Diodes Inc (DIOD) 2010 Q2 法說會逐字稿

Good afternoon and welcome to the Diodes, Inc. second quarter 2010 financial results conference call. (Operator Instructions.) I would now like to turn the call over to Leanne Sievers of Shelton Group, the investor relations agency for Diodes. Leanne, please go ahead.

Good afternoon and welcome to Diodes second quarter 2010 earnings conference call. I am Leanne Sievers, Executive Vice President of Shelton Group, Diodes' investor relations firm. With us today with are Diodes' President and CEO, Dr. Keh-Shew Lu; 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'd 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 contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today, and therefore we would 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 5, 2010. 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 in GAAP and non-GAAP terms. Included in the Company's press release is a reconciliation of GAAP net income to non-GAAP adjusted net income which provides additional details. Also throughout the Company's press release and management statements during this conference call, we refer to net income loss attributable to common stockholders as GAAP net income. 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'll turn the call over to Diodes' President and CEO, Dr. Keh-Shew Lu. Mr. Lu, please go ahead.

Thank you, Leanne. Welcome everyone. And thank you for joining us today. Diodes once again achieved record results in revenue, gross profit and the gross margin with strong growth in all regions. Including continued growth in North America and Asia.

We also experienced substantial improvement in Europe, where we reported our second consecutive quarter of record revenue for the region despite continued weakness in the exchange rate. Our focus on design wins, new product development, and cross selling from our Zetex acquisition continues to produce material results for our business. Additionally, our achievement of record gross profit and the record gross margin is a direct result of the operation efficiency at our manufacturing facilities combined with continued success on our new product initiatives. During the quarter, we realized better than expected utilization at the wafer fabs and generated record output at our packaging facilities.

Also, during the quarter, we announced our entry into the standard logic market which is a natural fit for Diodes' strategic focus on high volume standard products. Furthermore, there are strong packaging synergies in our existing analog and the discrete product lines that enable us to leverage our world class cost effective assembly facility. Those [multi] products are suitable for use in a variety of communication, computing, consumer and networking equipment and expand our SAM by over 15%. The expansion into this market provides new revenue opportunities for Diodes. And we expect that it will be an additional strong growth driver in the coming years.

As we look into the third quarter, we expect to report our sixth consecutive quarter of sequential revenue growth and to produce record results once again for the Company. As I have stated in the past, Diodes has emerged from the downturn as a stronger Company with expanded growth opportunities and I believe our achievement of consecutive record results is proof of our success. 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 afternoon, everyone.

As Dr. Lu mentioned, revenue for the second quarter was a record $149 million, an increase of 44% over the $104 million in the second quarter of 2009 and a sequential increase of 9% over the $137 million in the first quarter of 2010. Gross profit for the second quarter of 2010 was a record $53.5 million, or 35.8% of revenue compared to $27.4 million or 26.3% of revenue in the second quarter of 2009. And $47.8 million, or 34.9% of revenue in the first quarter of 2010.

The sequential increase in gross margin was primarily attributable to better than expected utilization at the wafer fabs, record output at the Company's packaging facilities, and a favorable mix of higher margin new products. In addition to our wafer fabs being fully loaded, our operational performance is at very high levels. During the quarter, our packaging capacity output from our China facilities increased 9% sequentially to 5.6 billion units. We expect output capacity to increase between 6% to 10% in the third quarter.

Total operating expenses were $29.4 million, or 19.8% of revenue, down from 21.1% of revenue last quarter. Looking specifically at selling, general and administrative expenses for the second quarter, SG&A was approximately $21.4 million, flat to last quarter, but an improvement to 14.4% of revenue compared to 15.7% last quarter.

Investment in research and development for the second quarter was $6.8 million, or 4.6% of revenue, which was effectively in line on a percent of revenue basis with the $6.4 million, or 4.7% revenue in the first quarter. Total other expense amounted to $3.4 million in the second quarter.

Looking at interest income and expense, we had approximately $1 million of interest income, primarily related to our portfolio of auction rate securities, and interest expense of $1.4 million, primarily related to our convertible senior notes and our no-net-cost loan. Under the previously disclosed settlement with UBS regarding our auction rate securities, effective June 30, we put back all of the auction rate securities to UBS at par and paid off the associated no-net-cost loan.

With for the remainder of 2010, we expect interest income and interest expense to be less than the first half of 2010 since we are no longer earning interest from the auction rate securities and are no longer being charged interest on our no-net-cost loan.

During the second quarter of 2010, we recorded approximately $1.9 million of noncash amortization of debt discount related to the US GAAP requirement to separately account for a liability and equity component of our convertible senior notes. Also included in total other expense was $1.3 million of foreign exchange losses, primarily related to our European operations.

Before reviewing the other financial highlights, let me first address several questions that have been raised about the impact of changes in rates of exchange on the Company's financial results. As many international companies typically experience, movements in foreign exchange rates can be adverse or beneficial to Diodes' results, depending on the movement of the currencies relative to our functional currency, the US dollar.

When we prepare our guidance, we make assumptions on the future rates of exchange. Our income and expense accounts denominated in foreign currencies are translated at the average actual exchange rate for the monthly period. Changes in these actual rates relative to our assumptions have the potential to impact our operating income as compared to our guidance.

