Diodes Inc (DIOD) 2010 Q4 法說會逐字稿

Good afternoon, and welcome to Diodes, Incorporated's fourth quarter and fiscal 2010 financial results conference call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session. (Operator instructions)As a reminder, this conference call is being recorded today, Wednesday, February 9th, 2011. I would like to turn the call over to Leanne Sievers of Shelton Group, Investor Relation.

Good afternoon and welcome to Diodes' fourth quarter and fiscal 2010 earnings conference call. I'm Leanne Sievers, Executive Vice-President of Shelton Group, Diodes' Investor Relations firm.

With us today are Diodes' President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer Rick White; Senior Vice President of Sales and Marketing, Mark King; and Director of Investor Relations, Laura Mehrl.

Before I turn over the call 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.

Management may make additional forward-looking statements in response to your questions. Therefore the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

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

In addition, any projections as to the company's future performance represents management's estimates as of today, February 9, 2011.

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, 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 statements during this conference call, we refer to you 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.

And now we'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 pleased to once again report another solid quarter in the years of profitable growth of Diodes.

We continued to experience strong demand for all quarter of growth on our worldwide markets. Driven by the continued ramp up of previous design wins and the customer acceptance of our new product portfolio, in 2010, we achieved recovery cells which underscore the successful execution of our profit of growth modem as we merged from the 2009 downturn as a stronger Company.

This accomplishment was further highlighted by our seventh consecutive quarter of sequential revenue growth and our 20th consecutive year of profitability.

The diversity of our end market and the geographic exposure provide us the flexibility to shift our focus to the (inaudible) areas or regions where we can maximize our growth and profits.

For example, even though notebooks may be experiencing slow growth in the US, we also participate in the fast growing [Tevis] market where we are achieving significant growth in the market penetration.

Additionally, our industry estimates indicate that the US consumer and computer markets may be slowing. Those end markets are experiencing higher growth rate in Asia, which is a region where we have almost 70% of our [ramials].

Likewise, there in the middle to late part of 2010, we were able to focus on European and North American markets, to take advantage of related strength in those regions, which contributed to persevering growth.

I believe it is this flexibility and the diversity of our business model that have allowed us to achieve better than market growth rate in the product mix.

This strategy has been consistently successful for Diodes, and our shareholders. We plan to continue to execute on this strategy for year to come.

In regard to the fourth quarter, we generated record growth margin of 38.3% primarily due to the benefit of an improved quarter mix, our aggressive cost reductions, as well as efficiency at our manufacturing facility.

As I have stated in the past, our model rate continues to be in the 35% range. But we always strive to improve our gross margins in support of our profit of growth strategy. We will always seek ways to gain more profit dollars when and where we can without sacrificing revenue growth.

Our accomplishment in 2010 has established a strong foundation for continued growth momentum in 2011. We remain positive on our outlook, due to our strong design win traction. Highly successful new initiatives, and additional opportunity to capitalize on Gtech growth (inaudible) synergy.

Although typically a seasonally slow period, our current environment appear to be exhibiting stronger season demand than in the previous first quarter.

We are including assembly equipment task capacity in first quarter, but our manufacturing output is being affected by reduced accumulation caused by channel labor shortage and fewer working days and the Chinese New Year in February.

As such, we are guiding revenue for the first quarter of 2011 to be flat to down 5% point with fourth quarter 2010.

In closing, I would like to emphasize that our record is sound in consistent execution reflect Diodes' continued commitment to achieve growth rate that exceed addressable market.

Our future growth will be driven by securing greater than market share in key increment, mounting additional product in new markets and the leveraging (inaudible) toward our portfolio to maintain a high level of design wins including an increasing contribution from our newly release standard [ocha] products.

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

Thanks, Dr. Lu, and good afternoon, everyone.As Dr. Lu mentioned, revenue for 2010 was a record $612.9 million, a 41.1% increase over the $434.4 million in 2009.

For the fourth quarter, revenue was $163.8 million, an increase of 25.7% over the $130.3 million in the fourth quarter of 2009. And a moderate sequential increase over the $163.1 million in the third quarter of 2010.

Gross profit for 2010 was a record $225 million. Increasing $104 million or 86% from 2009. Gross margin increased 880 basis points over 2009, to 36.7%, primarily due to benefits from our cost reduction initiatives, high operational performance, and utilization in our wafer tabs, record output at our packaging facilities and favorable product mix, related to our new product initiatives.

For the fourth quarter, gross profit was $62.6 million, or 38.3% of revenue, compared to $41.8 million, or 32.1% of revenue in the fourth quarter of 2009. And $61 million or 37.4% of revenue in the third quarter of 2010.

Gross margin was above our model rate of 35%, due to our factories running at maximum production and efficiency, as well as continued improvements in product mix.

Packaging capacity from our China facilities increased 3% sequentially in the fourth quarter to 6.3 billion units.

We expect equipment capacity to increase approximately 4% in the first quarter, but total output will be down approximately 9%, due to reduced equipment utilization because of the recent China labor shortages in the Coastal regions, coupled with fewer working days and the Chinese New Year holiday in February.

Total operating expenses for the fourth quarter were $30.4 million, or 18.6% of revenue, an improvement from the 19.1% of revenue last quarter and in line with our expectations of a 50 to 100 basis point sequential decline.

