Diodes Inc (DIOD) 2009 Q2 法說會逐字稿

Good morning, and welcome to Diodes, Inc. second-quarter 2009 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 6, 2009. I would like to turn the call over to Ms. Leanne Sievers of Shelton Group, the investor relations agency for Diodes. Leanne, please go ahead.

Good morning, and welcome to Diodes' second-quarter 2009 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, Richard White; Senior Vice President of Sales and Marketing, Mark King; Vice President of Finance and Investor Relations, Carl Wertz.

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 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 represent management's estimates as of today, August 6, 2009. Diodes assumes no obligation to update these projections into the future, as market conditions may or may not change.

Additionally, the Company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 60 days in the investor relations section of Diodes' website at www.Diodes.com.

And now I will turn the call over to Diodes' President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.

Thank you, Leanne. Welcome, everyone, and thank you for joining us today. I am pleased to report Diodes' strong second-quarter financial results. Revenue exceeded our guidance and increased 33% sequentially to about $104 million. Demand and the order rate continued to improve throughout the quarter, as production was ramped on previous design wins at new customers, and the new products were introduced for new application at existing customers.

Revenue in Asia increased 42% from last quarter, as we increased market share at the current and existing customers for our products in LCD TVs, LCD panels, set-top box, mobile handsets and notebooks. Also during the quarter, our packaging output was (inaudible)limited. Therefore, we continually hired in people throughout the quarter to improve our (inaudible) at our packaging operations.

We (inaudible) solid margin growth during the quarter. Gross margin was 26.3% for the quarter, which is a 770 basis point improvement over the first-quarter gross margin of 18.6%. As the broader economic environment and the demand continue to strengthen, we expect our margins would improve further as the result of increased factory utilization in our wafer fab and packaging facilities.

Also notable in the quarter, we realized the full benefit of the cost saving initiatives that we began implementing late last year in response to the global economic environment. As a result, operating expenses were held effectively compared to first-quarter levels, which contributed to our achievement of profitability on a non-GAAP basis in the second quarter.

Due to the recent improvements in the economy and the significant improvement in the Company's performance, we canceled the temporary cost-reduction efforts, including forced vacation and salary reduction.

During the quarter our continued effort to reduce our capital expenditure, as well as our inventory levels, together with other efforts, resulted in positive cash flow from operations, positive free cash flow and positive net cash flow.

Capital expenditures were $5.1 million in the second quarter, remaining significantly below our 2008 quarterly run rate of approximately $13 million. Year-to-date, capital expenditures totaled approximately $9.6 million.

We also further improved our balance sheet during the quarter, including continued debt deduction resulting from an additional $15 million buyback of convertible senior notes for common stock. In total, we have repurchased approximately $71 million of our convertible senior notes so far.

Additionally, we further reduced inventories by $3 million over the first quarter and $19 million from the beginning of the year. Based on our current estimate, we believe those positive trends will continue into the third quarter, driven by further increase in demand and market share in Asia, as well as additional improvement in North America and a steady recovery in Europe.

We also expect further improvement in profitability driven by higher revenue and continued improvement in factory utilization, further generating positive GAAP earnings and cash flow in the third quarter.

I am very pleased with our company's results. I believe our decisive actions taken in response to the global market conditions combined with our continued focus on new product development and design wins has resulted in a stronger overall financial position and improved profitability for Diodes.

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

Thanks, Dr. Lu, and good morning, everyone. As Dr. Lu mentioned, revenue was $103.9 million, a 33% increase compared to the $78.1 million last quarter, and a 10.4% reduction from the $116 million reported in the second quarter of 2008. Our results exceeded expectations due to continued improvements in demand and order rates, primarily in Asia, as well as the further ramping of new design wins.

Gross profit for the second quarter of 2009 was $27.4 million or 26.3% of revenue compared to $14.5 million or 18.6% in the first quarter of 2009, and $39.6 million or 34.1% in the second quarter of 2008. As Dr. Lu mentioned, this represents a 770 basis point increase, primarily attributable to a significant improvement in utilization at our packaging operations. Our capacity utilization during the quarter was approximately 75%.

ASPs in the quarter were on average stable due to tightened capacity. We expect utilization in our packaging facilities to continue to improve in the third quarter to approximately 90%, and have room for continued improvement at our wafer fabs.

Selling, general and administrative expenses for the second quarter were approximately $15.2 million or 14.7% of revenue, which was a significant decrease on a percent of revenue basis from the $16.1 million or 20.6% of revenue in the first quarter.

Research and development expenses for the second quarter were $5.4 million or 5.2% of revenue, which was comparable on an absolute dollar basis to the $5.3 million or 6.8% of revenue in the first quarter. We plan to invest in R&D at similar levels while remaining conscious of market conditions.

