Diodes Inc (DIOD) 2011 Q1 法說會逐字稿

Good afternoon, and welcome to Diodes Incorporated first quarter 2011 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, Monday, May 9, 2011.

I would now like to turn the call to Leanne Sievers of Shelton Group, the Investors Relations Agency for Diodes. Leanne, please go ahead.

Good afternoon and welcome to Diodes first quarter 2011 earnings conference call. I'm Leanne Sievers, Executive Vice President of Shelton Group, Diode's Investor Relations firm. With us today are Diode's 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 the call over to Dr. Lu, I'd like to remind our listeners that management's prepared remarks contain forward-looking statements that are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore we refer you to a more detailed discussion of the risks and uncertainties in the Company's filings with the Securities and Exchange Commission. In addition any projections as to the Company's future performance represent management's estimates as of today, May 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 and financial information in GAAP and non-GAAP terms. Included in the Company's press release are definitions and reconciliations of GAAP 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 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 I'll turn the call over to Diode's President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.

Thank you, Leanne. Welcome everyone and thank you for joining us today. Our revenue for the quarter was stronger than typical first quarter seasonal cadence. We continued to achieve market share gains as we expanded our content and key customers, especially in tablet, notebook, smartphones and LED TVs. We've had a strong quarter in Europe and Asia, while North America revenue declined sequentially. The quarter was impacted by reduced image output from our Shanghai packaging facilities, resulting from lower equipment utilization caused by China labor shortages mentioned last quarter, and a normal number of workers not returned from the Chinese New Year holiday. We shipped from finished goods inventories and that begins our contract assembly commitments which allow us to achieve sequential revenue growth in our core business.

Gross margin for the quarter reflects reduced fixed cost coverage caused by the lower unit output. We continue hiring manufacturing operators to insure (inaudible) are mentioned (inaudible) of manpower with (inaudible). It will require additional time to properly train those individuals but we expect the labor situation to be resolved during the second quarter and anticipate gross margin will be comparable to the first quarter.

Overall, I'm pleased with our result in the first quarter, and we expect to achieve growth in the second quarter with revenue anticipated to increase 5% to 10%. As we continue to escalate on our new product initiatives, (inaudible) traction and market share gains.

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

Thanks, Dr. Lu, and good afternoon, everyone. Revenue for the first quarter of 2011 was $161.6 million, an increase of 18% over the $136.8 million in the first quarter of 2010 and a decrease of 1% from $163.8 million in the fourth quarter of 2010. As Dr. Lu mentioned, revenue in the quarter was stronger than typical seasonal patterns. Gross profit for the first quarter was $57.4 million or 35.5% of revenue compared to $47.8 million or 34.9% in the first quarter of 2010 and $62.6 million or 38.3% of revenue in the fourth quarter of 2010. The sequential decline in gross margin was primarily due to the previously mentioned manpower shortages at our China packaging facilities which resulted in lower equipment utilization and reduced fixed cost coverage.

Total operating expenses for the first quarter were $29.1 million or 18% of revenue which was better than our guidance and an improvement from the 18.6% of revenue last quarter. Looking specifically at selling, general and administrative expenses for the first quarter, SG&A was approximately $21.4 million or 13.3% of revenue which is an improvement from the $23.1 million or 14.1% last quarter, and 15.7% of revenue in the first quarter of 2010. Investment in research and development for the first quarter was $6.5 million or 4% of revenue, a slight increase compared to $6.2 million or 3.8% of revenue in the fourth quarter.

Total other expense amounted to $3.2 million in the first quarter. Looking at interest income and expense, we had approximately $220,000 of interest income and approximately $930,000 of interest expense primarily related to our convertible senior notes. During the first quarter 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. Income before income taxes and non-controlling interest in the first quarter amounted to $25.1 million compared to income of $19 million in the first quarter of 2010 and $31.1 million in the fourth quarter of 2010.

Turning to income taxes. Our effective income tax rate in the first quarter was 19.3% which was within our guidance range of 17% to 23%. GAAP net income for the first quarter was $19.7 million or $0.42 per diluted share compared to GAAP net income of $15 million or $0.33 per diluted share in the first quarter of 2010 and GAAP net income of $24 million or $0.52 per diluted share in the fourth quarter of 2010. The share count used to compute GAAP diluted earnings per share for the first quarter was 46.7 million shares.