Looking specifically at selling general and administrative expenses for the fourth quarter, SG&A was approximately $23.1 million or 14.1% of revenue, which is in line with the $22.8 million or 14% last quarter.

Investment in research and development for the fourth quarter was $6.2 million or 3.8% of revenue, compared to $7.2 million or 4.4% of revenue in the third quarter. Total other expense amounted to $1.1 million for the fourth quarter.

Looking at interest income and expense, we had approximately $260,000 of interest income, and approximately $900,000 of interest expense, primarily related to our convertible senior notes.

During the fourth quarter of 2010, we recorded approximately $1.9 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 include in total other expense was approximately $1 million of income from forgiveness of debt from one of our Asian subsidiaries.

Income before income taxes and non-controlling interest in the fourth quarter amounted to $31.1 million, compared to income of $11.4 million in the fourth quarter of 2009. And income of $27.4 million in the third quarter of 2010.

Turning to income taxes, our effective income tax rate in the fourth quarter was 19.7%, which was at the low end of our revised guidance range of 20% to 24%.

GAAP net income for the full year of 2010 was $76.7 million, or $1.68 per diluted share compared to $0.17 per diluted share last year. And as Dr. Lu mentioned, represented our 20th consecutive year of profitability.

Non-GAAP adjusted net income for the year was $1.82 per diluted share. For the fourth quarter, GAAP net income was $24 million or $0.52 cents per diluted share, compared to fourth quarter of 2009 net income, of $14.2 million, or $0.32 per diluted share. And third quarter of 2010 net income of $21.2 million or $0.46 per diluted share.

The share count used to compute GAAP diluted earnings per share for the fourth quarter was 45.9 million shares.

Fourth quarter non-GAAP adjusted net income was $25.3 million or $0.55 per diluted share which excluded, net of tax, $1.5 million of non-cash interest expense related to the amortization of debt discount on the convertible senior notes, $900,000 of income from forgiveness of debt, and $800,000 of non-cash acquisition-related intangible asset amortization costs.

We have include in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income, which provides additional details.

Included in the fourth 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 fourth quarter was $28 million. Net cash flow was $7.1 million, and free cash flow was $5.5 million.

For the year, cash flow from operations was $118 million, net cash flow was $28.9 million, and free cash flow was $29.2 million.

Turning to the balance sheet, at the end of the fourth quarter, we had $271 million in cash. Our working capital, at quarter end, was approximately $289 million.

In the fourth quarter, our convertible senior notes, which are redeemable in October of 2011, were categorized on our balance sheet as a current liability, and amount to approximately $128 million.

At the end of the fourth quarter, inventory was approximately $121 million, an increase of $8 million from the third quarter.

This increase was due to a $2 million increase in raw materials; $4 million increase in work in process; and a $2 million increase in finished goods. Inventory days were 104 compared to 95 days in the third quarter of 2010.

Accounts receivable is approximately $129 million, and AR days were 69.

Capital expenditures were $14.4 million during the fourth quarter, or 8.8% of revenue, compared to 15.2% of revenue in the third quarter.

For the full year 2010, CapEx totaled $86.6 million or 14.1% of revenue, which was above our model level of 12% due to reduced CapEx in 2009.

Our investments in capacity expansion at our packaging facilities allowed us to achieve record output during the year while also further supporting our growth in 2011.

We expect CapEx for 2011 to be back to our targeted range of 10% to 12% of revenue. Depreciation and amortization expense for the fourth quarter was $14 million.

Turning to our outlook, in terms of first quarter guidance, we are increasing assembly test equipment capacity in first quarter. But our manufacturing output is being affected by reduced equipment utilization, caused by China labor shortages and fewer working days and the Chinese New Year holiday in February.

As such, we expect revenue for the first quarter of 2011 to be flat to down five percentage points compared to fourth quarter 2010.

In addition to the impact on revenue, equipment utilization is also affecting our gross margin, which we expect to be 36.5%, plus or minus one percentage point.

Gross margin will also be influenced by our China wage increases, and start-up costs associated with our new Chengdu assembly facility.

Operating expenses are expected to be comparable to the fourth quarter levels on a percent-of-revenue basis.

We expect our income tax rate to range between 17% and 23%. Shares used to calculate GAAP EPS for the first quarter are anticipated to be approximately 46.3 million shares.

With that said I will now turn the call over to Mark King.

Thank you, Rick. And good afternoon. As Dr. Lu was mentioning, our record results in 2010 demonstrate the scalability and sustainability of our profitable growth model.

Both Diodes and Zetex branded models reached record levels during the year as we continued to gain traction on both design wins and new product releases. From an industry's perspective, we believe the market has normalized and returned to typical seasonal trends with a healthy environment and long-term outlook.

Overall we feel positive about Diodes' position in the market and our opportunities for continued growth in 2011. In terms of end market breakout, consumer represented 32% of revenue; computing 28%; industrial 20; communications 17; and automotive, 3%.

Asia represented 73% of total revenue. Sales increased 2% sequentially, led by strength in consumer portables, Smartphones and tablets, with notebook, notebook adapter and power supplies relatively flat.

Similar to last quarter, LCD, LED, TV and panels decreased slightly during the quarter. Channel inventory rose to a traditional three months.