Total operating expenses amounted to $21.5 million, which was within our expected range and comparable to the previous quarter, reflecting the completion of our cost-reduction initiatives. We expect the third-quarter operating expenses to be comparable to the second quarter on a percent of revenue basis. Total other expense amounted to $3.1 million for the second quarter.

Looking first at interest income and expense, we had $1.3 million of interest income, primarily related to our portfolio of auction rate securities, and interest expense of $1.9 million primarily related to our convertible senior notes stated rate and our loan for the acquisition of Zetex.

During the second quarter of 2009, we recorded a pretax non-cash amortization of debt discount of approximately $2.3 million in accordance with APB 14-1. As we stated last quarter, effective January 1, 2009, APB 14-1 requires us to separately account for a liability and equity component of our convertible notes, which reflects an estimated nonconvertible borrowing rate of 8.5%.

We expect this additional pretax amortization to amount to approximately $2.1 million per quarter, or $8 million to $9 million for the full year of 2009. In addition to interest income, interest expense, and amortization of debt discount, also included in the total $3.1 million other expense was a $1.5 million gain on forgiveness of debt, which was partially offset by $2 million in foreign exchange losses related to foreign currency contracts that were part of the Zetex acquisition.

Turning to income taxes, we recorded a net income tax expense of approximately $5.2 million for the second quarter, which includes $4.9 million of non-cash booked tax expense related to our first-quarter repatriation of $28.5 million in accumulated earnings from one of our Chinese subsidiaries. The non-cash income tax expense from the repatriation of accumulated earnings more than offset the tax benefit from our year-to-date GAAP net loss.

Looking at the remainder of 2009, and even though we expect continued improvement in net income before income taxes and noncontrolling interest, which we refer to as PBT, we expect income tax expense to be a relatively nominal amount of 0% to 4%. This is due to the fact that we have recorded in the first half of 2009 all of the non-cash tax expense related to the first-quarter repatriation of earnings.

In addition, our earnings in Asia are taxed at lower income tax rates, while our losses in the US generate a tax benefit at higher income tax rates which offset each other. For 2010, with the phasing out of the preferential tax rates at our Shanghai operations, we now expect our income tax rate to range between 15% to 25%.

Second-quarter GAAP net loss was $3 million or negative $0.07 per share, which included, among other items, the $4.9 million of non-cash income tax expense related to the repatriation of earnings that I just spoke about. Non-GAAP adjusted net income was $2.5 million or a positive $0.06 per share, which excluded net of tax non-cash interest expense related to the amortization of debt discount of $1.4 million, non-cash acquisition-related intangible asset amortization costs of $800,000, gain on forgiveness of debt of $1.3 million, non-cash income tax expense related to the repatriation of earnings of $4.9 million, and nominal amounts for restructuring recharges and a loss on the extinguishment of debt. We have included in our earnings release a reconciliation of GAAP net loss to adjusted net income, which provides additional details.

Cash flow for the second quarter amounted to $17.8 million from operations, $12.8 million of free cash flow, and $16.3 million of net cash flow. Year-to-date, cash flow from operations is $24.6 million, free cash flow is $15.2 million, and net cash flow is $6 million, including the repurchase for cash of $9.6 million par value convertible notes.

Turning to the balance sheet, at the end of the second quarter we had $429.3 million in cash and short-term investments, consisting of approximately $109.5 million in cash and $319.8 million in short-term investments. During the second quarter, $319.8 million of par value auction rate securities and the related no net cost loan of $211.9 million were reclassified as short-term investments and current liabilities respectively, because the auction rate securities can be put back to UBS at par on June 30, 2010 under the previously disclosed settlement.

Our working capital at quarter-end was approximately $323 million. Long-term debt, including the convertible senior notes which are redeemable in October 2011, was approximately $142 million.

Now, turning to inventory. At the end of the second quarter, inventory was approximately $80 million, which was a decrease of about $3 million from the first quarter and a $19 million decrease from the beginning of the year. These reductions highlight our successful initiative to materially reduce inventory levels. Inventory days were 96. Accounts receivable was $85.7 million. AR days improved from 82 in the first quarter to 67 days in the second quarter.

Capital expenditures were $5.1 million for the second quarter, which was below our original estimate of $6 million to $7 million for the quarter. CapEx year-to-date is $9.4 million. During the quarter, we invested in new equipment to balance our manufacturing lines due to a change in product mix towards more complex devices as a result of the ramp of our analog and Zetex products.

As we look toward the future, we expect our capital expenditures in the third quarter will be $8 million to $12 million. Depreciation and amortization expense for the second quarter was $11.8 million.

Turning to the outlook. Looking at the third quarter of 2009, as Dr. Lu stated, we expect our business will continue to grow and that we will have further financial improvements to the strong results we recognized in the second quarter. We estimate that third-quarter revenue will increase 10% to 15% sequentially. And gross margin is expected to be approximately 28% to 32%, as we continue to benefit from further improvements in factory utilization.

