Diodes Inc (DIOD) 2009 Q3 法說會逐字稿

Good afternoon and welcome to Diodes, Incorporated third 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 beg recorded today, Monday, November 2, 2009. I would now like to turn the call over to Leanne Sievers of Shelton Group, the Investor Relations agency for Diodes, Incorporated. Leanne, please go ahead.

Good afternoon and welcome to Diodes' third quarter 2009 earnings conference call. I'm Leanne Sievers, Executive Vice President of Shelton Diodes Investor Relations firm. With us today are Diodes President and CEO, Dr. Keh-Shew Lu who is joining us from Taiwan; Chief Financial Officer Rick White; Senior Vice President of Sales and Marketing Mark King; and 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 projection as to the Company's future performance represent management's estimates as of today, November 2, 2009. Diodes assumes no obligation to update these projections in 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 and GAAP and non-GAAP terms. Included in the Company's earnings release is a reconciliation of GAAP net income to non-GAAP adjusted net income which provides additional details.

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. 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. The third quarter marked a significant milestone for Diodes as we return to GAAP profitability. While we have been profitable from an GAAP earning point of view, we are pleased with those results. For the quarter, revenue increased about 18%, and gross profit increased 37% sequentially. Revenue grew across all geographies with Europe increasing the highest of almost 30% sequentially. Other revenue exceeded the high end of our guidance due to customers in Asia that advanced fourth quarter orders into the third quarter, in preparation for the one-week National Holiday shut-down in China, which began October 1. As I discussed last quarter, we have been actively hiring at our packaging facility as well as increase capacity utilization, and as a result (Inaudible - Highly Accented) by the end of third quarter. Gross margin was 30.8% which is up 450 basis point improvement over the second quarter. Utilization also improved at our two wafer fab during the quarter. But they are not yet fully utilized. Realizing further utilization improvements at our wafer fab should provide opportunity for up side in gross margin in the coming quarters.

In regard to other key financial results, EBITDA has been fairly increasing throughout the year. And we have now returned to our previous $20 million per quarter run rate. In fact, the third quarter EBITDA was up 29% from the second quarter and up 10% from third quarter a year ago. In terms of capital expenditures, we invest approximately $6 million in our manufacturing facilities during the quarter. With the recent improvement in our business, we will resume our more normalized range of CapEx between 10% to 12% of the revenue. Primarily due to [procurement] lead time and our initial forecast of demand and seasonally higher quarter of 2010. Also, notable during the third quarter, we achieved approximately $19 million cash flow from operations, $16 million from free cash flow and $17 million net cash flow.

We also continue to strengthen our balance sheet during the quarter, further reducing debts throughout the repurchasing of approximately $20 million of our Convertible Senior Notes in exchange for Common Stock. In total, we have repurchased approximately $91 million of our Convertible Senior Notes. The achievement realized during the third quarter is a direct result of our disciplined operational management and solid execution of our new product strategies during the economic downturn which properly position the Company to benefit from the recent economic improvement, from the low point in the business cycle in the first quarter, we have grown revenue by almost 60% and increased gross margin by 1200 basis points as a result we have reached historical highs, in many product areas, in particular, our analog business. Over the last several quarters, we have been focused our cash preservation but are now turning to our profitable growth model which has been proven successful for Diodes over many years.

For the first quarter, we are pleased with the growth perspective as our outlook represents higher sequential revenue growth than our normal seasonal expectation, even when considering the advanced shipments back to customers during the third quarter. Our fourth quarter revenue guidance represents an increase of nearly 50% over the fourth quarter of 2008. Additionally, we expect further improvement in gross margin as utilization at our wafer fab increase.