The magnitude of the impact is dependent upon the change in the rates. As well as the functional currency in which we maintain our subsidiary accounting records and the mix of US dollar based income and expense versus the non-US dollar based income and expense.

In Europe, our functional currencies are the British pound sterling in the UK and the euro in Germany. We have a mix of dollar, pound, and Euro based income and expenses. The current mix is such that we have a natural hedge against our operating income. In effect, changes in the pound and the euro generally have a relatively immaterial impact on Diodes' operating income.

In China, our situation is different from Europe since our functional currency is the US dollar. Our revenue in China is primarily US dollar based, while our expenses are a mix of US dollar based and non-US dollar based. So, changes in rates of exchange have the potential to impact our operating income. Should the yuan strengthen versus the dollar the effect on Diodes' gross margin will be minimal.

All things equal for each 1% that the yuan strengthens, Diodes' gross margin would be reduced by approximately 10 basis points. We continue to focus on cost reduction efforts in our operations to minimize the impact on operating profit from changes in rates of exchange.

In addition to this impact on operating income, we are also subject to transaction effects, which are included in the other income and expense line items on the income statement and translation effects which are reported on our balance sheet in other comprehensive income or loss. More information on these effects will be included in our quarterly report on form 10Q filing for the period ended June 30, 2010.

Now turning back to our financial overview for the second quarter, income before income taxes and noncontrolling interest amounted to $20.6 million compared to $2.8 million in the second quarter of 2009 and $19 million in the first quarter of 2010. Turning to income taxes, our effective income tax rate in the second quarter was approximately 14.7%, which was slightly below our guidance. Improved profitability in Europe has allowed us to take advantage of some Zetex tax credits from prior years.

Under US accounting rules, a portion of this tax benefit must be accelerated into the current quarter as a discrete item rather than being a part of the overall effective tax rate for the year. Second quarter GAAP net income was $16.6 million, or $0.37 per diluted share, compared to a net loss or negative $3 million or $0.07 lost per share in the second quarter of 2009. And net income of $15 million, or $0.33 per share in the first quarter of 2010.

The share count used to compute GAAP diluted earnings per share for the second quarter was 45.5 million shares. Non-GAAP adjusted net income was $18.7 million, or $0.41 per share, which excluded net of tax, $1.1 millions of noncash interest expense related to the amortization of debt discount on the convertible senior notes, and $800,000 of noncash acquisition-related intangible asset amortization costs. 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 the second quarter GAAP and non-GAAP adjusted net income was approximately $2.1 million net of tax, noncash share-based compensation expense. Excluding this expense, both GAAP and nonGAAP adjusted diluted EPS would have increased by an additional $0.05 per diluted share. Cash flow from operations for the second quarter was $23.1 million and $46.9 million for the first six months of 2010. Second quarter net cash flow and free cash flow were a negative $2.1 million and negative $1.5 million respectively, primarily due to the CapEx associated with the continued capacity increase at our packaging facilities in China. Year to date our CapEx is 16.6% of revenue, which is above our model level of 12%.

Turning to the balance sheet, at the end of the second quarter, we had $246 million in cash. As I stated earlier, our auction rate securities have been converted to cash at 100% par and the proceeds used to completely pay down our no-net-cost loan. Our working capital at quarter end was approximately $373 million and long-term debt, including the convertible senior notes, which are redeemable in October of 2011, was approximately $128 million.

At the end of the second quarter, inventory was approximately $102 million. Inventory days were 92, compared to 93 days in the first quarter. Accounts receivable was approximately $117 million and AR days were 67. As previously mentioned, capital expenditures were $22.6 million during the second quarter or 15.1% of revenue.

Compared to 18% of revenue in the first quarter. For the first six months of 2010, CapEx totalled $47.3 million, or 16.6% of revenue. Depreciation and amortization expense for the second quarter was $12.6 million.

Turning now to our outlook. As Dr. Lu discussed we expect to post our sixth consecutive quarter of sequential revenue growth in the third quarter, with revenue expected to range between $158 million and $164 million. Or an increase of 6% to 10% sequentially. Gross profit is expected to increase at a rate comparable to our revenue growth, which would also represent another record quarter.

Operating expenses are anticipated to decrease slightly from second quarter levels on a percent of revenue basis. We expect our income tax rate for the third quarter to range between 15% and 20% as we expect profitability in higher tax jurisdictions to continue to improve. For the third quarter, we expect shares used to calculate GAAP EPS to be approximately 46 million. With that said, I will now turn the call over to Mark King.

Thank you, Rick. And good afternoon. As Dr. Lu mentioned, our record second quarter revenue was a result of strong demand across all geographic regions as both our Diodes and Zetex branded products continued to reach record levels.

Global POS was up 17%, with solid growth in all regions and inventory at distributors remained relatively flat. During the quarter we launched 111 new products across our analog and discrete product families including a major expansion of our USB switch line, which continues to gain market share in the TV and notebook space. We also achieved strong momentum for our high performance bipolar transistors as well as our SBR products in Asia. Design activity was also at record levels, with about 350 design wins across all market segments.

