Diodes Inc (DIOD) 2010 Q3 法說會逐字稿

(audio already in progress) management's estimates as of today November 8, 2010. Diodes assumes no obligation to date these projections in the future as market conditions may or may not change.

Additionally, the Company's press release and management's 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 are definitions and reconciliations of GAAP net income to non-GAAP adjusted net income and GAAP net income to EBITDA, which provide additional details.

Also throughout the Company's press release and management's statements during this conference call, we refer to net income 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.

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

Thank you, Leanne. Welcome, everyone, and thank you for joining us today.

I'm very pleased to report Diodes' achievement of our sixth consecutive quarter of sequential revenue growth which established another quarterly record for revenue and was complemented by our achievement of record gross margin and record net income in the third quarter.

Revenue increased in the quarter due to strong demand for our products across all of our worldwide markets. The successful capturing of (inaudible) product synergies has allowed us to take advantage of European and the North American market strengths which has resulted in higher revenue growth in those regions.

The improvement in gross margin was due to a favorable mix of higher margin products combined with generally stable ASP although the past six quarters, we have consistently executed on our new product development plans and expanded our design wins which has contributed to market share gain at key customers. In addition, the capital investment we made to expand capacity at our packaging facility over the last 12 months enabled us to achieve record output in the third quarter and has positioned us well for the remainder of the year.

Also, during the quarter in support of our profitable growth vision, we announced an investment agreement with the management committee of the Chengdu High-tech Industrial Development Zone to establish a manufacturing facility for assembly and testing. This is a long-term multi-year project that will provide the next assembly test site once we have reached maximum production capacity at our Shanghai site in the next few years.

As we look into the fourth quarter, the market supply shortage appears to be easing and the supply and the demand are becoming more balanced. As such, we expect to return to more seasonal trends for the fourth quarter.

Our consistent execution in the regular quarter results reflect Diodes' continued commitment to growing faster than our addressable markets as we secure greater market share in key end equipment, launching additional product in new markets and (inaudible) our broadened product portfolio to maintain a high level of design wins. For example, our recent entry into the (inaudible) market has expanded our addressable market and provided opportunity to drive additional revenue growth in 2011 and beyond. With that, I will turn the call over to Rick to discuss our third-quarter financial results and the fourth-quarter guidance in more detail.

Thanks, Dr. Lu, and good afternoon, everyone. As Dr. Lu mentioned, revenue for the third quarter was a record $163.1 million, an increase of 33.6% over the $122.1 million in the third quarter of 2009 and a sequential increase of 9.4% over the $149.2 million in the second quarter of 2010.

Gross profit for the third quarter of 2010 was a record $61 million or 37.4% of revenue compared to $37.6 million or 30.8% of revenue in the third quarter of 2009 and $53.5 million or 35.8% of revenue in the second quarter of 2010. Gross margin improved in the quarter due to a favorable mix of higher margin products, generally stable ASPs, another quarterly record output at our packaging facilities and continued high utilization at the Company's wafer fabs.

In addition to our wafer fabs being fully loaded, we also maintained operational performance at very high levels. During the quarter, our packaging capacity output from our China facilities increased 8% sequentially to 6.1 billion units. We expect output capacity to increase between 6 to 10% in the fourth quarter.

Total operating expenses were $31.1 million or 19.1% of revenue, an improvement from the 19.8% of revenue last quarter and better than our model rate of 20% of revenue. Looking specifically at selling, general and administrative expenses for the third quarter, SG&A was approximately $22.8 million, an increase over last quarter but improved our percent of revenue base at 14% compared to 14.4% in the second quarter.

Investment in research and development for the third quarter was $7.2 million or 4.4% of revenue compared to $6.8 million or 4.6% of revenue in the second quarter. Total other expense amounted to $2.4 million for the third quarter.

Looking at interest income and expense, we had approximately $300,000 of interest income which is a significant reduction from the second quarter due to our auction rate securities being put back to UBS under our previously disclosed settlement. Interest expense was approximately $900,000 primarily related to our convertible senior notes and was lower than the second quarter due to our [no-net cost] loan being paid off upon settlement of our auction rate securities.