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

Thanks, Dr. Lu. And good afternoon, everyone. Revenue was $122.1 million, an 18% increase compared to the $103.9 million last quarter, and only 9% below the $134 million reported in the third quarter of 2008. Gross profit for the third quarter of 2009, was $37.6 million or 30.8% of revenue compared to $27.4 million or 26.3% in the second quarter of 2009, and $38.1 million or 28.4% in the third quarter of 2008. As Dr. Lu mentioned this represents a 450-basis-point sequential increase primarily attributable to our packaging facilities being fully utilized by the end of the quarter, as well as the continued improvements in utilization at our wafer fabs. We expect further improvements in utilization at our wafer fab facilities which will have a positive impact on the fourth quarter.

ASPs were down 4.7% sequentially during the quarter, primarily due to product mix. Selling, general, and administrative expenses for the third quarter were approximately $19.1 million or 15.6% of revenue compared to $15.2 million or 14.7% of revenue last quarter. The increase in SG&A expenses was primarily due to increased employee related expenses due to the cancellation of our temporary salary reductions, increased sales commissions, increased equity compensation expenses, and additional global ERP costs. Investment in research and development for the third quarter was $6.3 million or 5.1% of revenue, which was comparable on a percent of revenue basis to the $5.4 million or 5.2% of revenue in the second quarter. We plan to continue to invest in R&D at similar levels going forward to support our future product initiatives in alignment with our growth. Total operating expenses amounted to $26.3 million, or 21.6% of revenue, comparable to the 20.7% last quarter. We expect the fourth quarter operating expenses to be comparable to the third quarter on a percent of revenue basis.

Total other expenses amounted to $4 million for the third quarter. Looking first at interest income and expense, we had $800,000 of interest income, primarily related to our portfolio of auction-rate securities and interest expense of $1.8 million primarily related to our Convertible Senior Notes and our loan for the acquisition of Zetex. During the third quarter 2009, we recorded a pre-tax non-cash amortization of debt discount of approximately $2 million in accordance with FASB ASC 470-20, which was formerly known as APB 14-1. As stated previously, effective January 1, 2009, this pronouncement requires us to separately account for a liability and equity component of our Convertible Senior Notes. We expect this additional pre-tax amortization expense to be approximately $2 million per quarter or 7 to $8 million for the full year. Also included in the total $4 million of other expense was $1.4 million in foreign exchange losses, primarily related to foreign currency contracts that were part of the Zetex acquisition.

Turning to income taxes, our income tax benefit was approximately $600,000. This is primarily due to the fact that our earnings in Asia are taxed at lower income tax rates while losses in the US generate a tax benefit at higher income tax rates. Income taxes for the third quarter have been included in the financial statements on the basis of actual year to date effective income tax rate. Looking at the fourth quarter, we expect income tax to be a relatively nominal amount.

Third quarter GAAP net income was $7 million, or $0.16 per diluted share as compared to a net loss of $3 million or negative $0.07 per share last quarter. As a result of generating positive GAAP net income this quarter, 44 million fully diluted shares were used to compute GAAP earnings per share, compared to 41.6 million basic shares used in the second quarter. The diluted share count in the third quarter includes approximately 1 million shares issued for the recent repurchases of Convertible Senior Notes. Non-GAAP adjusted net income was $9 million, or $0.21 per diluted share, which excluded net of tax $1.2 million of non-cash interest expense related to the amortization of debt discount on the Convertible Senior Notes, $900,000 of non-cash acquisition related intangible amortization costs, and nominal amounts for restructuring charges and a loss on the extinguishment of debt. We have included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income which provides additional details. Included in GAAP and non-GAAP adjusted net income was approximately $1.8 million net of tax, non-cash share-based compensation expense. Excluding this expense, both GAAP and non-GAAP adjusted diluted EPS would have increased by an additional $0.04 per share. Cash flow for the third quarter amounted to $19.4 million from operations, $15.9 million free cash flow, and $16.6 million net cash flow. For the nine months year to date, cash flow from operations was $44 million, free cash flow was $31 million, and net cash flow was $22.6 million.