First quarter non-GAAP adjusted net income was $21.8 million or $0.47 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 have included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income which provides additional details. Included in first 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 $0.04 per share. Cash flow from operations for the first quarter was $15.7 million. Net cash flow was $7.8 million and free cash flow was $3.3 million.

Turning to the Balance Sheet. At the end of the first quarter, we had approximately $279 million in cash. Our working capital at quarter end was approximately $314 million. We had approximately $255 million in current liabilities of which approximately $130 million related to our convertible senior notes which are redeemable in October of 2011. At the end of the first quarter, inventory was approximately $123 million, an increase of $2 million from the fourth quarter. This increase was due to a $7 million increase in raw materials, a $3 million increase in work in process, and an $8 million decrease in finished goods. Inventory days were 105 compared to 104 days in the fourth quarter of 2010. Accounts Receivable was approximately $145 million and AR days were 76. Excluding the Chengdu site expansion, capital expenditures were $17.7 million during the first quarter or 11% of revenue compared to 8.8% of revenue in the fourth quarter. As we mentioned last quarter, we expect CapEx for 2011 to remain within our targeted range of 10% of 12% of revenue, not including the Chengdu site expansion. Depreciation and amortization expense for the first quarter was $13.9 million.

Turning to our outlook. In terms of second quarter guidance, we expect revenue to range between $170 million and $178 million, an increase of 5% to 10% sequentially. We expect the gross margin to be comparable to the first quarter. Operating expenses are expected to be down slightly from the first 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 second quarter are anticipated to be approximately 47.5 million.

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

Thank you, Rick, and good afternoon. As Dr. Lu mentioned, we achieved better than seasonal revenue in the first quarter due to stronger sales driven by design wins and market share gains at key customers in the consumer and computing segments. In particular, we saw increases in LED TVs, smartphone and tablets, with smaller than expected declines in notebook due to customer mix and increasing share on several new products. Distributer POP was down 6% sequentially as we directed products to support these key product and key customer Q1 ramps. Global channel inventory was up 3% and is at traditional three months. Distributer POS was up 2% in the quarter. Our gross margin was pressured during the quarter by lower unit output resulting from the China labor shortages discussed previously but mix and new product momentum remain on track. Additionally, design win activity remains at very high levels, not only in terms of quantity but, more important, quality as we continue to gain traction on our new product releases.

Our end market breakout consisted of consumer representing 31% of revenue, computing 28%, industrial 20%, communication 17%, and automotive 4%. In terms of global sales, Asia represented 73% of revenue, Europe 15%, and North America 12%. Europe was a highlight in the quarter with increases specifically in automotive and consumer. Momentum is strong across all regions going into the second quarter.

Now, turning to new products. Overall market share continues to grow as a result of new product initiatives. We achieved record revenue for our MOSFET products on the discrete side and USB power switches on the analog side. Beginning with our discrete business, during the quarter we released 41 new discrete products across 6 product families. MOSFET design wins and in-process design activity has been unprecedented. We had 20 design wins at key customers for end equipment including set top box, DC to DC converters, tablets, multiple smartphones, printers and a new game console accessory. In terms of new product introductions, we expanded our innovative DFN 10006 MOSFET portfolio with the introduction of 5 new devices. We already had major design wins on 3 of these devices and production orders on 2. Additionally, we added 3 dual SO8 MOFETS which were developed specifically for the motor control market and are also being optimized for use in brushless DC motor applications. We also introduced 9 new devices with equivalent specifications to competitive parts targeted at opportunities for gaining sockets at key customers.

Delivery of standard products is a core competency of Diodes and the competitive landscape on MOSFET products represents a key opportunity for revenue and margin expansion for Diodes in the future. Our discrete business was also supported by solid new product revenue increases for our multi-chip array products, or ASNCs, with 1 standard and 2 customer specific devices moving from design win to production in the first quarter. We also secured design wins on 4 devices for applications including display modules, electronic metering, and automotive. Additionally, we continue to see strong momentum for our SVR family of products during the quarter.