In North America, fourth quarter sales represented 13% of total revenue. Sales decreased 27% sequentially as compared to a huge Q3 where distributors took advantage of Diodes' ability to ship while competitors struggled to deliver products.

As a result distributor POP declined 33% from the third quarter but Q3 and Q4 together averaged 22% higher than Q2. Distributor inventory is healthy and is creased in the quarter. OAM sales declined at seasonal levels.

For 2010, North American region increased 86% year-over-year, and distributor POS increased 73% and is positioned for continued growth in 2011.

To support internal wafer demand, we continue to reduce external foundry wafer sales which decreased another 76% quarter-over-quarter and were down $7.5 million for the year.

We have reached our goal to internalize our wafer production and wafer revenue will not be material going forward.

Sales in Europe accounted for 14% of total revenue and increased 27% sequentially, despite typical seasonality.

Sales were driven by a 25% increase in the industrial customers; 22% in automotive; and 17% increase with consumer customers.

Distributor POS gained traction and distributor inventory reached three months. Demand in the channel remained stable going into the first quarter.

Now turning to new products, it was a very active quarter for new product releases across all product lines.

During the quarter, we released 55 new discrete products across eight product families. There were three key product releases related to our MOSFET products.

This includes the expansion of Diodes' IntelliFET portfolio with the introduction of two single-channel and one dual-channel device.

The self-protected MOSFETs are well-suited for automotive and industrial applications and ideal for switching inductive loads such as motors, relays and lamps at low frequencies.

Secondly, the Company's proprietary DIOFET process that integrates the power MOSFET and a Schottky diode into a single dye, has been strengthened with the introduction of two devices targeting DC to DC conversion circuits in notebooks.

And thirdly, Diodes introduced four MOSFETs packaged in the DFN 10006 which deliver higher performance in a low-profile package and are ideal for small consumer portables like Smartphones, tablets, as well as media players.

Also within our discrete side, we released three bipolar transistor devices targeting back-lighting applications within the LED, TV markets, as well as two high-performance devices, one a dedicated gate driver intended for the power supply market and the other for automotive HID, lighting applications.

In term of analog new product introductions, we released 74 new product devices across eight product families, including the expansion of our LED, backlight drivers.

During the quarter, we introduced a multi-typology LED driver designed to increase the performance of high brightness automotive, industrial and commercial lighting systems.

The ZXLD 1374 LED driver is an integrated 60-volt power MOSFET switch that drives a maximum LED current of 1.5 amps.

This driver is capable of delivering high current levels and tighter inner lamp luminance matching required by higher-brightness LED systems.

We also introduced the AL 8400 linear LED driver controller, which is designed to tightly regulate LED currents via an external transistor across a wide variation of high brightness LEDs.

This device has a very low current sensing voltage, which reduces operating voltage overhead and increases efficiency compared with traditional solutions.

We also continued to make progress on further expanding our logic product line, including the introduction of new versions of our CMOS logic families and DFN packages.

These low power logic devices draw less than one micro-amp of supply current, making them ideal for use in battery-powered products, including Smartphones, tablets, notebooks, consumer portables, and other high volume, key- end equipment.

There continues to be a high level of interest from major customers for our single gate products, as well as our future product roadmap.

In terms of global design wins, we had another very strong quarter for design win activity across a broad range of product lines and end equipment. We saw three of our products -- an SBR, a Schottky diode and a voltage regulator, adopted into power charges for a major high-volume manufacturer of MP-3 players and tablet PCs.

These devices combine high powered efficiency with a very small form factor and reduce height. Advantages that are highly valid in consumer charger applications.

In consumer products, we saw design wins for our hall sensors into three different notebook PC platforms, further increasing our share of the notebook open-closed sensor sockets.

We had a very healthy growth in our USB power switch adoption across a variety of computing products, including wins in notebook, notebook gateways, docking stations and optical disk drives.

In addition, we also saw our USB power switches pushing further into the consumer product space with wins in [septop] box and LED TV applications.

In the industrial space, we saw further gains for our line of cost competitive LED drivers with three new wins for MR-16 applications, include one multi-million unit per year opportunity.

Our Diodes star product also continued to achieve strong design (inaudible) with industrial and Telecom equipment wins that allowed us to expand our customer reach to new accounts.

In summary, I believe that Diodes remains well positioned for continued growth and will further benefit from the disciplined execution of our profitable growth strategy.

This approach has allowed us to consistently grow faster than our addressable markets as we capitalize on driving revenue growth, benefiting from our operational efficiencies, and further improving our product mix.

Our continued success on new product initiatives and high level of design win activity will be key growth drivers in 2011 and beyond.

We are leveraging our broadened product portfolio to gain more share at customers by expanding our content within the same end equipment.

We entered 2011 with momentum across all business segments and we look forward to reporting our future successes as we achieve new milestones in our business. With that, I'll open the floor to questions. Operator?

(Operator instructions).

Your first question is from the line of Ramesh Misra from Brigantine Advisors.

My first question was related to your logic product ramp. When does that become a meaningful product portion of your revenues? And if you can provide some degree of the acceleration through 2011? That would be great.

We are pretty consistent on the path that we have been talking about. We are starting to see reasonable revenues from that or measurable revenues from that in the second half of 2011.