Turning to the balance sheet, at the end of the third quarter, we had $438 million in cash and short-term investments, consisting of approximately $126 million in cash and $312 million in short-term investments of par value auction-rate securities, which can be put back to UBS AG at par on June 30, 2010, under the previously disclosed settlement, net of the related current liability, no net cost loan of $204 million. Our working capital at quarter end was approximately $342 million and long-term debt including the Convertible Senior Notes which are redeemable in October 2011 was approximately $127 million.

Now turning to inventory at the end of the third quarter, inventory was $82.9 million, which was an increase of approximately $3 million over the second quarter, due to an increase in raw materials, which was partially offset by decreases in both finished goods and whip due to the strong revenue performance. Inventory days were 87. Accounts receivable was $101.7 million, and AR days were 69. Capital expenditures were approximately $6.3 million for the third quarter and $15.8 million year to date. On the cash flow statement to be included in the 10-Q, the $6.3 million CapEx is broken down into $3.6 million paid in cash, and the balance of $2.7 million is included in accounts payable.

Moving forward we will resume our more normalized range of between 10 and 12% of revenues due to equipment lead times and our preliminary forecast of demand growth in the seasonally higher quarters next year. Depreciation and amortization expense for the third quarter was $12.1 million and $35.1 million year to date. Turning to our outlook, looking to the fourth quarter of 2009, as Dr. Lu mentioned, we expect revenue to continue to grow sequentially and range between $126 million and $130 million. Additionally, we expect further improvements in utilization at our wafer fab facilities with fourth quarter gross margin expected to range between 31% and 33%. Operating expenses are anticipated to remain comparable to third quarter levels on a percent of revenue basis, and we also continue to expect our income tax expense for the fourth quarter to be a relatively nominal amount.

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 afternoon. As Dr. Lu mentioned, we achieved another solid quarter of revenue growth as we executed our new product strategy initiatives. Our increase in revenue was driven by strong demand for our products utilizing LCD and LED televisions, LCD panels, set-top box, mobile handsets and notebook. In particular, we achieved significant gains in MOSFETs, SBR devices, bipolar transistors, LED drivers and USB power switches. Additionally, our continued focus on new product development and product line expansion further strengthened our customer position as an analog supplier with analog revenue reaching an all-time high and surpassing the prior high posted in the third quarter of 2008. We also achieved sequential revenue growth across all geographies and we're particularly pleased with our expansion in China as we continue to focus on this region as key growth initiative.

Also during the quarter, we released new products at record levels and in-process design activity remained high, which I will discuss in greater detail in a moment. In terms of our end market breakout, computing and consumer each represented 32% of revenue with industrial at 18%, communications 15%, and automotive 3%. In regards to geographic breakout, Asia represented 78% of total revenues growing 18% sequentially, led by continued improvements in strong demand for notebooks, mobile phones, panels, LCD TVs, as well as power supply and D.C. fans. Distributor point of purchase grew in support of continued gains in point of sale and slightly exceeded POS. Distributor inventory increased 4% from historic low levels and ended the quarter at 1.4 months. Design activity remains strong in the quarter and included 11 different design wins for our USB switches utilized in notebooks, set-top boxes, and LCD TVs.

As previously mentioned, we are pleased with our continued revenue growth and account development progress in the China market. Increasing market share in China is a key strategic initiative for Diodes as we consider the China market a major growth driver for our business. In North America, sales represented 13% of total revenues, and increased 7% over the second quarter. Earlier design wins for SmartPhones continued to contribute to revenue during the quarter. OEM sales were up 23% driven by consumer audio and a recovery at a number of our set-top box manufacturers. Distributor POS was higher than distributor POP in the quarter, and inventory declined another 3%. Our backlog was strong moving into the fourth quarter. Design activity in North America also remains strong across entire product line highlighted by 30 analog wins, one haul sensor, four LED drivers, two SBRs, and 23 MOSFETs.