In terms of analog new product introductions we released 61 new devices across 7 product families. As I mentioned previously, our USB power switch revenue and overall market share continues to grow with design win activities very strong for these products. We also completed our automotive qualification on our VX LD1370 and 1374 LED drivers announced last quarter, which are designed to increase the performance of high brightness, automotive, industrial and commercial lighting systems. We also introduced Diodes' first offline LED driver that is capable of driving LEDs directly from 110 or 220 volts. This product is suitable for a wide range of commercial and industrial lighting applications including fluorescent tube replacement, LED lamps, and industrial signage. Separate linear and PWM inputs allow for a simple means of providing LED dimming capabilities. Sample activity and customer interest on this device is very high.

Also during the quarter, voltage reference design showed strong revenue increase in both portable and communication markets. We introduced a dedicated voltage protection innovative IC designed to protect the latest generation of power management ICs, [PEMIX] against overvoltages in applications such as smartphones, tablets, and other portable products utilizing battery power. This was a customer sponsored development program that has broad market appeal. Also, as a demonstration of our ability to leverage Zetex leadership in voltage regulation, we introduced the ZXRE 060 which is a 5-terminal adjustable regulator with excellent temperature and stability output handling capabilities in low voltage designs. This product is ideal for state-of-the-art microprocessor and DSV POL converters. This product line expansion was driven by customer requests to address the size constraints of today's portable products. We have secured multiple design wins and already have production orders. This is just one example of many cross-selling opportunities from our Zetex acquisition which continues to drive expanded offerings and market share for Diodes.

Furthermore, we also continue to make progress on expanding our Logic product line. During the quarter we introduced a complete line of advanced high speed CMOS logic devices offering power dissipation and switching speed improvements over existing alternatives. We also expanded our portfolio of LDC Logic devices with 8 single gate logic functions in a miniature 6-pin BFN 1010 package. This latest addition to the Logic family provides space saving opportunities for the smallest handheld devices including smartphones, tablet computers, e-readers, satellite navigation systems, cameras, and handheld games. Customer sampling and design in process has already begun on these devices.

In summary, we feel positive about Diodes' position in the market and our opportunities for further growth in 2011. There continues to be improvements in demand and orders as we execute our new product initiatives and ramp production of previous design wins at new and existing accounts. We have solid momentum across all geographic regions going into the second quarter and are focused on ramping output at our packaging facilities as we work to maximize equipment utilization. We look forward to reporting on further progress on next quarter's call.

With that I'll open the floor to questions. Operator?

(Operator Instructions) Steve Smigie with Raymond James.

Great. Thanks a lot. Congratulations, guys, on another set of solid revenue and EPS numbers. Along those lines, I appreciate the 2Q guidance. I'm just curious with the strength you're seeing here in terms of the design wins, any reason not to think that as we look out to September that we wouldn't also see at least a seasonal September, potentially maybe a little bit better, as well?

I don't think it's really that we really ever go out that far. I think we're pretty consistent that we thought 2011 would be a pretty solid year for growth but I think we would like to stay focused in on Q2.

Okay, well I apologize, this is a Q3 question, as well. But on the gross margin, part of, I think, what happened with the flat gross margin guidance here was you indicated that you didn't have quite the utilization levels that you're anticipating due to the people not coming back after Chinese New Year. Since you'll probably have a full quarter of full utilized, or near full quarter of full utilized, in Q2, would that suggest as we look out to Q3 that you might see a little bit better gross margin in Q3 or are there other mix and other issues that offset that?

Steve, you know our strategy is we prefer growth over just GPM percent. So if we have opportunity to grow, as soon as they're within our model, you know our model is 35%. If we can get above 35% we'll go after the growth, because mostly important is that GPM is a gross profit GPM dollar, not GPM percent. So we don't really talking about third quarter yet, but if I have opportunity to grow, I prefer growth.

Okay. Last question was just with regard to operating expenses. I would have thought R&D might have jumped up to 4% or something like that, and it came up a little bit but it seems relatively constrained. So are you guys doing, it seems like you're doing a pretty good job of keeping costs under control there, also on the SG&A line. Would we expect you guys to continue to have, as a percentage, SG&A and R&D maybe flat to slightly down going forward as well?