In terms of operating expenses, we rescinded the previous temporary cost reduction actions and expect operating expenses to be comparable to the second quarter on a percent of revenue basis. Our income tax expense is expected to be a relatively nominal amount of 0% to 4%.

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

Thank you, Rick, and good morning. As Dr. Lu and Rick mentioned, our strong second-quarter results reflected the continued increase in demand for our products utilizing LCD TVs, mobile handsets, set-top boxes and notebooks. Additionally, our continued focus on new product development and our high level of design win activities resulted in an increase in market share, specifically in Asia. We have seen strong gain in new customer penetration over the past two quarters in hall sensors and MOSFETs for mobile handsets, netbooks and notebooks.

As we stated approximately one year ago, it was our goal to further penetrate the cell phone market, and I am pleased to report that we have greatly expanded our content in cell phones over that time and are starting to see an impact on revenue. We continue to expect a high rate of adoption in the third quarter, resulting in further penetration of this high-growth market. We also saw expanded production in Q2 of new design wins for our SBR products over a broad base of applications and end equipment.

We continued our efforts to reposition worldwide channel inventory for future growth during the quarter. Inventory was down 5% in Q2 and 28% year to date. And we expect it to remain flat in third quarter.

Regarding pricing, ASPs were on average stable due to the tightened capacity, while average unit costs were down due to improved utilization. As mentioned previously, we significantly improved loading in our manufacturing facilities, which we expect will continue in the third quarter and further benefit margins.

In terms of segment breakout, Computing and Consumer each representing 32% of revenue, with Industrial at 18%, Communications 15% and Automotive 3%.

In regards to geographic breakout, Asia represented 77% of total revenue. Asia revenue increased 42% from the first quarter, driven by overall improvements in demand for notebooks, netbooks, panels, and market share gains in China, local branded LCD TVs and mobile phones.

After sharp declines in distributor inventory in the first quarter, inventory was flat, and POS roughly matched POP for the quarter. Distributor inventory is approximately 1 to 1.5 months and is expected to remain flat.

Design activity was strong and increased over the first quarter. In the third quarter, we expect to see continued growth in panel and LCD TVs, notebooks and netbooks, and China, local mobile phones.

In North America, sales represented 14% of total revenues, and increased 25% over the first quarter. OEM sales were up 7%, driven by solid gains in the lighting sector and increases in smart phone revenues driven by recent design wins. Distributor POS was higher than distributor POP in the quarter and inventory declined another 4%.

Industrial accounts, both direct and through the channel, remained relatively flat during the quarter as a result of the continued slowdown in the housing market. Design activity accelerated significantly in the second quarter, highlighted by 34 analog wins, one hall sensor, six LED drivers, four SBRs and 21 MOSFETs.

Sales in Europe accounted for 9% of revenues in the second quarter and decreased approximately 10% from the first quarter. Distributor sales were down 16%, as distributors continued to reduce inventory. Channel inventory decreased 20% quarter-over-quarter, and POS was up slightly. OEM sales remained flat over the previous quarter, but showed a positive trend going into the third quarter.

Direct sales to automotive customers recovered by 17% after a flat first quarter, while direct sales to consumer accounts again remained flat and sales to industrial customers continued to decline. Overall design activity increased significantly, with the value of new design wins more than doubling from the first quarter.

Although the third quarter is typically impacted by the summer holiday closures at many manufacturing sites, we expect improvements in the third quarter for our Consumer accounts in Europe and a more stabilized business with the automotive customers.

Now turning to New Products, New Products' revenue increased approximately $4 million from last quarter and represented 15.5% of sales, which was comparable to last quarter on a percent of revenue basis. Dollar increases were primarily due to increases in SBR products and discretes, particularly MOSFETs.

During the second quarter, we released 83 new products, consisting of 37 analog products across six device families, and 46 discretes, which included 30 MOSFETs, seven transistors and nine SBR devices. Our continued focus on new product development further broadened the range of devices introduced in the quarter. The 30 MOSFET devices were battery-packs, portables, commuting and LCD TV and backlighting applications. Our MOSFET business has continued to expand with new business being won through design-in opportunities.

Also during the quarter, we introduced a miniature precision current monitor, the market's smallest solution size for battery current measurement in portable applications. Packaged in a thin 4-pin DFN package, this current monitor supports system management function while extending active run times. The device helps reduce power and drain to prolong battery life and suits a broad range of battery cell configurations. Typical uses include battery charging, battery capacity measurement and overcurrent monitoring and applications, including PDA, mobile phones and smart phones.

Additionally, we extended our LED driver family with the introduction of a cost-effective and small form factor solution for small LCD screens used across a wide range of portable consumer electronics. This family of high-efficiency D.C.-to-D.C. boost white LED drivers is specifically designed for providing uniform LED backlighting to LCD screens measuring up to five inches. Targeted applications include personal navigation devices, digital photo frames, MP3 players, PDAs and digital cameras.