Sales in Europe accounted for 9% of revenue in the third quarter and increased approximately 27% from a soft second quarter. OEM sales were up sequentially led by automotive customers which increased 23% over the second quarter. Consumer accounts also grew in the quarter while sales to industrial customers continued to decline. Distributor POP increased as distributors responded to 10% increase in POS and a strong backlog going into fourth quarter. POS exceeded POP by 16%, while distributor inventory increased 11% off historic lows. Overall design-in activity once again increased significantly with the value of new design wins doubling for the second consecutive quarter. As a result, we expect further improvements in the fourth quarter.

Now turning to new products, new product revenue increased another 4 million from last quarter and represented 16.5% of sales as compared to 15.5 last quarter. The improvement was primarily due to increases in LED drivers, haul sensors, SBR devices and bipolar transistor products. During the third quarter, we released 179 new products consisting of 87 analog products across five device families and 92 discrete consisting of 15 MOSFETs, 35 bipolar devices, 12 SBRs and 8 application specific multichip devices for range of power supply, portable consumer, and lighting applications. Our progress with the Zetex LED driver product family was particularly strong with revenues increasing over 45% and revenue growth from new LED production exceeding 55%. Large gains were also achieved in our haul sensor product line of which 60% of the revenue in this segment was from new products. We also had strong growth in power management, standard linear and USB power switches. The adoption rate for USB power switches and LCD TVs, set-top boxes and notebooks continues to increase which provides Diodes additional growth opportunities as we rapidly expand our USB product portfolio. Also during the quarter, progress on our SBR devices continued with new product revenue growing 38% sequentially. We have strong momentum in Asia with significant design wins and volume growth as our technology leadership has led to market share gains in the power supply market. Additionally, our bipolar transistor new product revenue grew 27% with the latest Zetex proprietary Gen 5 bipolar process platform generating revenues in voice over IP, LED driving and mobile phone applications.

In terms of our MOSFETs product line, revenue grew 35% in new product revenue increased 13%. Growth was driven by specific target design wins for mobile phones, notebooks, and industrial accounts. With the significant momentum we achieved in our MOSFETs line over the past few quarters, we are on track to deliver record revenue in this segment for the fourth quarter. In terms of global design wins, in-process design activity remained at high levels with wins at 171 accounts globally, 93 wins and 72 customers in Asia, 85 wins at 57 customers in North America, and 82 wins at 42 accounts in Europe. Design wins and in-process design activity were broad-based in both product and equipment. Design activity was highest in USB switches, LED drivers, and low drop-out regulators on the analog side, and MOSFETs, bipolar transistors and SBR on the discrete side. New projects for customer specific multichip discrete devices were also high in the quarter.

One other point I would like to make before opening the call to questions. As I have stated in the past, our 2008 acquisition of Zetex has provided Diodes enhanced scale, expanded product offering, and additional capabilities for both product and technology innovation. With the recent improvements we believe that we will begin to realize the full financial benefits of this acquisition in the coming quarters as we further strengthen our position at customers and gain additional market share. Zetex's bipolar process technology for industry leading transistors and MOSFETs coupled with Diodes' packaging technology and competitive cost structure has allowed us to expand our discrete stand by almost 25% since the acquisition. The expanded customer exposure that is available to us from the combination of this industry leading technology and Diodes' global sales and customer footprint is just beginning to be exploited and presents significant growth opportunities for Diodes. With that, I'll open the floor to questions. Operator?

(Operator Instructions). Your first question comes from the line of John Vinh with Collins Stewart. Please go ahead.

Good afternoon. Congratulations on the quarter. First question I had was, on the gross margin side, why aren't we seeing maybe a little bit more gross margin up side there? If you look at your original guidance of top line 10 to 15% growth, your gross margin was 28 to 32%. You obviously up ticked that during the quarter to 13 to 17%, maintained gross margins, then ultimately top line revenues came in at the high end, actually slightly above that and you're kind of slightly above the midpoint. I would expect that you would have had slightly higher gross margins maybe coming in closer to the higher end, maybe slightly above. That wondering if you could comment on that, please.