During the third quarter of 2010, we recorded approximately $2 million of non-cash 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 approximately $400,000 of income from our joint venture and other miscellaneous income, partially offset by a foreign currency exchange loss of approximately $200,000.

Income from before income taxes and noncontrolling interest in the third quarter amounted to $27.4 million compared to income of $7.2 million in the third quarter of 2009 and income of $20.6 million in the second quarter of 2010. Turning to income taxes, our effective income tax rate in the third quarter was 19.5%.

Third-quarter GAAP net income was $21.2 million or $0.46 per diluted share compared to third quarter 2009 net income of $7 million or $0.16 per diluted share and second quarter 2010 net income of $16.6 million or $0.37 per diluted share. The share count used to compute GAAP diluted earnings per share in the third quarter was 45.7 million shares.

Non-GAAP adjusted net income was $23.2 million or $0.51 per diluted share which excluded net of tax $1.3 million of non-cash interest expense related to the amortization of debt discount on the convertible senior notes and $800,000 of non-cash acquisition related intangible asset amortization costs. We've included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income which provides additional details.

Included in third-quarter GAAP and non-GAAP adjusted net income was approximately $2.1 million net of tax of non-cash share-based compensation expense. Excluding this expense, both GAAP and non-GAAP adjusted diluted EPS would have increased by an additional $0.05 per share.

Cash flow from operations for the third quarter was $43.1 million, net cash flow was $18.2 million and free cash flow was $17.8 million. For the nine months of 2010, cash flow from operations was $90 million, net cash flow was $21.9 million and free cash flow was $23.7 million.

Turning to the balance sheet at the end of the quarter, we had $264 million in cash. Our working capital at quarter end was approximately $394 million and long-term debt including convertible senior notes which are redeemable in October of 2011 was approximately $130 million.

At the end of the third quarter, inventory was approximately $113 million, an increase of $11 million from the second quarter. This increase was due to a $13 million increase in raw materials and work in process, partially offset by a $2 million reduction in finished goods. Inventory days were 95 compared to 92 days in the second quarter of 2010.

Accounts receivable was approximately $124 million and AR days were 66. Capital expenditures were $28 million during the third quarter or 15.2% of revenue compared to 15.1% of revenue in the second quarter. For the nine months of 2010, CapEx totaled $72.2 million or 16.1% of revenue. Depreciation and amortization expense for the third quarter was $13.1 million.

Turning to our outlook, in terms of fourth-quarter guidance, revenue is anticipated to range between $160 million and $168 million or between a decrease of 2% and an increase of 3% sequentially. Gross margin is expected to be comparable to the third-quarter level.

Operating expenses are anticipated to be comparable to third-quarter levels on a percent of revenue basis. We expect our income tax rate for the fourth quarter to range between 17 and 23%. Shares used to calculate GAAP EPS for the fourth quarter are anticipated to be approximately 46.3 million. With that said, I will now turn the call over to Mark King.

Thank you, Rick, and good afternoon. Diodes' record results this quarter were driven by broad growth in all regions where both Diodes and Zetex branded products once again reached record levels.

Global POS was up 17% and distributor inventory increased but in line with market demand. During the quarter, we launched approximately 150 new products across our Analog, Logic and Discrete product families including DIODESTAR, our platform for a new line of high-voltage rectifiers. Design activity remained at record levels with approximately 400 design wins across all market segments.

With focus on new product development and design wins combined with our ongoing support of our loyal customer base, we continue to gain market share as we further capitalize on our expanded offerings and Zetex cross-selling synergies. In terms of end-market breakup, consumer represented 31% of revenue, computing 27%, industrial 21%, communications 18%, and automotive 3%.

Asia represented 72% of total revenues, sales increased 7% sequentially led by strength in consumer portables and smart phones, coupled with modest gains in [DC fans], notebook, notebook power supplies as well as adapters. Mobile phones were relatively flat while LCD, LED TV and panels decreased during the quarter.

POS grew 7% and inventory for the period increased due to lower demand and represents slightly over two months. In North America, third-quarter sales represented 17% of total revenue and sales increased 22% sequentially.

OEM sales were up 28% with increases at most OEMs across a variety of segments. We achieved solid growth in the consumer segment including set-top boxes, smart phones and audio and in the industrial segment with smart electronic metering, power supply, touchscreen technology and solar applications. Distributor POS continued to strengthen across a broad customer base and grew 14% in the quarter, once again outpacing POP.