In terms of specific end market breakouts, consumer represented 33% of revenue, computing 27%, industrial 20%, communications 17% and automotive 3%. Asia represented 74% of total revenue, sales increased 10% sequentially, led by strength in consumer portables, smart phones, DC fans and notebook power supplies. We continued to ramp new design wins for LCD and LED TVs, panels, and notebooks which collectively helped contribute to the growth in the quarter. Distributor POS grew 13% and distributor POP grew 4%.

Distributor inventory for the period was down 2% million and remained under two months. We expect this level of inventory to decrease further in the coming months due to strong demand and tight supply. Design activity in Asia once again remained strong, with 114 wins at 76 customers highlighted by 14 USB switches, 11 reset ICs, 27 power MOSFETs, 19 SBRs, 11 hall sensors and 11 LED drivers. In North America, second quarter sales represented 15% of total revenue and product sales increased 13% over the first quarter. OEM sales were driven by continued improvements in our industrial and communications customer base.

Distributor POS grew 22% outpacing POP, which grew 8%. Distributor inventory remains healthy and positioned to support further POS growth. Our backlog going into Q3 was strong once again, positioning us for further growth in North America, as the outlook for both OEMs and distributors remains very positive.

Design activity in North America was strong, with 111 total design wins, highlighted by 22 MOSFETs, 12 analog, ten bipolars, six SBRs and one key hall sensor win. To support internal growing demand, we continued to reduce foundry wafer sales, which decreased 24% quarter over quarter.

Sales in Europe accounted for 11% of total revenue in the quarter and increased 6% over the first quarter, representing the fourth consecutive quarter of revenue growth. In fact, when excluding the impact of the exchange rates, growth in the region would have been 13%.

OEM sales grew 10% sequentially across all our market segments with sales to industrial accounts up 19% and sales to consumer accounts gained 10%. Distributor POS was up 4% and outpaced distributor POP. Inventory decreased slightly in the quarter.

We enter the third quarter with a stronger customer backlog than we had going into the second quarter, and expect further growth against the usual seasonal patterns for Europe. Design activity in Europe was also strong, with 121 wins at 63 accounts.

Now turning to new product. During the second quarter on the discrete side, we released 47 new products. New product revenue from bipolar transistors grew 86% over the prior quarter due to the ramping of several high volume design wins secured in the fourth quarter of 2009 for the consumer and communication markets.

Our bipolar portfolio was enhanced by the release of our ZXGD 3103 synchronous controller using a combination of transistors, each specifically developed to enable high performance in the latest designs of set top boxes and TVs. Also in the quarter, we achieved strong momentum on SBR products with new product revenue growing 25%.

On the analog side, we continue to see new product revenue increase and market share gains from our USB power switch family, where revenue grew 57% sequentially.

This growth is expected to continue for the rest of 2010 and will be accelerated by additional business for our newly released products. Additionally, the reset devices continued to gain traction, driven by market share gains and flat panel TV. New devices in this family are expanding our SAM into major Tier 1 OEMs, which we expect to yield significantly higher volumes in the second half of the year.

Also during the second quarter, Diodes recently released AP 5100 high efficiency DC to DC converter, received its first design wins and product orders with shipments commencing in May. We are currently sampling our first high frequency synchronous DC to DC converter which we expect to release in the third quarter. Most notable in the quarter, we released our first family of single gate logic products and secured our first design wins.

As Dr. Lu mentioned earlier, Diodes is able to utilize our own world class, cost effective, high volume assembly facilities that are well suited for manufacturing low pin count SOD 25 and SOD 353 packages. We are pleased to be able to leverage this capability to provide users with an alternative source for cost effective high performance logic devices.

The introduction of our first single gate product family support both portable battery operated and traditional five volt applications. We are very excited about the future growth opportunities of this product line especially with the customer and packaging synergies that exist with our analog and discrete lines.

In terms of global design wins, in process design activity remains strong in both quantity and quality. We continue to be successful in designing our new products into target applications with new and existing customers. Strong momentum continues on the discrete side highlighted by key wins for our MOSFETs in notebook, smart phone and game consoles which are all key growth applications for this product. Our SBR efficiency characteristics are driving expanded interest and design success in power supplies of all types, solar power, LED TV, as well as broad based industrial applications. We have also secured recent wins on our bipolar transistor line that are benefiting from the move to LED backlighting in TVs.

On the analog side, the most active areas were USB switch with key wins in notebook, LED TV and set top box as well as LED drivers in very broad based applications. In hall sensors we had key wins in smart phone, DC fans and notebook.

In summary, our continued execution on new product initiatives and consistent high level of design wins are expected to drive further growth for the Company going forward. Additionally, the introduction of our logic product will be a material contributor to our future results as we leverage our cost effective packaging and customer synergies with our existing product lines. We enter the third quarter with a strong backlog and positive momentum and remain focused on driving additional growth opportunities and operational efficiencies to further execute our profitable growth strategy.

With that, I'll open the floor to questions.

( Operator instructions ) I have the first question coming from the line of Gary Mobley with Benchmark Company. Please proceed.

Hi, guys. Mark, I was hoping that you could start out by clarifying a point for me. On a global basis your point of sales were greater than your point of purchases. At least on the distributor level. If so, could you give us some numbers to support that?

I had trouble hearing you at the end.