The design activity is quite brisk, but the adoption takes a little bit of time. Most of this will be done in new design wins and new sockets. It takes awhile for those to get into production. But we feel pretty comfortable we are making good progress toward that goal.

When you start from considerable business, even you double every quarter, it still takes a long time to be significant to our revenue. But I believe, when you say you say 2015? I think he is.

Second half of 2011.

Second half 2011, it really won't be a major effect to our revenue growth.

Okay. Got it. In regard to the pricing environment, what are you seeing out there? Both at the end of Q4, and what are you seeing fanning out for Q1 and if you are getting any greater visibility then?

The price still fairly stable. You have seasonable slow-down and the price erosion, but typically is offset by our cost reduction. You see we still get very high on our gross margin.

And in fourth quarter, move forward to 1Q. We don't really see a major ASP declaration. We still see a normal season pattern, okay? And then you always try to offset by cost reduction. So we don't see any special difference from the past.

Got it. In regards to the labor shortages, Dr. Lu, this is actually the first time I think you have ever brought this up.

Are there any abnormal drivers for that? Or was it -- is it mostly related to the, to the New Year holidays? And do you expect the labor issues to be resolved by Q2?

Okay, number one, to answer you, the problem should be resolved by Q2, yes. But the reason they are unusual than before, is China just announced this fifth so-called five-year plan. China's government always, every five years, they have this so-called five-year plan. They just announced the 12th, five-year plan.

And this five-year plan start to put a lot of emphasis in the inland economic or inland situation than the cost. So China want to push the development in the inland faster than the cost, such that their economics is much balanced than before.

And in the before, China put a lot of emphasis in the cost, such that the cost begins to go way up and then cause this infraction and this infraction caused a lot of embarrass between the rich and poorer.

So the government tried to stabilize the situation, and tried to push the development in the inland of China and therefore, you know, you get more emphasis, more money, developed in that area.

And that cause the labor, instead of go to cost, to picket [chaw]. The labors start to go back and don't go back. Okay?

In addition to that is the weather and the transportation problem. People go home for Chinese New Year sooner than before. And that is what happened to us. So all those things caused the labor shortage. But we (inaudible) in that and we believe in the second quarter -- actually, we start hiring more people. But don't forget, it take us six, eight week of training before they can be productive.

Right. Just very quickly, I guess all this kind of pushes you toward your ramping up your Chengdu facility.

You are right.

When does Chengdu ramp up? What's the time line for production to become meaningful at Chengdu?

We, from the long term, we need to buy the land from the government, build the building, and then start to go to the -- go to ramp up the production.

But temporary, what we do is we [dees] a facility and that facility we just finish the day out and then we are going to start to install the equipment and then start to ramp.

But it will be not a high volume, until we have our own -- then purchased, build our own building. So I'm looking at, for the long-term biggest growth, will be probably one year to 18 months. But we are ramping up our diesel facility to get people trained, to get engineering, the crew did.

So we do have so-called initial production, and supposed to be equipment to come in after Chinese New Years. So there is total equipment now, and probably one quarter from today, we can start to do some limited production.

Okay, thanks very much. And congratulations.

Your next question is from the line of Steve Smigie with Raymond James.

Great, thank you. And congratulations on the nice result, the nice guidance.

Something to talk a little bit about CapEx strategy for this year. You guys accelerated the capital spending last year and I think that resulted in some pretty significant share gains.

Sounds like you are going back to your more normal CapEx plans. How does that fit in with continuing to capture market share? Could you maybe reaccelerate it later or is this going to be plenty of capital added, at this point?

If you look at our CHEI in the past, eight to ten years, we are running with our CHEIs, about 20- something percent. 23%, 25%. If we want to keep in that kind of rate -- we 10% to 12% would be okay. Okay?

And the reason, last year we spend 14% is we actually underspending in 2009 and in 2010 we grow 41%. That -- to support that 41%, you really immediate to increase and that's what happens.

But move forward. I think we will be keeping to our [bit of] model, which is 14%.

12%.

No, 12% . 10% to 12%. Now, we would start to consider [two door] and see how aggressively we want to grow up [chendu]. Okay? And that, if we grow our regular, then 10% to 12% can cover that. But at the beginning, we might need to be higher to cover and do

Okay, great. And then I guess, just similarly, you guys have done a couple of very successful acquisitions, Zetex and -- actually, more than a couple. Several successful acquisitions really ramped up your growth. Give you some good cross-selling opportunities. Been a little while since the last major one.

Does it make sense to start looking at another one here?

Yes, it always makes sense to do the M&A. The only problem is, in several packets, I want to buy the -- they think my offer is too low. If I can get to some kind of agreement, we will have some M&A activity.

But at this moment, I do not have the one I can talking about yet. Always my responsibility and is always in my consideration and always watch out for that opportunity.

Okay. Last question is just with regard to gross margin. Sounds like you are get something of the labor issues fixed up. I know your models are only 35% right now.

Seems like maybe pricing is a little bit more favorable than usual. As we start to look back at June, is it likely -- as it gets into June, September, that that gross margin trends more back toward that 38%? Or is that going to be too aggressive?

Well, it would probably be too aggressive. You know, our strategy always, if I can grow, then I choose to grow, instead of -- (inaudible) grow and that is why I improved the gross margin.