In terms of global design wins, in-process design activity was at a its highest level in recent quarters, with wins at 175 accounts globally, 90 wins at 68 customers in Asia, 94 wins at 52 customers in North America and 75 wins at 55 accounts in Europe. Design wins and in-process design activity were broad-based in both product and end equipment.

Our expanding MOSFET line was the most active, with key wins in mobile handsets and smart phones, notebook, netbook and automotive, with 32 active projects. SBR had 23 active projects, including a key solar power design win. Additionally, we had 20 new projects for lighting and 16 new projects for USB power switches, with several volume production orders placed on new wins from the first quarter.

In summary, I believe our continued focus on new product development and design-win activities during this tough economic environment has been a contributing factor to our strong results and growth during the quarter. Additionally, our decisive cost reduction efforts have allowed us to maintain expenses in order to improve profitability as revenue grows. We have also effectively capitalized on the operational and product synergies from our acquisition of Zetex that will continue to materialize in our future results.

Moving forward, we remain focused on further ramping new product design wins, while expanding market share at new and existing customers. I believe our proven business and product strategies will continue to produce profitable growth as the economy improves further.

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

(Operator Instructions) Gary Mobley, Noble Financial Group.

I'm going to ask a similar question than I asked on last conference call. I asked last time whether or not you guys can achieve gross margins in the 30% range on a peak utilization at $130 million a quarter in revenue. It appears as though you are trending above that line now. So I'm wondering now what your expectation is -- if you do get up to the $130 million per quarter level, what kind of gross margin we might see.

I think we gave the guidance on the third quarter, on and there, I think our midpoint of guidance is 30%. So you already can see from there, we should be able to hit 30% at the midpoint of what we give to you. But like I said, we -- our capacity is still not fully (inaudible) yet, at that level, at the third-quarter level.

And I need to be careful to separate from the main capacity to the economic capacity. Because every time when we talk about capacity, we more [difference] to economic capacity. But I think during the speech, I mentioned from main capacity point of view -- main power capacity point of view, we actually (inaudible). And the reason is reduced -- during the Chinese New Year, reduced almost 30% of people. And we are hiring the people back, but it takes time to train them, to make them to the production line and to (inaudible) more productive.

And when those is continually improved, then profit. Then productivity is getting better, then GPM can improve. So that will be continued improvement with GPM when our operators get more productive and when our (inaudible) continues to increase and when our economic utilization gets advanced. But that is only the (inaudible) side.

From the wafer side of the (inaudible), it is a little bit behind packaging. So we still have room for improvement, the (inaudible) improvement to give us more profit. So I think we should be able to get to the 35% our target when our (inaudible) continue grow.

I don't know when; I cannot give a prediction. But I am confident that if the loading continually improves, if the profitability continues to improve, if the wafer fab (inaudible) continues to improve, we should be able to --.

I do have a follow-on. What do you think you could have done in revenue if you weren't personnel-constrained in the second quarter, and will a shortage of personnel act as a throttle for your third quarter?

I really cannot give you that number, but I can tell you we actually turned down some of the business because we do not have enough main capacity to support all the demand. So we actually turned down some demand from (inaudible).

Thank you, guys.

(Multiple speakers) the third-quarter will continue to grow. The business still looking very promising, and we (inaudible) it will continue gaining the market share, and that is why we give the guidance on 10% to 15% in our growth. Even we grow [30%[ in the second quarter, we still strongly (inaudible) to be able to continue that growth path in third quarter.

Joe Wittine, Longbow Research.

First question is, Mark, you were walking through the European trends. It sounds like it is still mixed there, which is not surprising. Industrial a little bit weaker, automotive may be stabilizing a little bit.

So the question is (technical difficulty) your guidance (technical difficulty) up 10% to 10% sequentially, what does that assume for Europe? Is it a flat quarter? Is it another slight step-back maybe (multiple speakers)?

You know, we think we had a pretty bad second quarter, and basically, we decreased our distributor inventory by 20%. So we are projecting some slight -- we don't project the market to be up anything more than flat. But we expect some recovery in our numbers in the European market in Q3.

Okay. That's helpful. And then Mark, again, off of a comment that you made. You had mentioned there are some efficiencies from the Zetex acquisition yet to come. Just hoping you can give a little more color on those. Are they cost savings that are going to help operating expenses, or are they more synergies that are going to expand the top line, I guess, across more geographies?

You know, I think a little bit of both. I think we are putting more and more product of theirs into our factories, although we are quite full. So we are still -- we still have some benefits long-term to move product in. Of course, as we are full, we are not going to move out of subcontracters in order to put it in our facilities if we can't support it. So we have some opportunity there.