In the first nine months of 2010, we surpassed total 2009 POS by 15% and expect to close the year up 75% which positions us for continued growth in 2011. To support internal labor demand, we continue to reduce external boundary wafer sales which decreased 50% quarter over quarter.

Sales in Europe accounted for 11% of total revenue and increased 9% sequentially. OEM sales increased 8% sequentially mainly driven by 40% growth in the industrial customers while sales to consumer accounts improved another 5%.

Distributor POS continued to gain traction and was up 13% for the quarter. The available inventory in the channel remains at a healthy level. We entered the fourth quarter with a very strong customer backlog in Europe and expect further growth despite typical seasonality.

Now turning to new products, on the discrete side, we released 28 new products during the quarter across six product families. Most notably, we announced the development of a proprietary process platform for the manufacture of next-generation high-voltage rectifiers call DIODESTAR.

This process developed at our wafer fabrication facility in Oldham draws on our expertise in both Bipolar and MOSFET semiconductor technologies and is characterized by high-voltage handling and high efficiency. We've released our first device and will use the DIODESTAR process to support a wide range of high-voltage rectifier products that meet the ENERGY STAR requirements for a variety of end applications including LCD and LED TVs, notebooks and desktop computers.

We also introduced the first of four products in our proprietary DIOFET process that monolithically integrates a power MOSFET and a Schottky diode into a single die. These products improve the efficiency of POL converters used in high-volume applications including notebook and netbook computers as well as telecom and industrial.

In terms of Analog new product introductions, we had a solid quarter in which we released 118 new devices across seven product families including LED backlighting drivers for portable consumer products as well as further expanding our growing portfolio of devices for general illumination. Our AL8805 is a simple yet elegant solution for driving MR16 lamps that combines power density in a very small footprint and requires only four external components.

Other Analog product releases include a major expansion of our CMOS LDO line with a new family of 300 milliamp and 600 milliamp LDO devices that provide power-saving benefits in low-power battery-operated products including portable consumer products, set-top boxes, routers and LCD monitors. We made significant product on the next phase of our Logic product line rollout and we are very pleased with our progress.

We have been receiving strong market acceptance in terms of in-process design activity and orders. Major customers have expressed interest in our single-gate product as well as our future product roadmap. In terms of global design wins, we had another strong quarter with design win activity across a broad range of product lines and end equipments. We had several key wins in the consumer markets specifically LED TVs and set-top boxes.

Our new family of MOSFET devices has been designed into every model of a major LED TV manufacturer for the next year. These design wins are in parallel to the adaption of our CMOS LDOs in the same model.

We also secured additional wins for our USB power switch in both LED TV and set-top boxes while our bipolar transistors also continued to gain momentum in LED TV. It was also significant design activity for our products in the portable consumer electronic marketplace with major SBR and MOSFET design wins in handheld media players, tablet PCs and smartphones.

Small sensor adoption was strong in cell phone and notebook PC markets and we also had significant SBR and standard linear product wins in several power adapters for handheld consumer products. In the industrial market, we experienced strong initial wins for our high-frequency DC to DC converters in security and surveillance, for our SBR and Schottky diodes in the expanding solar power market, our [hall sensor] based motor controllers in DC brushless fan and we secured solid wins in the LDD lighting market for our LED drivers and standard linear product lines in several general illumination applications including LED flashlight and street lighting.

In summary, I believe that Diodes will continue our trend of growing faster than our addressable markets as we continue to execute on our new product initiatives and maintain a high level of design wins resulting from our expanded product portfolio. We also continue to recognize sales synergies from our Zetex acquisition as we provide more products to customers and expand our content within the same end equipment.

We entered the fourth quarter with positive momentum and are well positioned to benefit from multiple growth opportunities in the coming year. With that, I'll open the floor to questions. Operator?

(Operator Instructions) Shawn Harrison, Longbow Research.

Mark, maybe just a clarification. What was the point of sale again? Then I guess with that number, I guess you're seeing some -- maybe a little bit of destocking in Asia but continued strength in North America and Europe. What does that portend in terms of typical seasonality for the March quarter? Are you going to still see potential destocking in Asia distributors?