What I really took is in GPM dollar. I think you now that. That really -- (inaudible) give me the base of GPM dollar. I don't care it coming from revenue or coming from GPM percent.

The reason we take the opportunity is due to, we do not have enough accruing capacity, even we grow -- we put our (inaudible) in a 14% of CapEx in there, we still kind of capacity limited. [Acumen] capacity limited.

And because of that, you take the opportunity, since you cannot produce more units, then you might take opportunity by changing the product mix and get GPM percent higher to get more GPM dollars.

If I get the capacity, install it fast enough such that I can get in the market share and revenue instead of just growth rates and GPM percent. So our strategy always GPM dollar is what I'm focus on.

Right.

So when you play with the [motor], you can either play in revenue, but really target GPM dollar.

Right. Makes sense. Okay, thank you.

Your next question is from the line of John Vinh with Collins Stewart.

Thanks for taking my question. Just a follow-up question on the shortages. Obviously in your prepared commentaries you talked about demand being better than seasonal.

Obviously your CapEx capacity continues to expand in Q1. If you didn't have the shortages, sounds like revenues could have been up in Q1.

Is there any way you guys could quantify what the demand trends look like in Q1 in terms of either backlog or backlog coverage?

I don't know. We suppose we can do that or not. The two guys here, they are shaking heads. I cannot really talking about that. So probably we cannot talk about it.

But our market is better than traditional, because, typically, in our 1Q, you should be down 5% to 10% and I think your model, John, you show that too, right?

And even today, we show (inaudible) 5%. We still better than the seasonal down. But is a lot of -- some other reason was really due to market manpower shortage.

I got it. Then my follow-up is, obviously on the labor shortage. I mean, this time of year, you guys typically see quite a bit of turnover in China.

Does your Chengdu facility give you some advantages in terms of a -- do you think you get a lower turnover rate in Chengdu versus Shanghai? And also on wages, can you give us a sense -- is there a wage differential? Do you get a cost benefit from shifting a little bit more capacity to Chengdu versus Shanghai?

I'm glad to answer that. Before I forget, don't forget our fourth quarter, when typically is 0% to 5% down, our fourth quarter is actually flat. So that is why we believe our -- we continue gaining the market share. Okay? So that just finish what I'm talking about.

Talking about Chengdu, sure, Chengdu -- the labor costs going to be always lower than Shanghai area. Because where our facilities is in Shanghai and Shanghai is most expensive from labor costs point of view.

So Chengdu going to be reduced, our costs. And from stability point of view, yes, again, Chengdu is a big inland city and they control a lot of walking around [Sutran] province and to walking in there.

Chengdu going to be much easier to recruit the people than the Shanghai. Because, Shanghai, most labor you are counting on the labor coming from inland, walking into the Shanghai area. So if they don't come back, or they stay in their hometown, then we in trouble.

Great. Thank you. And my last question is, Mark, you talked a lot about this call on a new LED driver products. Can you clarify? I think you mentioned TVs.

Do you guys have a product that supports the LED drivers for TVs? You have design wins at this point in time?

Are you talking about LED, TV?

Yes.

We have some drivers in small panel, okay? Nothing in large panel. And so, we focused in small panel, presently, in general illumination LED drivers and we released our first AC DC recently. I can't frankly remember if that was in December or in January. So, our 9910. We continue to expand and we consider that a very exciting opportunity for us, and a true growth driver going forward. So we're moving in a lot of different directions, in that product space.

Actually, this is two different strategy. For the larger TV, that is really backlighting strategy and for the one AC to DC, that is more in general a lighting driver strategy. They are completely different product family. Product strategy. Great. Thank you.

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

Good evening, everyone, and congratulations.

Thank you, Sean.

First question, just wanted to follow up more on the cost side of the capacity expansion in Chengdu. As you start to, I guess, do some of the initial production potentially in the June quarter and the back half of the year, is there going to be a step up in cost ahead of revenues that maybe we should model margin degradation as you bring that facility online.

Don't forget, that facility start with very small quantities. So I think it -- probably don't need to.

I think we have some in our startup costs in the first quarter.

In the first quarter we do, because we are putting the facility together, we're hiring people, finance people, planning people. We have hired some direct labor operators for training. We are going to have expenses at least in the first quarter that aren't covered by any revenue.

And then other than that, the GPM should not be really affect that much.

Got you. In the first quarter, is it $0.5 million dollars? Is it less than that? Just trying to get an idea.

It was probably in that neighborhood.

Okay. The second question I have is on North America, with, I guess, the adjustment that took place in the fourth quarter, particularly it sounds like in distribution.

Do you think everything is normalized now going into 2011? Or is there any chance of further normalization here during the first quarter?

Yes, I think we are in pretty good shape. As I mentioned the inventory is pretty healthy. Actually it went through last year very, very clean. They just kind of got ahead of themselves a little bit in the third quarter.

Actually, we wanted that to happen, because we wanted it to be our stock in place instead of other people's stock in place, when they started canceling orders.

We got our stock in there, and we are -- it's allowed us to maintain our POS run rate. And I think we are well positioned to grow our POS from our position today in first quarter and beyond.