Yes, that's our basic model anyway. You remember, I keep talking about we keep the R&D as the same percentage as our revenue growth, but SG&A, we tried to control it to only allow probably half of the growth of the revenue. Therefore, at the end, our operational expense, R&D plus SG&A as a percentage, will continue going down. I'm very happy with 1Q because 1Q even our revenue going on 1%, we are able to get our operational expense as a percentage continue going down.

Shawn Harrison with Longbow Research.

I wanted to just maybe get your commentary on the pricing environment, through the March quarter and into the June quarter. It seems, the best way to describe it is somewhat benign but if you could just talk about the pricing environment, if it's less competitive than normal right now.

Yes, I would say it's pretty benign, as you said. I think that the regular part of your focus product still remain relatively competitive and I think we'll see typical ASP declines. I think in some of the standard products and the more commodity-based products I think pricing is quite stable. And depending on the traction of the year might present some opportunities later in the year to increase.

And as a follow-up to that, you may see a price increase later in the year just because of the tightness on some of these products?

Yes, I think some of the commodities are going to be under pressure for some period of time, but again, it all depends on how it goes. But I think that they're pretty stable at this point.

Okay. And correct me if I'm wrong but last year, it seems as if Diodes went after market share more than price and so that would be the expectation going forward if we were in that type of environment; correct?

Yes, it depends on how much pressure there is on those commodity devices on where we stand, but we generally are in a position, we put a high value on growth and a high value on capturing share and expanding our business base with customers. So we generally like to have people move to our price. We're not always the lowest price guy out there. We would rather see the customer move back up to our price and then accept more share than to be raising prices to our customers all the time. Customers generally don't enjoy that phenomenon too much.

That's more than fair. And then my follow-up question, will Diodes be shipping out of inventory again during the June quarter? Or will you have the packaging issues fixed early enough during the quarter that you won't have to ship out of inventory again?

We really at this moment, we don't know, okay? In the earlier quarter, we did some, but we believe we will make it up in May, especially in June. So very difficult to, at this moment, to tell you one way or the other.

If you make it up in May or June, shouldn't you see maybe some better overhead absorption because of that?

Yes, you're more talking about GPM percent; correct?

Yes, just trying to get back to that but if you're going to be making it up, you may see a little bit better overhead absorption as you exit the quarter. Is that the potential?

Don't forget at the same time, our cost is going up too. Our goal is start from 1400 at the beginning of Q1 and now it's going to 1580. And I really don't know it will continue or going down. So number one goal is the major cost to us. Number two, due to the labor shortage, we actually raised the salary in China, and China, Shanghai, raised their minimum salary for operator in effect in April 1. So again, our second quarter, our cost is going steadily up. At the same time, if you look at the exchange rate, we know that it's only one direction. So if you look at, and building material, due to the Japan earthquake and the tsunami, a lot of building material start heading up. So if you look at a lot of cost going up while we tried to maintain our GPM percent models. So that's why we give that kind of guidance.

Harsh Kumar with Morgan Keegan.

Congratulations. Another fantastic quarter. A couple of simple questions. The biggest part of your outperformance in the March quarter relative to your expectations, would you be able to tell us what segment that was in?

The outperformance in? I wasn't sure I understood the question.

Actually, in Europe, Europe is outperformed and Asia is not bad either.

I would say that we had upsides in some of our major key customers in Asia in Q. And we had a very strong Europe in Q1 that were a little bit more surprising. The Europe number, we were a little concerned going in. Not concerned, but we didn't think it would be quite as strong throughout the quarter as it was. And that was quite a good thing. And we had some resurgence on the key customer LED TV that was quite significant. And really maybe not even in unit volumes but in content. So our content expansion in a few of our major customers helped the quarter significantly.

And you're talking about smartphone, you're talking about tablets and you're talking about LED TV. All those give us a much better performance than what we expected in Q1.

Got you, thank you. And then, Dr. Lu, your Company is very well run as it is. I was surprised to see OpEx coming down as a percentage of revenues in June a little bit. Where is that going to come from? Any color that you want to give us would be very helpful.