Actually, I think the POS was up 17% globally and I think the inventory actually increased a little bit in the quarter but pretty much in range with the POS. I think it's in line to support the POS we required.

I don't think you are going to see -- I think you will probably see an inventory flat to slightly up going into the March quarter and we'll position -- we generally grow a little bit of inventory in the first quarter and then we level it off in the second quarter in Asia.

Okay and then as a follow-up to that, maybe for you or for Dr. Lu, with the supply and demand environment coming in more of equilibrium, what is the risk to the pricing environment? How quickly could it roll away or is it -- we are not a situation where things are that free that you are going to see abnormal pricing pressure as you get into kind of a seasonally weaker period?

Let me answer that first and then I'll let Mark King edit. In third quarter, our what we call mix independent which means the same (inaudible) going from one quarter to the other quarter (inaudible) we see some slightly ASP decrease. So we will see the same trend going to the fourth quarter.

But fortunately is we take opportunity to change the product mix. So if you look at our ASP, we say it's very stable and even going up slightly, but not really because we raised the price and it's not really just due to the support and demand and supply out of balance.

We do not really go to raise the price. What we do is we take this opportunity when you get shortage, we change the product mix. And in addition on that product mix, we have allowed the new products coming out a better profit margin, gross margin, which again helps the GPM percent.

So, going to the fourth quarter, yes, we see, we already anticipate the ASP could be a little bit more (inaudible) more but in our guidance, we said with all the new product, with the price mix, we're hoping we can get the GPM percent (inaudible) we will not expect another big increase like from Q2 to Q3 but our guidance we say (inaudible) Q4 to Q3.

Just in general, the ASP climate in the marketplaces, I think we'll see some things, that we'll see a little bit of pressure since there has been really very little pressure on the downside all year. But I don't think it's going to be anything dramatic.

I think it will be typical. there was some slight changes in Q4 and maybe a little bit moving into Q1, but I don't think we're going to see any major changes.

There's still a lot of product areas that still seem -- seeing some tight supply and I think customers are being relatively careful and vendors are being relatively conservative in making changes.

Thank you for the insights, everyone, and congrats on a good quarter again.

Thank you.

Harsh Kumar, Morgan Keegan.

First of all, let me also add my congratulations; tremendous execution all around -- gross margin, OpEx, everything. Having said that, maybe a question for Mark King.

Can you talk about how you are feeling about your computer and your consumer business? And then I have one more follow-up. I'm talking about the fourth quarter specifically, how you feel about those two lines.

I think -- you know, actually, I think we pretty feel pretty good about our consumer business. In Asia have we see some opportunity for some expansion or to at least hold our position and I think really in the computer area, we're seeing some down in panels but notebook kind of goes back to somewhere between flat to up, and we have some new content in some of our product lines in there. So I think we're relatively comfortable that we're in our guidance range in those categories.

Okay, okay. And I think your industrial and comm business shot up very hard. You alluded in your commentary to some explanation on what might've driven that.

Is this -- is any of this coming from Zetex or all of it? Or also is this simply a function of you guys getting more settled into Europe or is there something else also that's going on there?

You'll see -- clearly, our Europe numbers have been strong. And as I mentioned in here, I'd say Europe is probably the strongest market going into Q4. It's predominantly a small amount of consumer and a strong industrial.

Industrial in Europe was up 40% quarter over quarter. So we think the industrial business in Europe is responding later to all of this and that these customers -- some of them are just getting hot at this point.

We also had a very strong North American number as well as our SBR products and power supply are driving some pretty good numbers in Asia. So I think all along, we've got some good strength in the industrial segment.

Got it. Last if I can, just a housekeeping question. Tax rate, should we think of 20% as a next year kind of a tax rate or 17.5%? Any kind of color that you guys can give us would be helpful.

Yes, this is Rick. I think next year you could assume that it would be similar to what we have in the fourth quarter.

Okay, thanks. Thank you.

Steve Smigie, Raymond James.

Wanted to also add my congratulations on some great performance. Just if you could talk a little bit more about the facility in Chengdu and how soon does the Shanghai facility fill up? When do you need to start ramping there? Will there be extra CapEx and what sort of competitive advantages does that facility give you?