I was just hoping that you could give us some actual numbers on global point of sale versus point of purchase.

Yes. I think that -- I don' t have the exact number for global point of purchase, but I said in the speech it was 17% POS was up, and I think global POP was only up about 4% or 5%

Okay. And was your utilization rate in the quarter in fact 100% and what are you looking at in terms of production lead times and how did it change in the second quarter versus the first quarter?

Yes, Gary. Our capacity on the assembly is always full now and has been full for several quarters, you know that. And we have continued putting the capacity to support that. And if you really remember what I said, we focused another 6% to 10% of more output due to the capital we have been putting in for the third quarter. So we continued investing money since last -- third quarter last September. We have been continuing putting the CapEx and increase our package capacity. We have been full all the time

In terms of production lead times, were there any notable changes in the second quarter versus the first quarter?

For us, no change, because we are able to put the wafer ahead of the assembly. So all the limitation, or most of the limitation was due to the capacity, packaging capacity. Therefore, the lead time is really, packaging cycle times, which is two, three week. That's all we have. So the lead time, we know how much capacity we have. So if we cannot take the order, we don't take the order. We don't just take it and (inaudible) lead time.

Gary, we had a tendency to stretch out some of our lower end commodity products during the quarter and focus on the stuff that was a little bit more profitable for us.

Single source product and the customer specific type of product. We give them a higher priority. And for the standard kind of product, they have a low priority.

Okay. Thanks, guys.

Thank you.

Your next question comes from the line of Brian Piconi with BMO Capital Markets. Please proceed.

Yes. And congratulations on great results and a good outlook. You had great results.

Thank you, Brian.

I thought you had great results. One of the things that stands out to me is that your automotive business, which I know isn't a large business for you currently, seems to be fairly flat. We're seeing a lot of other companies, of course, as the auto industry has bounced back from the depths of the recession, lot of other companies are seeing pretty strong growth there. Is this a timing issue in your case or are you still working towards design wins there?

Yes. I think that our other end equipments have a tendency to drive us a little faster. So I think it's staying at 3% based on the growth that we've seen in the other areas. I think it's actually performing pretty well. I think we're doing okay there. It's not as close a focus as we would hopefully have it to be sometime in the future. But I think we're doing okay there.

Okay. Now you had mentioned logic, of course, you've been releasing a fair number of products. I would imagine that the size of the addressable market is fairly dependent on the number of products that you produce. But at what point -- what's the turn around time from product introduction on logic to volume sales?

I think it's -- I think that's a good question. We just entered it pretty recently, so it's hard to say. Frankly, with available capacity, design win time on this product is very quick. But we're taking our time and being careful and making sure that we position ourselves correctly because we are still in tight supply on some of the key packages for that. So we don't want to overcommit on a new product line. But I think we have a great opportunity there, long-term to position it and grow it in our present customer base and our present distributor channel. We just want to make sure that we're totally positioned to support the customer when we ramp it up

Brian, this kind of product, the lead time is not an issue. This is standard kind of report. So whoever is using it, as soon as they have confidence in our product they just replace it. It's pin to pin compatible. We have another category of this logic product which is at a higher performance to support the battery operation, three volt instead of five volt. Those really have higher performance, better product now because that lead time could be a little bit longer because it's no longer existing applications. But for existing applications, it's very easy to replace using our product. So the lead time -- or design win lead time should not be an issue.

Okay. Super. I'd just like to ask one more question then give up the line to somebody else. Are you doing any work with respect to copper bond? Because it would seem that that will be an opportunity for cost reduction? Thanks.

Well, when you see our gross margin continuing to improve. One of the key reasons I would contribute (sic) to our copper bond. We have been doing it probably longer than one year now. We actually -- I think it's almost two years. This is the key cost reduction (inaudible) for us so, yes. We are doing it.

Excellent. Thank you.

Your next question comes from the line of Joe Wittine with Longbow Research.

Hi, Joe.

Joe, your line is open. Your next question comes from the line of Ramesh Misra with Brigantine Advisors.

That's Ramesh at Brigantine Advisors. Good afternoon, gentlemen. Let me ask the previous question a slightly different way. Mark, when do you expect mature revenues in the logic business? Is it more of mid 2011 kind of a phenomenon or do you think you could see some in early 2011?

I'd say we can start to see some reasonable revenue in the late first quarter of 2011 ramping into the second and third quarter of next year. I feel pretty comfortable about that. Hopefully -- he's expecting me to do it sooner.

That's right. I will be very disappointed if he doesn't do that, but I think in his speech he ought to tell you we already have a design win, so we already have a single cu -- a design win on this product line. We are very excited about this product line.

We're very good at this type of product. I think this can be one of our strengths.

Okay. And in the past, you kind of innovated in the areas that you go in by kind of coming up with specialized packages and combining it with discrete components. Is that something that you will do here in logic as well. Or are your initial logic products going to be pretty much me-too replacements for -- and commodity standard logic parts?

I think right in the first stages we have plenty of opportunity just coming out with the me-too and pin per pin. We do see some opportunity for some further miniaturization that could offer some nice opportunities long term. But we need to get ourselves established. I think it's just easier to focus on our continued -- and we have a lot of waves of product coming out. And if we can just focus on getting the products that we have out into the customer base and getting them the feel for us as a logic supplier, then we'll look at what we can do to innovate and help the customer in their next generation designs like we've done on discrete and some of the analog components.