You always -- (inaudible) always do it that way. We are not going to be crazy to hire in people so while our revenue is going up, we just carefully hide in the SG&A. Now, R&D, I do not want to concern it because that's important, that's for the future, for the operation, we can try to constrain it, the growth a little bit. That's our basic model and I'm glad we are able to perform according to our business model.

Got it, thank you. Last question from me. You said a lot of new design wins, Dr. Lu and Mark. What area of products are you seeing the most traction in?

Yes, one of the most exciting areas that's relatively new that we're expanding our product line in and that the customer base is very interested in is our MOSFET products. Everybody wants to see the MOSFET, so I think that's going to be a very very strong revenue driver going forward. Seeing a lot of action, beginning action in our high volume logic. I think our USB switches, as I mentioned, are going quite well. But I think it's relatively broad-based. I think our position in our customers is quite strong and they're looking at our products across-the-board.

The key thing is we are able to grow the content of our customers' applications.

Suji De Silva with ThinkEquity.

Hi guys. Nice job in the quarter. Following up on the last question, can you talk about the second quarter and whether any end market you expect to grow stronger relative to your guidance and maybe some that are a little slower perhaps?

I really don't have that in front of me. I think it's going to be hard. I think we're going to have continued momentum in pretty much the same areas. I think we'll see some resurgence in Q2 in North America and relative stability in Europe. And I think we might see a little bit of improvement in notebook that might help the overall thing. But I think our general momentum is in the same customer base. Our focus is there so that's where we would expect to grow.

Okay, great. And then switching to the events in Japan, did you have any impact in the first quarter on your revenue, positive or negative? And then perhaps in the guidance from the events in Japan or was it immaterial?

I don't really think that we had. I think that we'll see and I think the industry will see some long term effects from Japan regarding cost. I think we're going to see some cost issues. I don't think it will be isolated to us over a period of time. I do think there was some short-term excitement that might have been run. Actually probably the Japanese semiconductor companies actually got ran up the most because everybody bought out the stock that was there that they didn't have. I think it showed some opportunity for entry in certain customers that were heavily Japanese based because they had some concerns long term but I don't think any short-term. There was not anything significant from a short-term perspective that affected the quarter.

And last question. With the labor shortages, Dr. Lu, are the lead times expanding there? And are you having trouble keeping customers comfortable with the availability or is that a non-issue despite the labor shortage? Thanks.

Again -- I took this one from him too -- but again, we look at led time as a decision. So we use channel and we use some of our contract business to adjust for our key customers. So we might not get enough product overall but, generally, we have the ability to keep our key customers happy through these periods. So we move things around and we keep the inventories and the hubs tight and we get through them as we go through to bring our units up.

Vijay Rakesh with Sterne, Agee.

Hi, guys. Just Dr. Lu, you mentioned the focus on gross profit operating dollars. So will you still plan on keeping the gross profit at the 35% level or will you let it come down as you focus on operating margin?

I think I would keep the same. I'm not really tried to just continue to bring the GPM percent up, okay? In our business model is as long as GPM dollar, gross profit goes up, that's what we are going after. And at the end, that's really the effect of earnings per share, not the GPM percent. And therefore, if I see the opportunity to gain the market share to grow it, then we'll take it.

Okay, got it. Also, it obviously looks like, when you look at the challenges, there's a little bit of concern there might be second quarter things are slowing down. How is the usual point of sales and point of purchases, how is that trending now in April and May now that you're almost in May here?

In our guidance we took that into consideration. We actually see the POS and the POP trending positively in the second quarter, and I think it looks good. I think there might even, haven't really figured out where the inventory is going to be but I don't think there's going to be a significant value change in the inventory in Q2.

Lastly, when you look at last question here, if you look at your revenues by PCs, handsets and TVs, can you approximately give us what percentage runs into those markets?

No, really we focus on the major segments. So if you look at -- I don't have the exact figures in front of me, I can look them up -- but obviously our 2 biggest segments are computer and consumer. We've never really reported by end equipment specifically and I don't have that data and I'm not sure. I'm trying to find the page. Okay, yes, so consumer represented roughly 31% in the quarter, computing 28%, industrial was about 20%, communication 17%, and automotive actually reached 4% in the quarter for the first time. So within those segments, we really don't break it out that closely.