I think we are in pretty good shape. I think the POP is still a little choppy, on the distys. They don't really know. They do have a good inventory position across all their lines.

They're trying to decide whether they are going to be flat or they're going to be down 5% in the first quarter or if they're going to be up 20% for the year.

So I think that there is still a little -- there is still a little hesitancy to reach out with great POP orders. I think our inventory in first quarter will go down in the channel. But I think, all in all, it should just level into a good position.

I guess the other side of that may be Europe, where you saw very strong in demand. Is that continuing into the March quarter? And also in the fourth quarter you did see a little bit of inventory build. But seems like the end markets in Europe are still very much your friend.

Yes, the inventory build in Europe was very late, okay? And the market is going on -- probably the strongest of all the markets we deal with.

So we were really a little bit surprised by the POP, by the strength of the POP, in December. Because European distributors have a tendency to turn off around the 10th and they were aggressively trying to get product in. And first quarter looks pretty solid so far, with POS. So I think that market is holding up better than we actually expected it going into the year.

Okay. Thank you very much.

Your next question is from the line of Gary Mobley with Benchmark.

Hi, guys. I have a question for Rick to start out with. The R&D in the quarter was low, compared to your recent run rate. And I'm assuming it's going to stay low in the first quarter.

So I'm just hoping you can provide a better understanding, of what's going on there, on the R&D front?

Yes. In R&D, it was basically a compensation reserve adjustment that we made between a third and fourth quarter.

So we made some accruals in the third quarter, and we ultimately didn't spend that much money in the fourth quarter.

So we -- the difference was about that amount. But you won't see that going forward, because those are -- we'll get back to the more normal 2011 status.

Normal, in the first quarter you mean?

Yes. Normal means basically accruing. And not reversing accruals.

Got you. Okay. And with the debt being redeemable in October, you'll exit the year with what? Roughly $275 million in net cash? Should we think about all of that being available for acquisition? Or how much do you need for working capital requirements? And, as well, how much is offshore?

Well, we don't break down where the money is. I will say, that it's not all in the US, and we'll need to have some money in the US, to pay off those convertible notes. But we've brought money back in the past, and we'll do it again if we need to.

We will have to have some money for working capital. We're investing in Chengdu and we're going to invest in CapEx and grow the output capacity. So you can say we need maybe $100 million, somewhere around that, for working capital to work with. And, other, on top of that, the rest of it is available, assuming that Keh-Shew doesn't do some M&A activity with it.

You have asked me how much money are variable for M&A. You can take that $270 million, and minus $130 million for the convertible bond, and then say $100 million for working capital. Then we don't have that much money there for M&A. So if I look at some sizable M &A, then I may need to do something.

Okay. I know you won't give me -- won't be able to give me a precise number on this question. But for the 190 basis points sequential decline in gross margin for the first quarter, how much of that is attributable to lower fixed-cost coverage?

How much is attributable to chasing lower margin revenue? And then, how much is attributable to pay increase?

Okay. Number one, we cannot really break down that clearly. But number one, we do not have anything tracing for the lower margin, okay?

Like I say, we do not even have enough people to get the revenue we want to. We will not produce any product which product much lower margins. So we -- I don't have anything to contribute into the lower margin part of revenue.

Okay.

And if you can look at it, our utilization actually went down to about almost 90%. Utilization, (inaudible) utilization went --

No, 13%. Because we're --

13%, yes.

In the past it went up 4%.

I'll put down 9%. Utilization go to 13%.

And those kind of utilization, when you go down 13%, you are going to hurt quite a bit, right? And another thing for us, 2% GPM, you are only talking about $3 million, $4 million, okay?

So that is why the GPM, percent changes so much is because our revenue base is not big, so when you go down just $3 million, $4 million, you affect 2%.

All right, great. Thanks guys.

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

Hey, Dr. Lu and Mark. Congratulations.Very good guidance in the quarter. Maybe, Mark, you can help me on this. Usually March is always a tough, interesting quarter. I'm curious about your color, as you see your markets for the four or five different end markets that you are in.

Which you think will be strong, which you think will be weak, which you think will be normal or abnormal?

That's a big -- every quarter is a challenge. (Laughter)March is no exception to anything.

Actually, again I think I mentioned in my speech, that we just kind of see a healthy business environment. I think we look -- we are seeing in improvements in areas, going into the year, that have been soft for a period of time. We are starting to see some good action on LED, and LCD TVs coming out of Asia. I think there is some improvement there. I think some notebooks look strong.

Notebooks actually run into some problems, because Intel have put a stop, because they are -- you know their issue on that, okay? But fortunately, it is a type of the -- it's one offset and is not affect by Intel's stop shipment. Oh, no -- not stop shipment, Intel's' problem.

So therefore, if you put the notebook and the tablets together, for us, it is actually, like you say, is up.

So consumer portables look pretty solid, as well as Smartphone? I think the automotive environment is quite healthy in European market and I think the industrial market continues to move forward.

So I think that when you come through the periods that have gone through, that we've gone through over the last couple of years, to be looking around the corner in the first quarter, and see a positive outlook and a healthy environment, I think it's good enough for me.

I'm not so worried about the first quarter. I kind of worry about the next three quarters after the first quarter. We're kind of already there.