I think from a customer -- the ability to expand the customer base and the product mix and combining the product lines and selling them as one, I think is offering us a lot of advantage going forward also, for top-line growth.

So the way to think about that expansion is those will be more expanded into North America from a geographic perspective?

No, I think in every region. It is the same customers or new customers for Diodes or new customers for Zetex in all regions.

Thanks for that. Last question, and then I'll step out here. Rick, the guidance includes operating expense guidance. You guys got into flat on a percentage basis. Just curious, looking out longer-term, are there temporary cost savings that you guys enacted that will naturally start to kind of flow back as we look out a few quarters, or is the kind of a flat percentage of sales the most accurate way to model things right now? Thank you.

I think what you will find is that we've rescinded those temporary things like forced vacations and salary reductions, so of course those are going to flow back in. And as we increase the utilization, we will have additional people that needed to be added. So we see the percent of sales going forward, operating expenses as a present of sales going forward as being a pretty reasonable amount.

Thanks and congrats on a great quarter.

Steve Smigie, Raymond James.

I just wanted to follow up on that last question a little bit more. So say we look out to Q4, will there be another sort of -- let's just say revenue were flat in Q4. Would you see a bigger step-up still dollar-wise in the OpEx just as more of that stuff comes off, or pretty much everything got taken off starting Q3, so it would be sort of all in there already?

Steve, the key thing is we really give a guidance Q3, but I don't think we have a clear picture on Q4 yet. And we do not -- we hiring the people is -- when we say we hiring people, we more different to manufacturers, wafer fab and assembly.

Now for the expense, we start to expense some additional money to R&D, and that is what we said percentage (inaudible) instead of dollar (inaudible). Okay? But we are very careful. We are not going to go crazy until -- hiring until we see a clear picture. Our business model is -- as a percent to the revenue will keep flat. And therefore, if the revenue the most significant growth, we won't significantly increase the operation of course.

Okay, that's fair. I guess just in terms of the balance sheet, you guys are generating some cash flow. I would expect that to continue to improve. Do you use that to continue to pay down some debt as you have, or what is the use of cash there, and what do you see the balance sheet over the next -- well, a year really, as you come to the period a year out where you pay that stuff down? Just if you can give us an update on that.

Well, you know that month, I think that month we bought convertible bonds back using stock. And we are very careful on the cash. Yes, we generate cash, but we know in this environment, cash is king, so we are very careful.

So I probably would not using the cash we generate to buy stock (inaudible). We might -- I don't know, we don't know what will be happening. If the opportunity is right, we may buy back some convertible bonds (inaudible) use in either cash or stock. But it really just depends on what kind of our opportunities present to us.

But we do not really set a goal to buy the convertible bonds back using cash or using stock. We don't set that goal. Just if opportunity presents to us that's good, then we will take opportunity.

Okay. The last question is just on the revenue side. You saw a huge pickup here in Asia, and revenue overall in guidance is pretty big. Do you think in Q3 you are shipping back to demand and then you actually need to see meaningful demand pickup to keep things going?

I know you are capturing a lot of share, so that is additive, too. But how much have you caught up with demand, and how much do you actually see demand sort of picking up Q3 and going forward?

I think the Q3 growth is based on a pickup of demand, and I think we are relatively caught up with demand at an equal level. Clearly, our inventory level globally at the channel are very, very low at this point. As I think I mentioned, there were 1.1 to 1.5 months in Asia, which is actually quite lean. And so we decreased our inventory another 20% in Europe, and inventory was already low and decreased another 5% in the channel in the US.

So we are very careful where the product is going right now, and if it is going into the channel, it is going to customers that are going to take it immediately. So pretty much it is all pass-through at this point.

Great. Thank you.

You remember, we've mentioned even in second quarter, due to the main capacity limitations, we actually [trend] the inventory, too. So we continue trending inventory. We are not at the stage to really -- some have that much of inventory we can -- can be used. So now we 100% (inaudible) our output from our manufacturers. And fortunately, our manufacturers, the people we hiring during the April timeframe, are able to put it back to production now.

It took about two months to trending, to hiring the people. After we hired, it took about 2, 3 months to training them to put on the production lines. And so we now can (inaudible) ourselves instead of shipping some inventory.

Okay, thank you.

Tristan Gerra, Robert Baird.

Good morning. I know you don't have too much visibility yet beyond Q3, but what is your visibility beyond your normal three-month backlog timeline, and do you think there is a chance for lead times to further expand now that shipping is back in line with end demand, or do you think you could see some lead time expansion in Q3?

I think the industry is going to see some lead time expansion in Q3. The question is how long that lead time expansion will move into Q4. I think that we are seeing more and more people having issues on their deliveries, even as recent as last night. So I think that there will be some industry extended lead times in Q3, which should be positive on ASPs and the general trend.