John Vinh with Collins Stuart.

Hi. Congratulations on the nice quarter. First question, Mark, you mentioned that reaction to some of the disruptions you've had at some of your customers or some of the DISTYS are reacting and holding more inventory. Can you comment on what are your DISTYS at in terms of inventories and where do they want to be at this point?

I mentioned in the script that we're right at about 3 months globally. So I would say that I think our DISTY inventory is clean around the world. I think we're starting to see some interest in bringing the inventory up a little bit in North America. I think Europe, I think, will balance for a quarter. And Asia, depending on the strength of the POS could come down a little bit, could stay flattish but I wouldn't expect it to go up. So I think everybody is in pretty good shape there and I think we're happy. I don't think that anybody is over inventoried at this point.

Okay, that's helpful. And then just a follow-up question, I think you'd mentioned that near term not a major impact either way on Japan on your business. What about over the longer term? Are there design activities and opportunities for you to gain share over the longer term, because obviously some of your competitors in Japan obviously had significant impacts over there.

Yes, I think there's a lot of opportunity. I think there's a lot of concern. Whenever there's a major disruption, people maybe even overreact. So clearly, where there was people that were sole source on Japanese products, that became very obvious to them when they have a threat. And then a purchasing organization gets hammered by their boss saying how could you ever put me in that position, and then that opens up opportunity. And I think all of these, as much as I hate to say that, Diodes, Inc. strength in the past has always been to capitalize on situations to help customers through these issues and I think we'll continue to do that going forward. In the short run, it's very hard to monetize that and but I expect to see continued opportunity as people review their vendor base.

And is it fair to say we could start seeing some of that start to show up at the margin in your revenues in the second half of the year at this point?

I would just stick with our traditional business models and work that way. I wouldn't try to overthink that, okay? Hopefully we can get an extra boost and come up with some better guidance in a later quarter or something but I don't think you should try to monetize that at this point.

Christopher Longiaru with Sidoti & Company.

Hi guys, congratulations on the quarter and the guidance. So my question is, so you have all these new products that you're ramping. Are these going to start to contribute to revenue in the typical time frame? When do you expect these to start to add? And then are these higher in terms of gross profit and gross margin than some other products? Can you give us some idea of how that's going to affect your mix going forward?

I think that the ramp time for some of these products is very diverse. Some of these products, we're designing them in and shipping them 3 weeks later at some pretty major customers. And some of our revenue in Q1 was at the sake of POP that we would have normally positioned certain products or our assembly business so that we could ramp those products. I would say that traditionally our new products are higher margin than our old products but the margin for Diodes, the manufacturing margin is a major portion of our business, so it's a little bit more complex to get down to that margin percentage. Clearly, if we're in a very prime mix and our operations are running at ultimate efficiencies our margins are going to go up. So I think as we get through this period, I think you make your own assumptions but I hope that answers the question.

The operations will be improved, we know that. The only problem I can not control is the cost? Because just like you, I don't think people can guess what will be the OREO price and I can not guess what will be the go wire price. Again, our vendors take opportunity to address wafer price, different price, more compound, they have a lot of stuff. Traditionally, you are going to expect going down every quarter due to the volume but this earthquake threw that curve away, and so we are really very difficult to predict. My job is to try to keep it above our business model as much as I can.

Steven Chin with UBS.

Yes, thanks for taking my questions and let me also add my congratulations on the strong results and guidance. My first question is just to touch upon inventories one more time. I know a lot of good discussion's already happened there but I just wanted to see if there's any additional color you can offer on some different segments or different geographies, if there are any (inaudible) product types, whether it's discretes or analogs, that might be tighter in terms of the balance between those two? And again I understand that overall your inventories are clean, but just wondering if there's any tightness or any excess of one type of product or the other in the 3 major geographies.