Okay, great. Rick, can you remind us of the terms of this convertible debt that gets redeemable late in 2011? What's the convertible price, so on, so forth?

We have $135 million outstanding. And the rate is 2.5%

October, 2011?

Yes, October, 2011, as I mentioned. They're puttable back to us at that point in time.

What's the conversion price?

$39.

Okay. Okay. Thanks very much. That's it for me.

Thank you.

Your next question comes from the line of Christopher Longiaru with Sidoti & Company. Please proceed.

Hi guys, congratulations on the guidance.

Thank you.

My question is about gross margin. How much is utilization and how much is just a product mix? As you said you shifted out some of the lower margin stuff.

I don't know how to separate that. But great contributions by both. Especially the backend had been full for a long time. So it's not -- from the percentage point of view it's not really coming from the backend. But the wafer fab, we started with very low loading, from Q12009 and continue up, up. And you can see. Now we are -- we are now almost there. Okay? We still have slightly room for increased output. But we are almost there. Okay? And that's coming from the back end -- from the wafer fab. Okay? So (inaudible) if compared relative to 1Q, then probably I would say it's contributed by the wafer fab (inaudible) but product mix is another key improvement, okay? We take this opportunity we constrain our low end standard product and the focus on -- more on the high value added product.

Did you just shift out that production? Does that mean that, if you're pushing that out, that the margins are going to come back down a little bit in 2011 when that product mix gets more normalized and you've got more production capacity?

Well it depends. It depends. If we continue to grow. When we have more capacity ahead of that, and that could be. Then another one I need to mention is the product mix is really (inaudible) the region too. If you look at it, we typically in US and Europe have higher GPM than Asian products. And when you get a capacity situation, you constrain, and we let the US and Europe grow as much as they can. So when Asia starts to go back to the growth more, you are going to see we have the top line will have much higher growth rate. Then our gross margin could be constrained. Okay. Or percent.

Okay.

We just play with those numbers. The objectives, get the maximum GPM dollar, gross profit. You remember having said that, my focus is not the GPM percent. My focus is the GPM dollar. So we play with whatever we can to get maximum GPM dollar. Gross profit.

Okay. Thank you. That's all I have for now.

Thank you.

Your next question comes from the line of Steven Chen with UBS. Please proceed.

Hi Steven.

Thanks for taking my questions. Can you hear me okay?

Yes.

First question is on CapEx. Just given that if your CapEx to date is running around 16.5%. That's above your original guidance for this year of I think 12% to 14%. What is the -- do you expect that rate to continue, the 16% rate to continue for much of the rest of the year and also is that more equipment that you're buying? Is there higher costs that you're facing for certain pieces of backend equipment? And is there any additional or incremental frontend equipment that you need to purchase as well given that you're close to fully utilized on the wafer side?

Well, Steven, the capacity -- the capital authorizations started with September last year. We started (inaudible) approved the capital. But then the CapEx didn't really hit us until the back part of the year and then first half of this year. So if you look at Q1, our percentage was even higher, I remember something like 18%, okay? And then you're going to get the slowdown to the (inaudible) this year . I don't think we will be able to go back to our10% to 12% model because we underspent last year. If we want to continue support our growth, historical growth, we do need to spend a little bit more this year. So I expect, if you look at our third quarter, we say our capacity will increase 6% to 10% and we'll have another growth in fourth quarter and I expect this year we are probably somewhere around 13% to

Okay.

But our capacity expenditure. And this is kind of a one time deal happening. But if it's just normal manufacturing capacity I was thinking somewhere around 13% or14%. Slightly higher than our model of 10% to 12%. But just last year, we underspent, underexpensed.

Okay. I guess just to clarify on the front end wafer capacity, that's the thing that you expect to expand later this year?

I just need to be careful. You remember on the wafer fab we have some foundry business. And those are low GPM. And if needed we will gradually reduce our foundry business and that will again improve our GPM percent and support our sales. So, we might, but at this moment, I don't have those in my plan because in all fab we still have some room to improve in third quarter, fourth quarter. In fab (inaudible) we can deduce some of the subaccount wafers.

Great. Thanks. And the next question is either for you, Dr. Lu, or else it's for Mark. Just looking at all of the design wins and the diversity of product win types that were mentioned, can you give some more color on whether or not these are relatively more proprietary products or if they're relatively more kind of standard catalog and commodity type products that are more seasonal from a demand perspective or if they are more proprietary, is there some amount of stickiness that we might see for these wins going forward beyond the upcoming holiday selling period?

Oh, yes. I don't think that this is all -- there's a lot of activity out there that some of it's shortage based so you'll see a little bit, the design win numbers may be a little higher. I think these are all good solid long term design wins. Really people don't spend any time on something they don't plan to use for a very long period of time. So I think that, I'll always say they all have legs. Okay? But I think we have some really nice opportunities to use these design wins to expand our revenue number in 2011 a great deal. That's what we're working on now. We're working on 2011 and how we position ourselves with the customers in that period. So, I think it was a very exceptional quarter in the design win area. And we won several very, very key wins at -- on key projects, as well as new customers. So clearly, it should help make my life a little easier next year.