Okay, and could you say what your utilization rates were front end, and what your expectation would be for Q3?

On the front end, we have to wait for fab. One is in Kansas City, one is in (inaudible) -- one is in [Gtech] in the UK. And we are in the second quarter -- in the second quarter, actually Gtech is quite low. So t is about 40% loaded, and in the (inaudible), it is almost about a little bit more than 50% of economic capacity point of view. Now, main capacity is higher, but from the economic capacity point of view, it is a bit better than 50%. And that is in second quarter.

And we look into the third quarter, then (inaudible) is the bulk average probably somewhere up to about 65% to 70%.

Great. That's very helpful. Thank you.

Harsh Kumar, Morgan Keegan.

First of all, congratulations. These are very good numbers, very good job of managing your business. I have a couple of questions. As you look into your business, there is obviously a tremendous build that is going on. Do your customers, when you talk to them, have any visibility into the actual end consumption, or are they going by a forecast? Any kind of color you could give us on that would be very helpful.

I would say that they are watching the end demand very closely. And I don't think anybody after what they went through in the fourth quarter and the first quarter is being overly aggressive with inventory. So I would say they are watching their ramp-ups quite tightly also.

So it is pretty tight all the way, very well controlled, it sounds like.

Even including the building materials for us (inaudible), we even need to (inaudible) our people to our vendors to get the part we want. So I think the tightening condition is not just one location. It is really across the whole (inaudible).

Good. And then Mark, maybe you can answer that. It sounds like there is a little bit of inventory replenishment left in Europe. But for most part, would you say that has played out; this is basically real demand? Is that a pretty fair statement?

Yes, I don't think that there is -- in our numbers so far, there has been zero inventory replenishment. There has actually been continued inventory decrease at the channel perspective. I think there is clearly opportunities later in the fourth quarter and the first quarter where we would want to restructure our inventory back to normal rates, or -- I don't think they will ever go back to the previous normal rates, because I think everybody is going to be more sensitive to cash in the next round.

But clearly, we don't want to operate at one month in Asia on inventory, when basically Asia is a pull environment. So we need to have more inventory in the channel in Asia. I think there may be even a little bit more decline in Europe over the next two quarters on inventory. And I believe that North America is right where it needs to be.

Got it. And then maybe another question for you, Mark. Consumer took off pretty strongly, very strongly. Is that what is driving September growth more so than Computing, or is it sort of, would you say, equally split?

I don't know. I think they are running the same. I think we probably had a little bit of extra netbook in Q2 and we probably had a little bit more cell phone in Q3 -- I mean in Q2. And the LCD TVs' growth really helped the Consumer section so they are balancing. But all of that is looking relatively strong as part of our guidance going into Q3.

Thanks, guys. Great quarter. Great guidance. I'll get back in the queue.

Vijay Rakesh, ThinkEquity.

Good quarter. Just trying to understand on the industrial side, how are things looking? Are you seeing any signs of life there in your geographies?

I think the power supply market is looking okay, and the fan market is looking okay in Asia. I think the -- I think it is pretty clear that the Industrial side in Europe is struggling. And then in North America -- I don't know, I think it is just kind of moving along flat. There is no real decline, but there is really no sign of any great increase in those areas.

Got it. And you just looking at (inaudible) the demand side here, look at the point of sales trends here in July/August now. How has that held up in the US, Europe and China?

I think in Asia, POP and POS are going to match. I think Europe, I think that they will probably pretty close to match, but the POP trend will be up, because they need the parts. And in US, I think we will see a slight uptick in both.

Lastly, when you look at the gross margin side, I know you mentioned the fab loading sites should have. But as Zetex picks up, shouldn't there be a product mix component also to the margin, the gross margin line? And shouldn't that help you kind of move above where your historical trend has been?

I think our (inaudible) model is we want to go to 35% GPM, and so --0. But don't forget our really (inaudible) model is profitable growth. We pay more attention to gross margin, gross -- dollar growth instead of gross margin percentage; we more pay attention to gross profit.

So if we can grow very fast, then we might sacrifice a little bit of either ASP or as a percent -- gross margin percent. And so I really don't want to put it and say our objective is to get to 35% (multiple speakers).

So right now, if we go 30 something percent, we are looking at 10% to 15% growth, we are going to continue driving the growth. In our (inaudible), when we grow, we improve the loading in SKE and improve the loading in our wafer fab. Then the profit automatic generated and coming out, then the gross margin will be automatic in there.

So I really don't sense that much effort just look at the percent. I really spend a lot of effort driving for the revenue. And when the Gtech and the new products come up, product mix will automatically help. When the Gtech orders get to the market, and we know Gtech products, they can give us a better gross margin. At the same time, when the new products coming up they generate more margin. And when those product mix give us the advantage, the margin will come up.

But I'm really driving more on the growth and get more and more revenue and that adds gross margin dollars --.