Well, original guidance, if you look at the midpoint, is 30%. And we now actually 30.8%. Here are a couple of the reasons. One is is our back end is loading up quite a bit, and almost full now, and actually we reached the full capacity utilization in September month. So it went up from in July to September faster than what we expected. And number two is, due to our fab. Okay, our fab recover -- fab is not easy to recover as fast as the back end. We hired the people, and training took a little bit longer, and the ramp-up is slower. So our fab especially -- they are not ramping up -- actually, they ramp up a little better than what I expected. So our [GPM] percent is better -- 18 basis points better than we expected. Some minor one, we -- ASP declaration, and it's a little better than what we expected, because due to the capacity shortage. So all those give us 30.8%. Look at our guidance for fourth quarter. We actually guide furnishings look at midpoint that will be about 32%, which is, again, (Inaudible) from the wafer fab loading, helping us.

Okay. I appreciate that. And then on peak margins, obviously peak margins historically have been in the mid 30% range, given that your front end utilization rates are seeing some meaningful improvements the next couple quarters. How soon could we be back to kind of those peak gross margin run rates at this point?

Well, we don't really give the guidance further than fourth quarter, and we say 32%. I believe with the continued recovery, we'll continue to improve, and continuing to improve, then depend on next year's business we really don't know. And if next year the business recover quite well, especially our (Inaudible) business, our fab, fab tech, still -- business, we don't like. That we try to convert it, but still today, depend on our partners and depend on how they recover. It's very difficult for us to guess.

I see. Okay. Then on the -- can you help us understand what the magnitude of these pull-ins are? Also, were there any sort of key end markets where you saw more of these pull-ins, or were they broad based? Hoping you could shed a little more color on that.

Our pull-in, every year, typically, the Chinese National Holiday is always October 1, so every year and this year the pull-in than the past is because our customers he' inventory is quite low. They are due to the capacity constraint. Our customers' inventory is particularly low, so they're all asking to us give them more than for the first week of their production. But again, we are constrained by our output, so we help them as much as our back end can deliver, and so I would say probably a couple million somewhere there.

Got it.

More than our expectation.

I see. Thank you very much.

Your next question comes from the line of Harsh Kumar of Morgan Keegan.

Congratulations. Very good numbers. I also had a couple of questions on your margins. Dr. Lu, could you tell us about what your long-term goal, again, for gross margins is going out? And in this recent quarter, did you get any benefit from mix, per say?

Okay. Our long-term -- I can family size we really want to focus on GPM dollars instead of GPM%. We want to focus on gross profit instead of gross margin. And the reason is, our company's vision is profitable growth. We family size growth, and what we want is profitable growth. I believe if I can get the top nine growth 20%, our GPM dollars, gross profit, 20%. And the growth GPM dollar 20% is much easier and the benefit to both our customers and us better than just -- gross margin, or gross margin up and therefore I really do not really set a goal of continuing increase gross margin up and up and up. That's not the company focus.

Got it.

Company focus. So that, and actually the (Inaudible) -- I think in the markets, our ASP actually decreased a little bit, but it's due to the product mix. Okay. So our -- it depend on which one growth, which one not. Our ASP is affected by quarter mix.

Got it.

4%, right?

Okay. And that was very helpful, Dr. Lu. Let me ask a question on what you're seeing. Looking into December, a lot of companies have guided flat. You're guiding for growth. Of your four or five markets what are you most excited about for December? Is it computing or consumer or one of the other ones?

I think computing is not in the mix, I feel -- we feel very strong in the LCD, the LCD TV, LED TV, and those areas. So consumer area is still quite exciting fours.

Okay. That's also helpful. And then last question, it's a little bit tough, because I'm trying to reach a little bit into March, Dr. Lu. Chinese New Year is in the second week of February. I guess question for Dr. Lu and Mark, do you feel like it's going to impact the March seasonality to be a little bit worse than normal?

Well, that's really seasonality. For our business, normal cycles. First quarter of 2010, it will be back to normal cyclical.

Congratulations. Very good numbers. Very good execution.