Okay.

Steven, the more broad our portfolio, you're going to get much easier on the design win. Okay. Because you start talking to a customer who needs to pay attention to us. And step into the logic, our Zetex acquisition, all those give us tune for key design wins to go to the key customer.

Great. Just one last question. This one is more for Mark. Mark, you mentioned a lot of strength on the USB switch product line. Is that associated with PC products or is that more consumer electronics products?

I would say that the two biggest end equipments that have shown success there is in LED and LCD TV, as well as notebook. Okay? That growth is driven and the growth is being driven by new design wins every quarter, every model.

Okay. And then just related to that, in terms of UC power switches for the PC space or notebook space. Is there any difference in the type of product or the content for a USB 2.0 type switch versus a USB 3.0 switch?

To be honest with you I can't answer that question. We don't really see -- I think everything that we're focused in right now and everything that we're winning design is 2.0. To some degree, some of the 3.0 requirements are still a little bit unclear and uncertain. So, we try to -- unfortunately, we try to focus a lot on today, okay? And this quarter and how we make this and probably we won't have the first 3.0 product.

Don't forget, we focus (overlapping speakers.) Steven, we focus on the high volume, okay? So if the market is not really big we would wait until the volume starts picking up. Then we come in and take over the market. That's why we are good at it.

Okay great. Thanks for all the color and nice job in the quarter and solid guidance

Thank you.

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

Hey, guys. First of all, congratulations. Very good quarter. Very good guidance. I have several questions. Let me start off with perhaps a little controversial tone. There was a company in your space, sort of your space, that had an earnings a couple days ago and said they started seeing a slowdown in Europe and China and they saw somewhat of a pause there. Obviously that's not happening to you looking at your numbers and your guidance. I'm curious if you ever saw a pause in the month of July or was it steady Eddie business? Maybe Mark, you can handle that one?

Well, we announced it today, so obviously July is already over for us. You can look at our guidance. We are confident on 6% to 10%. If we are not, we won't make that guidance.

Right. That's kind of where I'm coming from. It doesn't look like you're seeing any problems. Okay. Good.

It's not the market. Don't forget, I [make it say] due to our design win effort and due to our new product and our past design win efforts, our aggressive new products, we are continuing -- we are going to continue to grow. But I'm not saying general market. I won't say somebody is right, somebody is wrong. I'm just saying we are able to -- we are able to do 6% to 10% growth in third quarter .

No, no. Very good. Very good. Dr. Lu, can I ask you if you have started to see the Christmas build already or is it going to come somewhere at the end of August?

Not yet. Not yet. It start to get ready, okay? But it's not yet.

Okay. Got it. And then I'm obviously very excited about your entry into the single gate logic but I don't understand the applications as well. Can you maybe just explain to me roughly what kind of applications this will lead to?

It's really all the applications. It's all the same end equipment. It's the same TVs, the same end equipments. It's the same customers. Often the same buyers.

This is standard logic. The type is called glue logic. What means glue logic is, if you have some design mistake, for example your signals mismatch. You put that (inaudible) then you make the signal correct. If you forget to sum two signals together you put that in the gate in there, and the signals will connect together. If you do -- all signals all gate, then you put the two signal -- It's kind of, if you have some, you need some signal change, then you use those single gate to do that. Okay? That's what they call glues in the logic. And almost all the end equipment, especially handheld, notebook, and even desk top, almost all the end equipment we go after need this kind of product.

Okay. So it fits in pretty well, really well

Oh, yes. It is a standard logic, single gate logic product.

We don't need to find any new customers.

Yes. We don't need to. It will sell themselves very easily. Just open up the (inaudible_ and you will see a lot of logic gates, and you just say we (inaudible) those and those and those, buy this. That's all.

Got it. Got it. Did you have to leave revenue behind this time around because of capacity?

Well, I don't know how to answer that. We are still very capacity constrained. We still continue to ramp up our capacity. If you look at it, we forecast 6% to 10% more capacity in third quarter versus second quarter.

I think you could say that we left some commodity products behind. But I don't think we left our positive mix behind.

I got you. Okay. And then last question for me. I'm just looking at your revenue mix. Obviously it looks like consumer exploded up pretty high. As you look forward into the second half of the year, Mark or Dr. Lu, do you expect a similar trend where consumable will outperform computing. Or maybe give us any kind of color as you see your business progressing

Your answer is yes, we're going to continue seeing consumer perform well. And we know the notebook actually is -- they still grow, but they are at what they're expected. Okay? TV? We see, the customer we target at, they will grow quite well.

And you might see a little bit -- again, it goes back to that, a little bit on the commodity line. The motherboard portion of the computer segment is all commodity products. So we have a tendency to shift out of motherboards in tight supply periods.

No, no. That's great. Great, great execution, guidance and results. And I'll talk to you guys soon. Thank you

Thank you.

Your next question comes from the line of John Vinh with Collins Stewart. Please proceed.

Thanks for taking my question. And congratulations on the strong results.

Yes, thank you, John.

Hey, Mark, I don't know if I missed this, but can you quantify what distributor channel inventory was in Asia this past quarter?

It was down around 2% and it was just under two months.