Well the Shanghai facility still has several years. I don't know if you visit there or not recently, we're building the second and the second building is bigger or actually 2x size of the first building and we still have several floors to go in the second building.

And then, after that, if we need it, then we'll add one more floor on both buildings and then we can move our warehouse to outside. So we probably in the (inaudible) depending on how fast we grow, I think our outlook can be probably almost double before we fill up.

So depending on how we grow, but we now -- I think the weakest number, we're talking about 6.4 billion units in Q4 (multiple speakers) in third quarter. So we are talking about another 6 to 8% growth in fourth quarter. And you know, we are talking about almost double that output if we do everything we can and that facility will be full.

So you can see it probably still has several years ago. But we don't want to wait that long, so we started looking in Chengdu and we'll eventually build it up.

So, you will not see a major CapEx expenditure. It will be just part of -- in our business model talking about 10 to 12%. Now this year is a little higher because we underexpanded last year.

So this year we are about a little bit higher than last year. But we're going to be still within our business model to 10 to 12%. And you will not really see a major expenditure -- major capital expenditure for that.

The reason we really go to Chengdu is really for the risk reductions. Most of our output is from Shanghai and we really need to have another site to spread out the risk and that's why we are now moving to Chengdu to build up the Chengdu facility. Does that answer your question?

Yeah, that was great. Thank you, I appreciate that. Dr. Lu, you also mentioned we're in an environment where we're returning more to more normal seasonality.

What would you guys -- I'm not saying that you would necessarily do seasonality in Q1, but what would you consider a seasonal Q1 quarter at this point? Down 5% or something?

And similarly on the gross margin, you guided flat for Q4, but if pricing softens a little bit as we return to a more normal environment and maybe you have some of the consumer and PC products start to pick up again relative to your nice industrial, would that also suggest that we should be a little cautious and maybe there's a little bit of gross margin returning to more normal levels as we look forward?

Let's talk then about next year, Q1. We don't give the focus on Diodes alone. But in general, in semiconductor seasonality, Q1 typically is 5 to 10% down and 5 to 10% down depends on actually Christmas sales.

If you have very good Christmas sales, then you need to back fill with (inaudible) then Q1 typically will be low trough. But then if you have -- you do too much of a quarter for Christmas and the Christmas sales is not as good, then you have a lot of inventory left over, then Q1 typically will be low.

But now with the channel starting to get stronger, which is the Chinese New Year and this year, the Chinese New Year is at the beginning of February, then you'll be struggling in the December and January to build up for Chinese New Year. Therefore again, Q1 at two months is post Chinese New Year, then you have more risk of down. So it plays between US Christmas and the Chinese New Year. But typically we're talking about 5 to 10% negative.

And then, we are talking about ASP, I think we already gave the guidance on Q4. So we already consider the ASP going to be dropped, but then we will try to improve by the mix. So we're hoping our ASP in Q4 will be (inaudible) from Q3.

You won't see the improvement and we will see some (inaudible)

If I could just sneak one more in. You guys obviously are pretty good in diodes. There has been some talk recently as we're getting a lot more power efficiency concerns out there that there's going to be some more use of silicon carbide to accomplish some of the tasks that Diodes typically accomplished.

How much do you guys do there? I would kind of think not a ton yet? Of is that an area you'd guys would be interested in or not so much using silicon carbide for the diodes or even transistors for that matter?

Number one, I'm not really interested in getting into silicon carbide. And second thing, I don't really think that's a big threat to us. And our costs are so low (inaudible) the diodes and ASP is so low, it's not that easy.

Steve, you know, in my speech and some of the announcements recently, we have talked about DIODESTAR. That is definitely right there to kind of challenge that efficiency but at a very cost effective way.

I mean, it's really the manufacturable general solution to the requirements of what people are talking about for efficiency. So I think we're going to drive that technology and I think we're going to be able to make it propagate to many more applications than say the costly silicon carbide.

Ramesh Misra, Brigantine Advisors.

First question for Rick. In Q2 you had suffered some foreign exchange losses. Did you have corresponding foreign exchange gains in Q3 or what is happening on the Forex side?