I think there's one area that's really really tight and that's SOT-23s. I think the industry is short on SOT-23s. And it's funny that price doesn't really want to go up, but nobody can get enough. So everybody is just getting enough. So I think in those areas, that's an area where we're very very short everywhere. I think outside of that, everything is relatively balanced. If there's no market for it right now in a situation like that, then we build what there's a market for. So I don't think we're creating much inventory on items that are slow. I don't think, in the industry, the nice thing about our industry today is, is that packaging isn't as abundant as it once was because some of the broad liners don't continue to invest in their packaging. So when business is relatively good, packaging is tight. So I don't think you'll see a lot of people just building stuff that's not out there. So I don't think there's any way to isolate it but I would say SOT-23s, there would be a shortage there.

And that's the low GPM?

And that's the low GPM. So we consider that mostly a service business so we have a certain amount of customers that we have to support on a certain amount of that to get them to work with us on other product lines.

I understand. One other question for you Mark. In terms of the new design wins that you were referencing earlier, are those largely centered on new products that you've introduced over the past year or two or is there a good amount of that also centered on more mature product lines, if not commodities?

I would say some of the best design wins we've had are either a reconfiguration of an older product in a new package or in a new size, or maybe with a slightly different spec or a brand new product. Some of those things, like when I talked about the 10006 MOSFET, those are relatively simple products but have very very good specifications and a very very small package, and their acceptance has been very very high, and the ramp on that. So I think that it's a combination of both but I would say it's more towards the new product area.

Great. Last question, just looking at overall industrial and automotive demand trends, and obviously that's continuing to be quite healthy in the first half of this year. In looking at the modest change in your overall sales mix with auto reaching 4%, I was wondering if your cost structure behind those products that you sell into industrial and automotive, if they're the long lead time, long qualification and development cycle type product that's typical of your competitors. Or is this a different type or more of your traditional computing and consumer type products but just happen to be selling into the automotive and industrial vertical? Thanks.

I would say both. Some of the product, we're definitely an Asian-centric new product developing company but we definitely look at how we can fit those and configure those for our other markets in North America and Europe. The key difference is the design cycle for automotive is--

Very long.

Yes, very very long. And the design cycle for industrial is also quite long. But the life cycle is also quite good too. So sometimes we have to show a little patience, and try to do that thing. But if we see a good solid opportunity to develop product in the industrial cycle, we're doing that. And we're seeing a lot with our SBR products in adapter and in power supply. Those are very key opportunities for our product line that are maybe not so consumer based and so on.

And some of the Zetex products.

All of the Zetex products is very centered around industrial and automotive. And we as a Company are going to try to expand our marketplace in auto over time. But it may never keep up with our growth in the consumer and computer segments. It has been very hard to get to 4% and it may not stay there. Europe was very very strong in the quarter, that's probably why we drove to 4% in automotive so it was a solid quarter in automotive because of Europe.

And overall, if you look at quarter after quarter, our industrial automotive is about one-quarter of our revenue. Even we are grow very rapidly in the (inaudible) consumer, computer, communication in Asia, but at the same time, our industrial and automotive, it's seeing a rate.

Did that get it for you?

Yes. Thanks a lot for all of the color and congratulations once again.

Brian Piccioni with BMO Capital Markets.

Thank you, and congratulations on great results again. Of course, most of my questions would have been asked and answered so I have a small amount of trivia. There's an other amount of $534,000 on the income statement, but that's not taken out of your non-GAAP results. What is that amount?

Rick, you might need to answer that.

Yes, I think that's rate of exchange. That's one of the non-GAAP things that we just leave in.

Okay, all right. And there's a lot of questions, obviously, been asked about pricing of various things. And, of course, you've been working to replace gold bonding wire. Recently I've heard some companies make comments, and you might have been alluding to them a little bit earlier with your SOT-23 comments, but that lead frames are starting to reflect the increased price of the materials that go into that. Are you seeing an impact from that or is it relatively modest relative to the other things that you're having to deal with?

Exactly, you hit the point. I think earlier, I said gold wire, I said wafer and another one I do say is lead frame. Actually, lead frame, a lot of lead frames are supplied from Japan and due to this earthquake, they issue a tech opportunity to raise the price on the lead frame. So lead frame is one. And that's another thing we're talking about SOT-23. Yes, we know they have a shortage and we want to spend a lot of capacity for that? No. I'm not going to spend a lot of capacity for it. We use that to be able to support our key customer and therefore, we can gain business from some other packaging. But you are right. Lead frame is one of the key costs up.