Great. Thank you. Question for Dr. Lu. Obviously you've talked about, I think you mentioned that you're planning on releasing additional CapEx to expand capacity in Q4. Based on your visibility today, can you talk about what your expectations for Q4 is. It sounds like you're expecting that Q4 could be seasonally up for you at this point?

Well, actually, if I release now, probably it won't be really available in Q4. Q4 capacity is going to be -- is already authorized in May and June because of the lead time is about five months. So if I authorize now, most of that (inaudible) is in January. Won't really be able to -- well, come in say, December. It won't really support Q4 upside. Okay? We don't give the guidance of Q4 yet, but so far I don't have a reason to believe it will be worse than a similarity. I think we should be slightly be slightly better and see similarities .

Okay. And just to clarify, does that mean that your capacity is right now going to stay flat in Q4? (Overlapping speakers.)

Oh, no, no, I didn't say that.

We decided earlier in the year to get relatively aggressive on the year and take the chance that this is going to be a real positive year and have capacity in position. So basically we booked Q3 and Q4 capacity all at the same time, that we would need. We figure that our long term outlook for our business is very strong and we really can't look at it one quarter in the quarter. We if saddle with a little extra for two quarters, that's just a little bit of depreciation. But the missed opportunity could be greater. We'll be expanding our capacity in this quarter to meet our quarterly revenue guidance. And the rest of that stuff that we'll have to do this year will be just kind of some cleaning up or some rounding of our packages. But I think we're well positioned for the balance of the year with capital and a good position going into next year. I think we've been relatively aggressive with our capital by our number.

John, an easier way you can do is through your own calculation. Because we can't release here. But like I mentioned, 16% in the first half, okay? And then 13% to 14% for the whole year. So you can see third quarter would still come in and we will still some in the fourth quarter. So you can estimate yourself about how much capacity more on fourth quarter. (Inaudible.)

Great. And one just additional clarification on the PC front. You kind of talked about notebooks. What is your exposure of notebooks versus netbooks in the PC space and also desk stops as well?

For us? We don't really separate between notebook and netbook.

For about one quarter there was a big separation. (Overlapping speakers.) Then they've kind of blended again. In our view anyway.

That's right. Yes. And the reason is, our product goes to -- LCD driver, (inaudible) driver? There's no difference between the notebook and the netbook. Okay? And for our USB and whatever -- (Overlapping speakers.)

They use the same --

That's right. So it would be difficult -- it doesn't make sense for us to separate the netbook and notebook.

Great. Okay. Thank you very much.

Your next question comes from the line of Tristan Gerra with Robert W. Baird. Please proceed.

Hi, this is Scott Hurlman, thanks for taking my questions and congratulations on a great quarter. My first question would be, can you give us utilization rates specifically at the Zetex lab? It sounds like you're getting pretty close up to full utilization on those fabs. And what do you view as full utilization on your front end fabs? Is that going to be in the 85% to 90% range or is it going to be higher?

Right now it's probably at about 90%. Second quarter is about 90%. And we are getting up higher in the third quarter. Then if we need it, we'll start to move some of the stuff to other foundry fabs. We do have that capability if our wafer fab is underloaded, we just load it ourselves. It is overloaded, then I can start to move some of the wafer out to somewhere else. Okay? And so we'll continue to keep the fab loaded. (inaudible) So we'll continue and we'll keep all fabs loaded. All fabs started getting more capacity in third quarter. One bottleneck on equipment, I authorize instead of putting on the line in second quarter. In second quarter. So third quarter, they will have a notch up. And then after that, they will start to improve utilization in the fourth quarter. So, that's why I say, our own fab is almost there. One more notch up in third quarter, then it's almost there.

Okay

The Zetex, like I said, we are there, but we have the capability to analog some of foundry business.

Okay. So, right now it's pretty full. Then you could just -- you could fill it up in your own products if you have that need?

That's correct.

Okay. And then I would be remiss if I didn't look at your backend capacity was up 9% last quarter. Your revenue was up 9% last quarter. Your guidance for this quarter is up 6% to 10% for both backend capacity as well as the revenue guidance. How much of the revenue growth is driven by back end versus front end?

I'm sorry. We don't --

All of it's driven by back end. Because we don't really have -- theoretically we have no -- we might have a mix in the quarter at different times, we might have a slight mix problem. But we really don't have a wafer shortage.

Okay. But, I mean, should we expect your front end revenues to be going up that much as well when we're just kind of thinking about it, or is it that capacity that 6% to 10%, are you using all of that for your own front end production or is some of that all being used for --

Well, in the speech, I remember Mark, you said (overlapping speakers.)

Our foundry business dropped 24% last quarter.

Okay

Yes. So our revenue actually affected by that. That revenue actually is going down, because that's outside. That's the sale revenue.

Okay. So your front end is using up more capacity of the back end than that 6% to 10% growth

Yes, correct.

And then on the standard logic business, can you kind of talk about the gross margin profile of that type of business? Is that -- I understand it's a big market opportunity. But is that going to be kind of in the 15% to 20% kind of gross margin or is that going to be more where you are now and what you've done in your analog business, taking your total business up above 35%?

It works right in our model. You know? It's -- it fits in perfectly with our model.