Sure. Okay, great. Good job, guys. Thanks.

John Vinh, Collins Stewart.

Congratulations on the quarter, guys. First of all, just a housekeeping question. Your OpEx side, was there any stock comp in the quarter?

In the past, we always put our stock option costs and take it away from GAAP. But Rick can tell me I am not allowed to do that. They don't want to do that. So that does not [pick] up. So actually, stock option cost is included in that number. It is not really picking up from non-GAAP basis.

I don't like it, but Rick is the boss here. He gets to tell me we cannot take it off.

So, John, to answer your question, there was -- in the second quarter of 2009, there was approximately $2.2 million of share grant expense, including RSUs and stock option expense. And the details of all of that will be in our Q, which I think we are getting ready to publish tomorrow or early Monday.

So if you want to back that out, you can use that number.

We have not done that in our adjusted net GAAP -- or adjusted income. If you look at the charts at the back of our earnings release, you can see exactly what we've backed out of operating expense, other income and the tax impact of those. And this share grant expense is not there.

Okay. Honestly, I want don't want to get too bogged down in this, but just can you just give us a quick reason why you are not reconciling that in your non-GAAP numbers, because most of your peers seem to kind of back that out?

He says the law allows us to do that.

(Multiple speakers) an SEC comment letter, and we were requested not to do that, specifically because it is a recurring expense. And so because it is recurring and has recurred several quarters and years, they do not believe that it is an adjustment necessary. So we agreed that we would not do that.

Okay. Fair enough.

So what you do is you can add those back up.

You could go to the Q and find the data and make any adjustments you feel are necessary.

That's right.

Fair enough. Just a follow-up question for Mark on channel inventory. To your point, channel inventories have come down substantially the last couple quarters. It seems like they are pretty lean, especially in Asia. Why would you not expect just to build a little bit of inventory into Q3 here as we head into kind of seasonal kind of period here? I would expect they would want to have a little bit more relative to the first half levels.

I think they are going to try to. It is our goal not to allow them to. We want to make sure that we service as many customers as we possibly can with the product that we have available. And we don't believe that there is enough product available for us to allow them to build inventory.

So yes, some of them will win. But our goal will be that we try to maximize -- we maximize the product for our customers and then position inventory at times where demand isn't quite as high.

Okay. Does that suggest that if you are successful doing that, that Q4 could be slightly up from Q3 levels if they don't build any into inventory?

Assuming that the quarter tracks on POS like we are projecting it to track, then that could be an outcome from that.

Okay. And then just to clarify, you talked about being labor constrained in Q2. Were you labor constrained in July?

Yes.

Okay.

Still today, still -- fully main capacity, fully limited -- it is limited. That is why even -- we said we talking about third-quarter 19%. We still have the demand more than what we can supply.

Okay, so you think that capacity constraint will go away by the end of the quarter?

Well, it depends on the market. The problem is nobody has a clear picture on what is going on -- going on in the second quarter. Nobody can tell what is going on in the third quarter or even fourth quarter. So we -- by guess, we hired in people, by estimating what will be in the fourth quarter.

And the time when you get to there, it is too late if you are wrong, because it takes about two months to three months to be able to put in production line. So I started hiring the people in April, and so those people started put it back to the line in June. But unfortunately is that in the April time frame, when I look forecast on third quarter, I really don't expect a 30 something percent growth in second quarter and another 10% to 15% growth in fourth quarter. Nobody really forecast that kind of growth -- 10% to 15% in third quarter.

And therefore, if you are asking me why do I don't hire enough people in April, so third quarter I should not be people limited. Well, I wish I have a crystal ball, but I am not -- not aggressive to hiring the people in April time frame.

Okay. Got it.

Last question for me on LCD TVs. That seemed to like it would be a big growth driver in Q2. How much of that was China domestic driven versus rest of the world, roughly?

To be honest, I don't have the --.

We cannot really tell. We go to our customer, say Samsung, [AWA], [Shemein] and those. And we really cannot distinguish where their (inaudible) go.

Got it. Thank you very much.

Brian Piccioni, BMO Capital Markets.

Thanks for taking my question. As you can imagine, most of the questions have probably been asked and answered by now, but I will give it a shot. You were talking earlier about capacity utilization, and it sounds like your sort of overall capacity utilization is going to be around 90% in the third quarter. We had some questions about that earlier.

What sort of capital expenses and this sort of thing are going to be required as you approach 100%, because obviously you can't buy one-tenth of a fab or something like that?

When we are talking about capacity, we are more talking about packaging capacity. When we say 90%, we're talking about packaging capacity. With the packaging capacity, you do (inaudible) 2 million, 3 million each time on a different package. So we are able to do that, and I think we keep our focus of $8 million to $12 million capital for third quarter.

So it doesn't look like there is any real need for major capital expenses at this for the foreseeable future anyway, right?