So I just think it's generally a healthy environment. We generally, in the long run, don't take -- if the market grows, in mid to low single digits, then generally, we can perform pretty well as a company.

I guess, yes -- no, that's really helpful, Mark. Maybe I can rephrase the question a little bit differently.

Are there any areas you think will be up sequentially in the March quarter? And what would those be?

I'd say the consumer portables and tablets.

Yes.

That's pretty healthy. And then a competitive-type question. A couple of the other companies have talked about the industrial market, basically talking a lot of inventory. I'm not suggesting that you have that issue.

Your revenues were down slightly. Have you seen that issue? And if so, just maybe talk about it-- inventory in the industrial markets specifically as you see it for Diodes?

In the industrial areas, I'm not seeing a great inventory problem. In the power supply market and the areas we play in, adapters and so forth, we are starting to see reasonably good demand.

Maybe it matches the end equipment that we play in, from the consumer portables area and so forth. So I can't quote to that issue.

Got it, very helpful. Thanks, guys, and congratulations.

Thank you.

Your next question is from the line of Vijay Rakesh with Stern Agee.

I was just looking at the -- you mentioned 2011 was a pretty healthy environment. But when you look at this year, what do you think would be a key drivers? Where do you see growing upside to your markets? And also on the M&A side, what it is you are looking to fill on your portfolio? Where do you see some maybe that are lacking there?

Well, when you are talking about our upside, you are talking about 1Q?

No, for the year. For the year.

Oh, for the year? I think we, actually, we are going to grow in almost everywhere. Okay? Our most [med] has come out very, very strong. Our transistor and our [airlock].I cannot really tell you one area, because we are, in the 2010, we have been gaining market share everywhere. We grow 41%. Obviously we gain the market share. We just don't see anything that would slow us down, because by look at our design activity, by look at our new, we believe we have another gaining market share year.

I don't really just in one area. We are able to take advantage of our product portfolio, our region, and move around the products that you got, whenever the area give us best GPM dollar, we move. Okay?

Okay.

What is your next -- other question?

On the M&A side, what portfolio are you looking to fill? Already see you need to fill some products.

When I look at M&A, I have different regions, different opportunities. So I don't have anything to say, I'm going to buy something because I need to get into this product area. In the past I always say depend on where the opportunity. Then I look at what kind of synergy that can get to us. And as long as the synergy is good, we can acquire it right away or within the twelve monthsand give me the good addition of something, then will do it. So I happily say my M&A's target at which area of the product family, I don't have that in my mind.

And lastly, just a housekeeping question, the tax rate, is it still 20% for the year?

Yes, I think we give the taxes --

Yes, 17% to 23% in the first quarter.

And for the year, about the same?

Approximately the same. We don't give guidance on the year. But you can look at 2010. It was about 20%.

Right.

Okay. Great. Thanks a lot, guys.

Your next question is from the line of Brian Piccioni with BMO Capital Markets.

Of course, congratulations on a very strong year and a great outlook. Of course, most of my questions have already been asked and answered.

In prior calls, we talked about your efforts to reduce costs through things like replacement of gold bonding with copper bonding and package reduction, size reductions, and stuff like that.

Now are talking about labor cost savings by shifting around. I was wondering if there were any other things that you were targeting to sort of sustain your ability to maintain good profit margins despite fairly significant pricing pressures in the market.

Well, number one, the goal convert to copper, copper wire conversion, the goal is to higherest (sic) cost today. We have seen in how many factions? So we are not there yet.

We still have a long way to continue reduce our goal cost. Our goal wire cost. So we going to continue our cost reduction effort in the gold wire elimination and convert to copper wire.

Then another area we are doing cost reduction is by when we grow up the revenue, our wafer usage will continue increase. And so we will have -- if this support from internally, then we'll continue able to deduce our wafer cost, because the volume or because the usage.

But at the same time now we are in a much better position to negotiate to get a local price of the wafer from our factory business.

Therefore, we just continue our effort of cost reduction, and I don't see anything will be slow or say slow it down. We are no longer able to do any cost reduction. That's not the case.

We continue going to be able to knock that cost down, and to offset that labor cost at the same time, to offset ASP.

Another way we can deduce ASP effect -- infection -- actually impact is by changing the product mix aggressively, driving the new product. And you can see in the 2010, we have so many new product coming out, and obviously, the new product will give us a better GPM. And then to depress or deduce the effect by ASP reduction. So come on with a new product.

Come on with the wafer cost reduction, gold wire reduction. And we have so many things going on to deduce the cost the offset the ASP decoration and offset the labor shortage or labor cost increase.

In other words, you are not running at a runway here. You can see clear to keeping ahead of that curve then. That's great.

Now, you had a question earlier about cash usage and everything else. I'll just come out and ask directly. Has there been a decision made with respect to how you deal with the convertible debt? Whether you simply pay it off? Or refinance it?

No decision made yet. Because it is still eight, nine months away from us. We just, number one, we get our money ready. So we do have our money ready. If we need to pay off, we pay it off. That is not an issue to us anymore. So just look at if I have an M&A target coming up, I need to do something to raise your money, then we'll do it. But if no target coming up, we have enough cash to pay for the convertible bond.

Great. Okay. That's my questions. Thank you very much.

Thank you.

Your next question is from the line of Suji De Silva with Thinkequity.

