just need to convert into pounds. So when we do acquisition, we are returning pounds to pounds.

Unfortunately, US GAAP said, well, if you converted at that time but you don't really give them the money at the time of close, then whatever the exchange rate (inaudible), it's on your P&L. It is not in the (inaudible). So for us, you can say we buy cheaper in US dollars, but in pounds, we're buying the same. And that's cheaper versus the original announced dollar is showing to our P&L.

And that is what we are talking about the hedge loss, which is not really impact to us from the operation point of view. We expect to spend X dollars for it and that's the X dollars.

Okay. Just looking at the other expense line, $2 million to $2.8 million. Just curious, if I take your convert and multiply that through and your interest income from the ARS, that other expense line for Q3 looks somewhat higher than I might expect. I am just curious if there is just some one-time thing in there? Is that sort of the level we would expect roughly to run through our models going forward?

The key thing is the expense for borrow the money from UBS to purchase Zetex. That never really happened. That doesn't happen until June 9 or something, when we closed it. So if you look at it now, we pay in three months of the interest payment to UBS for borrowing the money to purchase Zetex.

Okay. At some point, I guess, if you are -- the auction and rate market starts up, and you should pay that off of cash, the rates would go back down, then?

Yes, immediately. Exactly. Whenever we get some additional cash, we will try to pay off. So either from operations or (inaudible) off or if we get them -- and we did -- from the ARS, we will pay it off immediately.

Okay. I'll let somebody else have questions. Thank you.

Vijay Rakesh, (inaudible).

Dr. Lu, just going back to your questions on better margins with -- trying to get better margins with your fab absorption at Zetex, how do you see your gross margins going forward as you start to get more leverage out of Zetex?

I think from a gross margin percent improvement point of view, it will be gradual. It won't be a big increase in a very short period of time. If you look at our expense on the [Interchip] integration, it takes about -- more than one year. I still remember we acquired Interchip in January 2006. The real impact of major show up is in September, in the third quarter of 2007 and fourth quarter of 2008. Those two quarters to show the major impact. Okay?

And the Zetex will be the similar way, maybe even take longer, because like I said, their customer won't be quickly changing that much. But the one we really want to get all the synergy is like I mentioned, we want to be aggressively growing the revenue by cross-selling, by bringing the product to all the different distributors -- their distributors use our products; our distributor using their products. And (inaudible) in Asia for their products, (inaudible) Europe for our products. We have a lot of cross-selling activity going to be happen.

From there, you are going to be -- since you are holding R&D and SG&A, correct -- then you are going to significantly reduce -- improve the bottom line. And that is what -- we committed, it will be accretive within 12 months. We today is already showing June, we will tell you, is accretive from operational. And we are accretive from operational actually in the third quarter. Okay? But with the expense of paying those interests. But we are going to be, we think 12 months, we should be able to generate bottom-line savings to pay for it.

And Dr. Lu, on your core business, Diodes business and the Zetex business, as you look at your guidance here for the second half, how is that visibility and what does your backlog look like for your and Zetex businesses --?

I think Mark can answer it.

I think our backlog is probably around our traditional. It's pretty much level to the same it was in the second quarter. There's still a lot of turns businesses that had to occur. I think we went into the quarter about 60% loaded.

Now, their backlog is a little stronger than the Diodes' -- traditionally stronger than the Diodes' because they have had traditionally longer lead times. But I think we are pretty much right where we always are.

Got it. Okay. And here as you look at your -- the ASPs within the two segments, within the two -- Diodes and Zetex, for the quarter, and as you look out -- pretty flattish or what do you see?

Actually, you are going to see a big shock to the ASP next quarter because their ASPs are quite a bit higher than our ASPs, but their units are much lower. So we'll probably have to retrack it.

If you look at the Diodes ASPs, they were down pretty consistently and traditionally in the second quarter. But with that one month, our overall ASPs were up about 8%. So we're going to have to kind of readjust the whole ASP situation when we get a full quarter in.

Okay. And then last question here on the tax rate. It looks like it creeped up a little bit. Is that just Europe or what's happening there?

Well, yes, because all that Zetex revenue or their profits, it's 100%, 100% through Europe tax rate. And that's why it bring our average up.

Now, we are working now, but it will take a while to try to get the products (inaudible) shift in all this one. But today, 100% of their profits all through Europe and European tax rate.

So should it be the 16.5% range for the next couple of quarters, 17% virtually?

I think you are right. You should use that, yes. Until we start to have some actions to (inaudible).