No, as I mentioned in the speech, we only had about $200,000 of foreign exchange loss in the third quarter. So those were significantly reduced. The currencies basically stabilized and we didn't have that issue in the third quarter.

Okay, are you doing anything more aggressive on a hedging standpoint in that regard or not really?

No, not really.

I think if you remember, we talked about that before. It's a natural hedge for us because our operation in Oldham is using euro and then -- our price and our revenue, most of our revenue in Europe is using the euro. So it's a natural hedge.

It just moved from [GPM 9] and up and down to the SG&A. But the reality is go to the bottom line, they wash out each other.

Okay, great. And then Dr. Lu, in regards to commodity pricing, are you seeing any worrying trends over there? Things like metallization prices or other packaging materials?

You are talking about ASP?

No, pricing of some of the raw materials; things like copper, aluminum --

Well actually, the most -- the biggest item to affect us is the gold price. We use a lot of gold and gold prices have been going up tremendously.

So what affects us the most is the gold price. Fortunately, we [are aggressive] to convert gold to copper wire or reduce the dimension of diameter of the gold wires and both give us enough cost reduction to offset all the material increase.

So for us, we don't have -- the total material won't affect us that much.

Okay, great. One final question for Mark. You did talk quite a bit and have been talking a little bit about the general lighting market from an LED standpoint, Mark. How significant is it for you at this point and when do you see that portion of your business really beginning to become that a fair -- let's say a 5% or 10% portion of your business?

I don't know if I'm really ready to get into that with the numbers in front of me. I'm kind of sitting in Europe and I don't have all my books with me.

But in reality, I think -- every quarter our business grows in that marketplace and I think the application horizon for general lighting in our LED drivers grows. So I think were making steady -- regular and steady progress. And as we continue to release more products, we are seeing more options for our product [mostly] in the industrial segment as well as in the automotive segment for those products.

(inaudible) actually we are more in the backlighting, like LED TV backlighting or the handheld instrumentation backlighting. We have more of that product or revenue from that area than the general illuminations. And general lighting is a major area we are focused on but the revenue from that side is still not significant at all.

John Vinh, Collins Stewart.

First question for Dr. Lu. You keep downplaying at least on past calls kind of your ability to expand margins above kind of 35%. Obviously with guidance into Q4, this would be kind of three quarters in a row where you have meaningfully exceeded that 35% gross margin rate. Should we be thinking about kind of a new sustainable higher gross margin rate for you or should we still be thinking about kind of 35% over the longer term at this point?

Well, you know, my business model is 35% and we kind of said 35% is what we targeted, but we don't mind to take opportunity to -- if we can get higher gross margin, we don't mind to take it. And yes, we are now probably looking for somewhere around probably say 35 to 37%.

But I still don't want to put the focus on the GPM percent. I still prefer we grow -- we don't want to lose business because gross margin is too small. We still try to put the growth as our number one priority, GPM dollar is more important than GPM percent.

Got it, got it. Just to follow up to that, you also had talked about your ability to kind of change mix to drive higher gross margins to offset some of the pricing pressures that you guys have seen.

With supply coming in balance with demand, how sustainable is that? Is there still an ability for you to kind of drive higher mix going forward over the next couple of quarters or how do you see that playing out?

I think looking forward, you're probably going to see the mix will be offset -- the mix improvement will be offset by the ASP reductions. Now that's several quarter.

Mix are weighting the ASP production, therefore we can get the GPM improvement or GPM percent improvement. Move forward, I was thinking ASP drop will be -- start to get more significant and that will be probably better (inaudible) by a mix change and therefore that's why I said probably you're going to start to see somewhere 35 to 37% and you probably won't see continued that GPM from 35.8% in Q2 to 37.4%.

We are saying now fourth quarter probably 37.4% and then move to -- later on it might start to drop. Now I do -- as Mark King already said, we won't see a major drop from that GPM percent because we have the product mix to offset that.

But when the ASPs start getting really aggressive, we're going to see some GPM percent drop. As soon as they're better than my business model, I would just (inaudible) business and do the growth instead of keep up the business and drop the revenue.

Great, thank you. Then just last one for me, you had mentioned earlier that you expect your back-end capacity unit volume to increase by 6 to 10% in Q4.