Thank you.

Your next question comes from the line of Steven Smigie with Raymond James.

I will add my congratulations on the numbers as well.

Thank you.

I was hoping you could talk a little bit about where your inventory is in the channel in terms of weeks. I know you guys certainly don't provide the exact numbers, but if you could give us some color it sounded like you put a little bit more into the channel, but you also said you were coming off record lows. So are your weeks of inventory in the channel half of what they normally are, or something like that? Just to get some sense of that.

Well, I think in the Mark's speech he gives to the POS versus POP, you can see in Asia POP is more than POS inventory up about 4%, and the US is actually going down, and Europe is -- anyway, but if you look at those numbers compared with our growth, third quarter we actually grow 17%. So those inventory compare with the revenue level I would say actually going down, okay. As a percent. -- that's why we say because the inventory is very low level, historically low level, up from the historical level. But very, and if you look at -- to our revenue, revenue growth 17%, so better inventory continuing growth. Then from that percentage point of view, it's not high.

Steven to give you a little perspective, the inventory in the channel is down just under 30% for the year. So it's still down very significantly.

Okay. Could you talk a little bit more about SG&A expense here, particularly sequentially it looks like it had add decent jump. Sounds like maybe it's sort of some temporary stuff coming back on line, but then you also guided to have OpEx same percentage-wise, and normally you guys talk about having OpEx grow less than revenue growth. So I was hoping you could talk a little bit about that.

Okay. There's a couple of key elements. Number one, number one, 1Q and second quarter, we have allowed temporary cost reduction efforts. For example, we have, and we have reduction, and we stop all the bonus accrual, and all this one. So we have, due to the business, we're in the negative profit, we have allowed the action we've taken, and to start from third quarter, for example, our -- we just don't feel if the company turning to profit you are going to continue asking employees to take the salary deductions. So we stop the salary deductions in third quarter, okay. And we start to accrue some employee bonus, okay. So those are the key. And we need to continue that. And that's why, go to the first quarter will be the same. Did I answer your question? Hello?

Hello.

Your next question comes from the line of Ramesh Misra with Brigantine Advisors.

Dr. Lu, I know going forward you probably don't want to break out Zetex as part of your operations but with the industry coming back to a more normalized range, can you give us a sense of how Zetex did? Are we back to pre-acquisition revenue run rate? And do you see Zetex actually contributing to gross margin growth going forward?

Okay. Number one, we really -- very difficult now to separate Zetex from Diodes' operation, because we consolidated together. Right now, our analog is consolidated together, the and probably a year ago, and then this week we consolidated last quarter. So it's very difficult now for us to look at Zetex and Diodes different, because a lot of time we take a Zetex product, package it and sell it, so very difficult to distinguish from a Diodes product. So very difficult. But I can tell you Zetex, even our Diodes business, we are not back to the highest point yet. We're about 9%, the higher, higher this quarter. I think our highest quarter is third quarter last year, and we -- third quarter this year we are about 9% below our highest quarter. So we almost recover but not fully recover yet. And Zetex is relatively slower than Diodes recovery. So you can, from here, you can guess, Zetex recovery is not as fast as Diodes recovery.

That helps, Dr. Lu. In regards to your fab, the silicon fab production right now, can you give us a rough sense of from a wafer standpoint how much is external and how much is internal currently?

In the past, it's 50/50. Now it's internal, more than external, because our internal recovery faster than our external. Rick, do you have that number?

I would say it's about 65 to 70% internal now.

Okay. And that's in the fab test. Now Zetex is 100% internal.

Right.

Zetex is 100% internal. The reason Zetex is a little bit slower to recover is because we shut down -- I don't know if you remember or not -- we actually shut down the -- last year, first quarter last year, and we shut down four-inch. We transferred that to the six-inch. So we put the six-inch, and that's -- build up the capacity. Gradually build up utilization. So Zetex currently is about -- Zetex in the third quarter is about 50% loaded, and the fab tech is about 70% loaded in third quarter, and for the first quarter, Zetex probably increased to 75%, and -- probably increased 85%.