No, in the wafer fab. Wafer fab, we are okay.

Okay, super. And I think you've answered this about three or four different ways. But just to be sure, you had mentioned earlier that you had turned down some business in the quarter. You had also mentioned that the inventory at your customers is very, very low. Am I correct in saying that you are trying to manage very carefully to ensure that your customers are not over-ordering to offset concerns of shortages in the future?

Yes, I think that we have a pretty clear understanding that our customers are not double-ordering.

Because sometimes they pay extra money for dropship from our factory. So you know if they are building up an inventory, they won't do that. And we do have a customer say, I need it right away, overnight, and we say well, we you need to pay the dropship, they will. So you can see we know the customer is not really double-ordering.

And in the channel, we track the POS run rate versus the order run rate of the distributor by part number pretty closely. So we can see whether the distributor is just trying to blast up. So we watch it relatively closely. Some orders we would hope that they would double order so that we didn't have to (inaudible). But it is not working out that way.

That's great news because, of course, during inflection points in the industry, that has happened in the past. Thank you very much.

Yes, that's right. We have a lot of experience on that. We are in the semiconductor for a long time.

Thank you.

Steven Chin, UBS.

Thanks for taking my question. I wanted to revisit some of the comments about share gains earlier, especially in the handset market. Is that coming from new products, or is that enabled by new products that are proprietary to Diodes, or is that more commodity-oriented products where you're better able to ship products compared to your peers currently?

I think we've had some gains in proprietary product, and we've had continued expansion in our standard product. I wouldn't necessarily say all of them are commodity products. We don't really have a significant amount of commodity product in the cell phone since we don't target that part, but there is some that are differentiated or limited or vendor-based and so on, but we do have some proprietary in the cell phone area also.

You know in the past we're talking about -- about a year ago when we started to introduce hall sensor, we're talking about hall sensor going to be the (inaudible) into the cell phone business. So we are successfully, but using the hall sensor to get into the cell phone business, and now with that relationship we are able to extend the design wins on much more product of ours. And therefore, we have good growth in that area.

Related to that from a pricing perspective, is the stable ASP environment that you are seeing, is that for underlying sort of commodity-oriented products, or is that more of a blended ASP that you are referring to that includes potentially more proprietary products that are going into production currently?

We've seen actually, even in the second quarter and going into the third quarter, we've seen continued declines on some of the most commoditized devices in our area. And we've tended to back away from those devices and let that be taken. Now we are starting to see some of that pricing be attached to lack of delivery. So we are going to see some -- we are going to see where some changes could occur in that in the next month or so.

So there is still -- let's be clear we still live in a very competitive pricing environment, and most people aren't as full and most people are never as full as we try to keep ourselves. So, yes, there is still always pressure on price in our product line. But I think we will see pretty stable through Q3 and hopefully deep into Q4.

Great This last one, either for or Dr. Lu or for you, Mark. Just from an overall government stimulus spending or program impact, Dr. Lu I think last quarter you mentioned China stimulus programs for rebates for consumer products is having a big impact. But looking at more on the industrial side, is there much impact so far from infrastructure spending in China? And similarly for the US, whenever you think that comes into play how should we look at the impact in Q3, and more broadly the rest of this year?

I don't think from an infrastructure standpoint we could see a lot of impact or find a way to measure that impact. A lot of our product is high volume, lower-mix boards, medium volume, medium-mix boards, and infrastructure would be higher ticket item devices.

So I think -- we did see some benefits in China from some of the consumer electronic devices and so forth. I think most of those have run out, but the demand has remained. The demand for TVs and phones in China is quite good right now. But I don't think we can say anything from an infrastructure standpoint.

Okay.

But you can see a lot of our growth really is not just coming from the market environment growth. Our growth often is coming from new design wins, new customers, new applications we get into it. So we're certainly gaining the market share through all the design wins. If you remember, last several times Mark can always say how many design wins, design win activity looks very good. But I always ask him, where is the revenue. And now the revenue (inaudible), and I think this is where we see our growth, majority of our growth coming from.

So yes, China stimulus package helps, but the market is hot, but if you look at our growth relative to our comparative, we actually grow much more than our competitors.

If you remember 1Q, we only down 10% while everybody down much more, and this time on top of that we are up 33%. And now we are talking about 10% to 15% growth. Certainly we grow much faster then. And that is our business model. We want to grow 2X faster than our competitors, and that is our business model. And we're definitely going to go that direction.

Okay, great. That's very helpful. Good job in the quarter, guys.

(Operator Instructions) Ladies and gentlemen, that concludes the Q&A portion of the presentation. I would now like to turn the call back over to Dr. Lu.

Well, thank you for all your participation today. Thank you very much. I'll talk to you probably three months later. Operator, you may now disconnect.

Thank you, sir. Thank you, ladies and gentlemen, for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.