Okay. And one of the things that's been alluded to, as well, in prior conference calls is there's a risk that if we can imagine a hypothetical Korean TV manufacturer, for example, may have a television that's sitting and waiting for a single sourced component out of Japan. And as a result, and this is a hypothetical scenario, because they can't fill in the kit, begin to perhaps postpone orders or whatever. Do you have any visibility in that regard or do you just think that's an unlikely scenario?

I think that that is the worst scenario that people start to think about when they think about the situation in Japan. So far, we haven't seen that occur. I think there's been a significant amount of scrambling by the world, by customers, to make sure that it didn't happen. And I think that there's been a lot of resolution to some of these problems on raw materials and so forth. Actually, the response in Japan to key chemicals and key raw materials has been quite good. And the companies that had total losses came to agreements to work with other companies in Japan outside of that area very quickly. So I think actually the industry has responded quite well and I think that we don't see signs that that's going to occur.

Ramesh Misra with Briggatine Advisors.

Good afternoon, folks. Good job in the quarter. First question for you, Rick. Were there any key issues altering the accounts receivable in the quarter that jumped up pretty significantly?

No. The basic reason it jumped up was that because of the Chinese New Year, the January and February numbers were down, the revenue was down, and so we did a big March and so it just hadn't been collected yet. But no big issues there.

Okay. In the CapEx guidance that you issued, you excluded Chengdu. How should we be thinking of Chengdu expenditure? And did you have a number for the Chengdu CapEx in Q1?

Yes, but the number was less than $1 million for Chengdu. It was small because we just put together a workshop over there. Going forward, the reason we've taken it out is that there's no revenue out of Chengdu yet. And so to have our model at 10% to 12% comparable to what we're actually spending on the rest of the business that's generating revenue, that's the reason we've taken it out. Now, I would assume that in the second half, we'll start getting revenue and we will start looking at including some Chengdu CapEx. The issue is that we're going to have to spend some amount of money on site development, building the first set of buildings and you're not going to get any output out of that for 12 to 18 months. So we're trying to make the numbers that we're showing the public comparable from a time period to time period standpoint.

Okay. Then Mark or Dr. Lu, there has been some concern about disruptions in the automotive market. What are your thoughts going forward over there? Do you anticipate any of that impacting you or do you feel you're pretty immune to it based upon your customer exposure?

I don't think we're qualified to make a big judgment on that as a percentage of revenue. It looks like our customer forecasts are still coming in pretty good. Most of the people's problems are in raw materials, and ours is mostly European based so they're European cars. So, again it's one of those things where we just really haven't seen a big sign that that's going to occur yet but I know there's going to be some issues on the Japanese cars. I just haven't seen where that impacted us as of yet. It's a good thing that it's not 20% of our business.

Gary Mobley, with The Benchmark Company.

Hi, guys. Glad I was able to sneak my questions in. Regarding the gross margin, you mentioned some labor shortages. Did that lead to a greater percentage of your revenue coming from products that are resold from other suppliers such as Lite-On? And then, as well, second part to the question, how much of an increase in wages are we talking about here for some of your employees based at your China packaging facility?

Okay, let's talking about the wage first. Actually, we are talking about the minimum wage, so not majority. Well, not the high pay employee. We are more talking about the lower end of the operator. But when you raise the lower end operator, then you still need to raise TAM on the high end of the operator. So the tail time between each range may not be what we shoot, but you still need to relatively move everybody up. It just the low end move more, the high end move less. And for us, I think we actually take action in February 1, so half of the first quarter gets affected, and then 100% of the second quarter will be affected. And so that is already flecked to our GPM guidance? Yes, Shanghai raised the minimum salary, but fortunately we raised more so we are able to cover to meet the minimum requirement. And that way, we can keep the good people and keep our workers there. And what's the other question?

Percentage of your revenue derived from resold products in this quarter and as well, looking into your second quarter.

I don't think it was any different than any other quarter, and I don't think we've really reported that.

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

Thank you for all your participation today and that will be the end of the conference call today. Operator, you may now disconnect.