First of all, can you remind us what the 2Q seasonality is and if the constraints in the first quarter, as they come off, provide a tail wind for the second quarter?

Second quarter seasonality. How does that compare to where we are in the first quarter?

I think we are now -- we believe now we back to the normal cycles -- semiconduct cycles.

I think you just look at how, historically, second quarter versus first quarter. In the semiconductor cycle, then you can look up the information over there.

Okay. In line with semi's typical seasonal events. What's your target inventory level versus accrual here? Where you like to keep the inventory for Diodes?

Am I back on?

I'm sorry? Can you hear me?

Somebody is speaking in the background.

Oh, sorry about that. Can you tell me where your target inventory levels are typically, versus where you are?

Yes, we are somewhere in the 90 to 100 days. If you look at where we've been historically, that's about where we are now.

Okay.

And we built up inventory for certain people. And if we increase our assembly test capacity, we have to increase raw materials and whip, so it will continue to go up, as we continue to grow.

Okay. And then last question, it sounds like to a prior question you said ASPs are relatively stable. Do you still expect them to decline year-over- year, on a 3% to 7% basis, or do you expect them to stay stable going forward?

I think we are going to have some ASP declines. We are going to have some pricing pressure. I don't think it's been clear -- clarified yet what those are going to be. But pricing pressure is something that we -- I have been here for 20 years and we go through the same pricing pressure pretty much.

There are some periods that are a little stronger than others. But in our product lines there's always going to be pricing pressure.

Yes. All we need to do is put the pressure on the cost reduction and hoping the cost reduction can offset the ASP decoration and changing the product mix by doing the new quarter. We kind of know how to doing it, we just need to continue our effort to doing the same thing.

Great, thanks guys.

Okay.

Next question here is from the line of Steven Chin with UBS.

Great, thank you for squeezing me in here at the end. I want to ask about capacity, first or in general for the industry.

Just given some of the supply tightness at your competitors late last year and also given that, I think, in general, supply is still tight for a number of products, what is your expectation for overall industry supply growth this year for both discretes as well as Analog products that you play in currently?

I would say on the Analog side and the products we played last year, we didn't see a significant amount of shortage. We thought it was a really more normalized cycle in the commodity standard linear product area.

From a discrete side, we think the shortage has eased off in Q4 based on most of our competitors and most of the industry being down in that period.

But we do see some shortage opportunities going into this year. And I think that it's possible that discrete packaging stays relatively tight through the first half of the year.

Maybe a little bit of room in Q1 and I think maybe getting a little tighter. And I think in Q3, there is a possibility that it could be relatively tight again. Especially in certain product lines.

Especially you don't really see that many people putting the capacity for the commodity product or the standard product.

Everybody putting the capacity for the newer more complicated device. So when you go to discrete or even standard Analog, you just don't see that many people putting the CapEx in the packaging area that aggressively, you know?

We probably, the only few other Company aggressively putting capacity, 14% CapEx to address this market.

Okay. Got it. And then the other question I had was just in terms of products that you sell into either both the handset market, as well as into consumer portables, can you talk about any opportunities for increased product content in the semiconductor dollar content from the portfolio? Or maybe the ability to up sell higher margin products into some of those pockets that may be drivers for those two target areas this year?

I don't think I can get too specific. But I can tell you that our content is growing for our products in those product areas are growing every day. We have had a lot of expansion in our MOSFET product lines and are specifically targeted in those areas.

A lot of stuff in our bipolar arena, some -- it is very consistent with our miniaturization strategy and so forth.

I think that you can look at all of our key end equipment that we're continuing try to add content in order to expand. That is a key part of our goal in order to sell the same products to the same customers.

And, Mark, just a follow-up there, is it more discrete content specifically or is it a combination discrete and Analog content?

I think it's a content of both and then throw in logic. Single-gate logic solves all problems in design. So we think the positioning of our logic product is very much in line with what we are trying to accomplish in those end equipments with our discrete and our Analog thing. Clearly, we can move much faster in discrete, because the design time for a new product is much shorter. But there's still opportunities for both.

Okay. If I could squeeze one more in, just one last question on industrial market and perhaps Europe specifically.

In terms of the drivers of the industrial business. Any thoughts as to how much longer that healthy demand will continue? And what's underpinning it? I know it's very broad-based. Is there potential for any positives?

I think that's hard for me to say. The one thing I can say is that our product addressing that marketplace continues to grow every day. We are getting more and more products that were -- that we're going to make available to that marketplace with our SBR, product line, as well as our DIODESTAR product line and our MOSFET product line.

A lot of the new product that we're coming out with are very, very focused into those particular marketplace. We have had a lot of new solar parts in both -- in our SBR line and so on. I think maybe the industrial market's not as good as we say it is, but we have more product to sell to it.

Especially after the chief acquisition. We are gaining to the industrial and automotive application, by expand (inaudible) product. It is really a good opportunity for us.

Okay. Perfect. Thanks. And congratulations on solid results again.

Thank you.

Ladies and gentlemen, that is all the time we have for questions today. This concludes this portion of the call.

Thank you for your participation today. Operator, you may now disconnect.

Once again, ladies and gentlemen, thank you for your participation today. You may now disconnect your lines and everyone have a great day.