Okay, thanks.

Kevin Rottinghaus, Cleveland Research.

This is Dennis Reed for Kevin. Just wanted to dig in a little bit on the pricing environment. You had mentioned kind of the core pricing were down at a traditional level and you got a boost from the Zetex acquisition. If you look at your competitors, how have they behaved on a pricing side?

I think we always live in a very competitive price environment, and I think if you look at this environment, it is probably as competitive as it gets. I think there's significant amount of price pressure. Nothing that we have never experienced before and so forth. But obviously, when the demand is less than traditional in a period, people are going to be more aggressive. So in our product lines, we see the competitors positioning themselves aggressively.

Okay. Looking at the Zetex ASPs, what type of cost savings could you drive by moving some of their outsourced assembly and test into your facilities?

I think I mentioned it. Savings will be good. By doing their (inaudible) -- assembly packaging from their (inaudible) to our assembly side, savings would be good. But we -- like I mentioned, it's not just move it and then go. Because Zetex capital base is very, very restricted of this sourcing change. And nobody likes -- all our customers don't like us change, because saving money for us instead of good for them, right?

So my plan is not just pulling out and putting our assembly side and then saving the money. That is not really the plan. Our plan is qualify their product in our own SKE, and then add those products to the new customers, not existing Zetex customers. It's a new customer or a Diodes' customer who has the confidence on our packaging side. You know, most of our customers already can afford us from our SKE side. They show confidence on our packaging side. So we are going to be selling them the Zetex product using our own packaging side to our customers. And that is when you are going to see the savings instead of their Zetex customers who really don't familiar with our SKE side.

And that is where we are -- but again, our synergy is going to be quickly accomplished by cross-sell, by bringing up the revenue as fast as we can, holding the (inaudible), which is R&D and SG&A, as a constant dollar instead of percent, holding at a constant dollars. Then you're going to see a much greater flowthrough from TPM-9 to [PFO9].

Okay. Sorry to jump around. In terms of the cell phone market, I think you mentioned another couple of design wins in that market. Could you provide any color, I guess, in terms of what percent of revenue it has become and where you ultimately see it going?

Well, how about that Mark can answer this.

Traditionally, the cell phone marketplace has been really negligible in our overall number, and I think we are still in that level. We are seeing more and more -- we are winning more and more design wins with our Hall product. We see some more opportunities with some of our analog products. The Zetex product line and some of their current monitors, there's some opportunity. And we are starting to do more work in discrete.

So I think it can become more significant for us going forward, but at the present time it is not. The timing of that depends on markets and other things, so I don't really want to get too much into when we can see it much different at this point.

Okay. Then just one last one for me. If you look out at your customer base, whether distributor or direct, just any thoughts or commentary on kind of inventory in the supply chain?

Frankly, our customers, for our products, I can say that they are not overinventoried. They keep very low inventory. And I can't say the overall chain, but our distributor inventory for Diodes' products is quite clean.

The pressure is overall inventory in those distributors, and so that puts pressure on us. Because it is not that they're not buying Diodes' products; they're just not buying anything, okay? And basically, they are trying to -- they are all focusing on cash and keeping things in cash rather than inventory. So until I think that the sentiment changes a little bit about the direction, I think we are going to be up against that from a distributor standpoint on a POP basis.

Now I think from the OEM side, I think they are very cautious with inventory also. Really, we have never experienced an inventory problem at our customer base on our product line. But I think that their buying cycles are shorter now, and they are being more conservative about planning long-term.

All right. Thank you very much.

Steve Smigie, Raymond James.

Thank you. Just as a follow-up, could you say how much of Zetex's revenue is outsourced to the subcons versus done in-house?

I would probably say 60% is outsourcing and 40% is produced themselves. And then when we said produced themselves, they have two sites. One is the (inaudible) -- in Chengdu, which they only own one third. But then they 100% own is in new house in East Germany. So that is about that.

Okay. Then I know the major part of your plan, it sounds like, is not to move that stuff in-house because customers don't like that. But is there any of that 60% outsourced that you'll be able to move over to your packaging and stuff in Shanghai?

Long time.

Take a long time?

Yes. Like I said, our objective is not really aggressive move those into our own assemblies. Our objective is qualify the parts, which we are doing right now; sell to our own Diodes' customers, Diodes existing customers, new opportunity, new customer. And that is really our objective.

Okay. Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back to Dr. Keh-Shew Lu for closing remarks.

Thank you for your participation today. We appreciate your time and also consideration, and I see you three months from now. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.