Wondering if you could kind of reconcile that against kind of the midpoint of your guidance which is kind of flat to slightly up. Is that mix, ASP, maybe a greater mix of OEM. If you could give me some color, that would be great.

Well, you know, we fully increase the (inaudible) capacity. If the business is not there, I think we give the business guidance. Now that business guidance, some of that was due to the ASP drop but the mix will be covered, and so we put GPM percent about the same.

But, the volume, it will be increased some but that -- what we really want to do is give us a little bit of breath room such as that. If the business pick it up, we will not be -- we will not lose the revenue opportunity.

If you remember, the whole focus is profitable growth. As long as the GPM is better than 35%, I really don't want to lose the opportunity just because the capacity constraint. Therefore I'm trying to build a little bit more capacity in case the revenue of business is there.

Gary Mobley, Benchmark.

Could you share with us by how much your production lead times shrunk throughout the third quarter? And could you have done any more revenue in the third quarter if you weren't perhaps overutilized in the early part of the quarter?

Well, I think in our business model, we don't have that much leadtime issue because our product -- wafer cost is not high (inaudible) cost as high, much higher. Therefore we always build up the wafer inventory to support the packaging need.

The packaging leadtime is only probably two weeks. Therefore we really don't see that much of the leadtime issues.

When you get capacity, we just say yes, we can support it, no we cannot support it. We can see it and we really do not play with the detail.

If we can support it, we take an order. If we cannot support it, we just say no, we cannot. Because we can very clearly see our capacity and that's why -- the reason we don't see that much of double ordering because basically we know the leadtime is two to three weeks.

Okay, and could you have done more revenue in the third quarter if you had a bit more capacity?

In the third quarter?

That's correct.

We probably at the beginning, yes, so --

If I could take that, Dr. Lu. I think we probably could have done a little bit more commodity product in the early part of the quarter and maybe even in the latter part of the quarter. But really I don't think it would be overly material.

Okay, my next question relates to your foray into the standard logic market. Could you give us an update there on the timing of perhaps some revenue and when it might become material?

We don't separate our revenue by analog, discrete or logic. What I can say is this. Our discrete product comes in at the right time when our customers cannot get support from other vendors.

So they're very welcome on our logic product and we see a lot of good design wins, but we don't really separate. Again, those kind of revenue now at the beginning of stage is not really significant to our total revenues.

This is really a growth driver for probably 2012 to be really significant enough. Mark, do you want to add it?

No, I think that's probably on track. I think if you looked at the thing, the progress of the program, I think we have had distributor acceptance and we've positioned reasonable stock levels to support the product line across our distributor channel.

I think we've got some very exciting interest from some of our key OEMs in the product line and I think actually everything is going quite well in the product area. The revenue, we do have revenue and we have our first orders and so forth that are beyond distributor stocking. But again, it's going to take some period to get the right mix with the right customers and start to get into the production, major production cycles with these customers.

Tristan Gerra, Robert Baird.

How much wafer capacity do you think you would have added year over year and in 2010? And also, you had said earlier this year you had booked capacity for both Q3 and Q4 on the basis of your visibility for demand. Are you booking capacity for Q1 at this point?

Well, wafer capacity -- we typically -- our motto is if we reach about 80 to 85%, we consider that it's full because our capacity is not very big in Oldham fab, so we (inaudible) and therefore we really (inaudible) about 80 to 85% we consider as full. And at this time, Oldham fab is running about that rate.

Now, if necessary, then we will probably put some capital equipment for redundancy purposes and then that that will increase that 80 to 85% to 100%. So that's in the Oldham fab.

In Kansas City, again, we do have use in that to support some foundry business. And we are now running somewhere around again probably 75 to 80%. But we still have the room to increase and then if necessary, we will start to squeeze out the foundry business to be used by internally. Therefore, I don't think wafer capacity will be that much of a concern of me.

Brian Piccioni, BMO Capital Markets.

I was kind of worried I wasn't going to be able to get in under the wire there. First, congratulations on great results.

You have obviously answered most of the questions I would've asked. But just as a follow-on, you had discussed earlier in the call on a few occasions issues like inventory at customers and stuff like that.