Okay, great. And then, Mark, this is in regards to your automotive business. I think you said it was around 3% of sales. Now, especially based upon comments out of European automotive that business has kind of rebounded and trending upwards. So I wanted to get a sense where, do you see automotive as a percentage of your revenue going forward, and is there a tangible lag in your Zetex automotive business versus the rest of the industry?

Actually, as I said, we did have good improvements in the quarter, although we don't look at the jut look quite as positively. I think there's still a little bit of uncertainty in the automotive market predominantly in Europe. And I don't foresee that I can forecast the growth in our automotive numbers, because we have so many opportunities in our other end equipments to grow the Zetex line faster that I think the growth rate in the automotive section will be slower than some of the other segments. So it will be hard to keep up actually.

Okay. Is there any real difference in gross margins in auto versus others?

Not really. On the Zetex line, they're pretty consistent. Depending on products on the Diodes side, there may be some, but think automotive is pretty close.

Okay.

To the same.

Thanks very much, gentlemen.

Your next question comes from the line of Shawn Harrison with Longbow Research.

Good evening and good morning. Just looking ahead in terms of the March quarter, more operating expenses, given that you've had bonuses and other items come back during the September quarter, will there be another step-up in operating expenses to begin 2010 that we should look for, or do you expect it, getting back to an early question, just to see it grow continually steady in line with sales throughout 2010?

I don't think so. Right now, back to the normal. 1Q, 2Q, for us it's not a normalized. (Inaudible) try to cost save -and improve the performance. And I think next year we will continue our growth and we should be back to normal. When you go back to the growth, you can easier to maintain your gross margin -- GPM and SG&A as a percent, of operation expense, as a percent of revenue. If your revenue can continue to grow. So we will try to get -- that's why I said in my speech, I tell everybody now, we are going to our growth. Last year at this time we said this outlook, we're going to the cash growth, positive cash flow, so we're very careful, our cash expenditure, and our capital expenditure, we are very careful, but aside from this quarter actually for CapEx, for the next year, we start to go into back to the profitable growth, and when we go back to the profit of growth the most, we will try to put in the capital, put in the capacity to support our growth, and then if revenue can grow, then your operation expense as a percent of revenue should be easy to control.

Okay. So there shouldn't be a one-time step-up for higher bonus or something like that, or stock-based compensation. We should just kind of expect back to normal.

Well, it will be our third quarter, fourth quarter especially, you be go back to our fourth quarter run rate. If our revenue go down or reduce our bonus accrual, if the revenue going up, the profit going up will increase, so we'll go back to this normal performance.

Okay. My second question has to do with ASPs. Maybe if you could just help clarify something. With ASPs down 4% but sales in Europe up strongly, I thought typically Europe is maybe -- or can be beater margin business, maybe if could you compare and contrast ASPs are down, maybe a little bit less than you expected, but Europe is up so strong I would expect that to help out ASPs a little bit.

Well, Mark, can you answer this one?

Yes. I think it all has to do with the -- the ASPs all to have do with mix. We didn't -- we were very firm on price throughout the third quarter in all regions, okay, and Europe being up 27, remember, it only represents, what did I say,9% of sales. So I don't think that could have the impact. Actually, we were quite happy the way the prices progressed during the quarter. We were pretty firm. There may have been a little ASP move in Europe. Maybe a little bit of ASP move in North America, but there was almost no ASP move in Asia. So really, I think it's mix, and the growth may be just -- we grew in areas that were a little lower in ASP.

Okay. And then --

That's the reason our GPM can better than -- expected, is because our ASP really performed better than our expectation.

And then kind of a final question, based upon those ASP trends, my guess is given that there's a lot of capacity constraints in the industry that's aiding ASPs right now, do you think your capacity constraints will be fixed exiting this fiscal year, and does that mean that you could see a little bit more price aggression just in the market in general in early 2010 as other manufacturers also fix their capacity constraints?