I think you remember one thing I didn't mention about. We have very cost effective packaging.

Right.

Number two, the die cost is less than packaging costs. So this is going to -- in line with our -- strategy, our packaging incentive, our packaging related type of business. Not wafer fab. And so if we are able to do our model, we believe we are suitable to do this. And this is just right at our product strategy.

Yes. Sounds like it's right in your wheelhouse. Okay. And then two quick questions. Can you talk about what like for like pricing was in Q2 and maybe any expectations for Q3, and then also what are your lead times doing for your products that you're producing totally, your own internal products where you're making the front end and the back end?

I think ASPs were up slightly in the quarter.

Because of mix.

Because of mix. Okay. Again, we spent more time shifting our mix, and shifting our product than we did raising price.

Okay.

So I don't think -- the price wasn't an impact in our revenue. It would be mix, if anything. And the second question was?

So I was trying to understand lead times. You talked about back ends --

I'm kind of a bad guy about lead times because I don't really believe in lead times. I believe lead times are a decision. I would say that our lead times came in slightly, okay, on products that we really are focused on. And we are continuing to keep our lead times out on non-focused products, but we're probably delivering them a little shorter now than we were three months ago.

Okay

Again, we will not let the lead time hurt our strategic products. So whatever strategic product we wanted, with our capacity, we can always support it and then squeeze on the standard product, non strategic product.

We adjust very often.

And I guess one last quick one. What are your thoughts right now on industry back end capacity and how tight we are on that? Seems like that's been loosening up slightly across the industry in Q3, early Q3, late Q2. Just what are your thoughts on that?

Well, if the capacity could be a little bit loose, but it's not. All the packaging. All the packaging time is loose. Some of the standard product could be but still, a lot of packaging in the shortage, okay. But for us, this really -- everybody talking about this but for us. That is not really what we focus on. We focus on tech opportunity, changing the product mix. And shortening the lead time for the strategic product and getting the lead time a bit longer for the standard product.

Okay. Very helpful. Thank you.

Thank you.

Your final question comes from the line of Joe Wittine with Longbow Research.

Hi, Joe.

Can you hear me okay?

Yes.

Super. I'll keep this quick since I slid in at the end here. Mark, you mentioned when you were speaking about the geographic segments, I guess, that inventories and distribution in Asia, you actually expect them to come down a head. That's kind of against the back drop of some investors concerned about inventories building in the supply chain. So I'm just hoping if you could expand upon that a little bit more, is it a seasonal move? Is it a fundamental issue where supply is just not able to catch up to demand? And then also what you expect distributor inventories in the western hemisphere to do as well for the next one to two quarters? Thanks.

I think probably the distributor inventory in the western hemisphere will probably go up a little bit over the next two quarters. But I think that they'll go up to catch up to a higher POS rate. Okay? So I think they've been running behind where they'd comfortably like to be. Distributors went through a period where they didn't want to have any parts. And then they went into a period where they wanted to do this, and do this. I think they're getting back to more traditional models. They kind of -- some of the big guys went to models of turns of nine times. And they used to operate at four times. I think they'll kind of balance out at five to six times. So I think that it will settle in and product will start to catch up a little bit. But I think inventories are quite healthy.

So in Asia, our inventory always drops in the third quarter. Then it slowly but surely grows and grows a little bit in the fourth quarter, and a little bit more in the first quarter. Starts to even out again in the second quarter then goes down again in the third quarter. That's kind of our pattern for years and years on. So, yes, we generally have trouble catching up completely with the demand in the third quarter. And we drain it a little bit and then it comes back a little bit in the fourth quarter.

Gotcha. Thanks for that. And then just a real quick follow-up. You guys were first to add, start to add back some capacity. It sounds like your commentary, you still think you're a little bit ahead of the curve in adding capacity versus your peers. Is that a fair statement? What are you seeing as far as competitors adding back capacity, I guess, and especially in some of the areas you compete more heavily like MOSFETs? Thanks.

I still think there's a tightness in packaging. I think we've been aggressive because we're pretty comfortable with our long-term strategy and packaging is a major part of our strategy. Some of these guys haven't produced, haven't added much capacity for several years. Even before the downturn, every time there was any little bump in demand, there was a shortage of SOD 23s and other things. I think maybe it will level out a little bit and create a little bit more room in the industry. But the units continue to grow on these packages. So I think that again, either we're going to be able to capitalize and get a little bit more growth in third and fourth quarter by using this capacity or we just won't have to invest a little bit as fast as next year. We could use a little room.

But what the difference is, we do the packaging ourselves, so we can be aggressive to support our future growth. And a lot of our competitors, they actually do a subaccount and they will need to convince their subaccount people to invest for them. And typically, that would be difficult at the beginning, so we are able to do it right away before we need to spend another two or three quarter to convince them. And by the time they put it up, we already started, say hey, we can slow it down and, you know. So it's difficult for them to do, to be aggressive to do. But for us, since we control ourselves., we don't mind to put the money earlier to support the future growth.

Appreciate it, guys. Thanks.

Thank you.

At this time I'm showing no further questions. I would like to turn the call back over to Dr. Lu for any closing remarks.

Well, thank you for your participation today. Operator, you may now disconnect.

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