Would you characterize yourself as being very confident that there isn't possibly excess buffer inventory being maintained at your end customers or at some point in between?

Well I can tell you we're very confident on that and the reason is since we are -- our leadtime is not really that long because like I mentioned, we put in wafer inventory. So our leadtime is very short.

Second is we really support the customers, so we don't really -- the customer double ordering and they know we have big capacity to support them. For the important customer, they know (inaudible) wait, they probably just don't even want to waste their time or waste their money to put the inventory in their site. So basically, I don't feel that concerned about our customer view of their own inventory.

Okay, that's great. As a follow-on to an earlier question, with respect to raw material, you answered the question of gold of course. But you have other raw materials like molding compound, the stuff that goes into your lead frames and stuff like that. Would you characterize that pricing environment as being stable or declining or rising?

Well actually, from the wafer -- wafer is our next big one because we bought another wafer from somewhere else. So wafer is another big one other than gold wire.

And we do have the wafer price up in third quarter and even in second quarter. But we don't see they've continued up anymore, so we started going to asking for price down.

So from a wafer point of view, which is our next major expenditure, I think fourth quarter or even that Q1 we will start to see some decrease. Basically Q3 is the hardest one, Q4 will probably equal to Q3 but we started negotiating with our vendor trying to win the wafer price down. But we definitely don't see any increase anymore because wafer demand has been easing up and that's our second one.

Now the rest of the years, they're up but they won't be our major cost. Gold wire is our number one cost and wafer we are buying from our support -- our foundry or some other foundry is our second larger cost.

Stephen Chin, UBS.

I had a couple questions related to the industrial market and the products that you guys are currently selling in there. I guess first of all in terms of the demand that you're seeing from Europe and the Americas for the industrial market, is the demand in Q4, is that considered seasonal or is it still better than seasonal (inaudible)

The seasonality is generally driven by Asia. So in our picture, it's not so clear. But I think the demand is relatively -- is consistent.

And frankly the fourth quarter in North America and Europe is new from two years of relatively soft periods. So I think that it's hard to tell. I think we're going to have to just keep going. But it looks very consistent and the rates look very consistent, are growing from third to fourth quarter.

Okay, in terms of the products that you are selling to the industrial market, I assume a lot of the favorable mix shift towards higher margin products, I assume that's going into the industrial markets.

Any color on the leadtimes for those products, the higher margin products? Are they primarily being produced out of the Oldham fab as opposed to (inaudible)

I would say they would be produced out of all different fab areas, the different products and so forth. And I think you can always see -- we tend to see on our higher margin products and so forth are generally -- we try to keep our leadtimes the shortest.

So we make a major effort to capture anything we possibly can in those product areas. But where we stretch our leadtimes generally is in the commodity area so we can control the input to our factory.

(inaudible) we have transferred the technology from Oldham to Kansas City which is much bigger fab. And for example, we transferred our transistor, bipolar transistor which originally was produced (inaudible) all fab, we've now transferred that technology to Kansas City.

So in case other product had demand increase such as that, Oldham fab is full, then we can offload some of bipolar transistors which originally (inaudible) fab can be started to generate by the Kansas City fab. So we do a lot of stuff such that we can have a dual source in case we get some upside from one area, we still can support it.

Obviously (inaudible) product which give us a better margin is one of the products -- is the product we're going to put more support for.

I guess I'd just follow up one more up time on that. These higher margin products, are they typically a high trend type product or is it somewhat proprietary where your customers would have to book a quarter in advance at least in order to (inaudible) them or --?

I would say both and I don't think you are -- whether they book in a quarter in advance and so forth, generally our own customers, we know their buy rates pretty regularly. So we have generally decent issues on it and we can generally jump to -- jump up support as required. So I think we have a pretty good capability to turn these products relatively quickly.

Last question I had was just on the -- in terms of order momentum for the computing and consumer markets. If you could offer a little color on how those growth trends are today relative to exiting -- steady from Q3, is it a little better, a little worse? That would be helpful.

I think it's pretty consistent with our guidance. It's right around in that same area, maybe a little stronger on the consumer.

Okay, wonderful. Thanks again and nice job on the quarter.

Thank you.

At this time, I'd like to turn the call back to Dr. Lu for closing remarks.

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

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.