Well, very difficult for us to see, okay, and we -- in semiconductor business, you always expect ASP declaration, you just need to be -- you just need to improve the productivity, improve the (Inaudible) -- everywhere to take care of that and so your gross profit will be continue to improve due to the (Inaudible) so that's normal life. We are not really (Inaudible) we are semiconductor business. ASP [deterioration] is life, always.

But just to confirm you believe your capacity constraint should be fixed here in the fourth quarter on the back end?

On the back end, we are 100% fully realized on the -- fully utilized on the back end. But we start to authorize the CapEx, okay, so we start to put -- next year the revenue -- sorry, the business will start to turn, growth will be coming, then we start to put -- we will start to put in the capital equipment authorization now and get ready for next year growth.

Okay.

May not be first quarter, but after the first quarter.

Okay. Thank you very much, and congratulations, everyone.

Thank you.

Your next question comes from the line of Stephen Chin with UBS.

Good morning, Dr. Lu. Dr. Lu, first, a question for you in terms of China. I guess looking at the growth expectations that you're pursuing out there, how does that change the nature of your business either from an OpEx position in terms of the headcount that you may need to hire to help pursue opportunities from a sales perspective, and a pricing perspective, products targeted for the Chinese domestic market does that also change the whole pricing dynamic of your overall business?

Well, you know our growth coming from Asia, and the end product -- US and Europe. Our customer view, really consumer in the channel, especially the cost, channel cost. But for some reason, we know that the ASP typically channel should be loaded. ASP (Inaudible) we don't really particularly feel that it's worse than our normal. That's why our ASP -- decrease. And so I just don't think it really affects but from operation point of view, yes we are going to be probably put more people, try to do the sales in Asia and China, we probably from sales point of view, we will continue enhance our channel sales -- enhance our channel sales teams, or sales force.

Great. The other question is related to CapEx, in terms of the 10% sales spending is that relatively constant on a quarterly basis or is that sort of a target over the next fiscal year? And any split that you can provide on how that will be spent from capacity expansion standpoint versus technology standpoint? Because I believe Zetex related technology, as you waterfall that technology through some of your other product that may also have some increase in spending.

Okay. Our CapEx, before this year, in the past, we always grow 10 to 15%, okay. So this just go back to our normal run rate. Other than this year, go back to our normal run rate. We start to authorize the CapEx in first quarter because equipment time, we looking at start from second quarter, third quarter, the capacity -- I mean, the -- start to ramp up again. Increment, qualified increment, and get ready for our growth. So we start to authorize the CapEx from this quarter. Now, talk about Zetex, give us technology is in the wafer fab, not in the packages. So are we talking about CapEx, more talking about packaging capacity. Our wafer fab capital is still not as high. Still very small portion of our CapEx expenditures. So, especially (Inaudible) not fully loaded, and Zetex is not fully loaded. We are not putting the manufacturing capital. Now, for R&D, yes, we are putting some wafer fab R&D equipment for our process technology, innovations. That we spend some, not a major amount. 10 to 12% is go back to the packaging capacity. Utilized by Zetex, but it's not due to the Zetex technology, does that answer your question?

Yes. One quick follow-up. The longer lead times that you're seeing for back end packaging equipment, what is that approximate lead time currently?

About three months.

Okay, great.

Three months, so we need to authorize in 4Q, and get equipment and then Chinese New Year, so I need to take action now. Because Chinese New Year and three-month lead time, get it qualified, get ready for the -- it won't be ready for 1Q, but I hope it get ready sometime in second quarter.

That's very helpful. Thank you and nice job in the following quarter.

Thank you.

Ladies and gentlemen, we are out of time. I would like to turn the call back over to Dr. Keh-Shew Lu.

Okay. Thank you very much for joining us today, and have a good, well for you it's good afternoon, for me good morning. Thank you for joining us, Operator you may now disconnect.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may disconnect and have a great day.