Diodes Inc (DIOD) 2012 Q1 法說會逐字稿

Good afternoon, and welcome to Diodes Incorporated, first quarter 2012, 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, Tuesday, May 8, 2012. I would now like to turn the call to Leanne Sievers, of Shelton Group Investor Relations. Leanne, please go ahead.

Good afternoon and welcome to Diodes, first quarter 2012, 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 the call over to Dr. Lu. I'd like to remind our listeners that management's prepared remarks contain forward-looking statements. Which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements 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 8, 2012. 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's statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. Included in the Company's press release, are definitions and reconciliations of GAAP net income to non-GAAP adjusted net income, debt net income to EBITDA and free cash flow, 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 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. Revenue of $145 million in the first quarter represented a moderate sequential increase and was significantly better than typical season slowness. After the Chinese New Year, we began to see signs of recovery in our end markets. We took advantage of this renewed market strength, by significantly reducing our low margin finished goods inventory, which helped to support revenue and secure incremental market share gains. Overall, we reduced our finished good inventory by 20%, while channel inventory declined 3%. As a result, we achieved moderate sequential revenue growth. However, our decision to reduce inventory, combined with the increased price pressure and lower utilization, continued to impact margins during the quarter.

That said, we believe the first quarter represented the low point in the cycle, and that overall demand will continue to improve across all of our geographies. As such, we have shift our strategy back to our growth model to aggressively capture additional market share. With our improved productivity and (inaudible), we have begun adding capacity for new, more advanced package at our Shanghai facilities, to support our continued growth. As the demand and the pricing environment improves further, we will transition available capacity to higher margin product, to enhance our product mix and the margins going forward.

Our expectation for strong growth in the second quarter further validated the strengthening of our business. We are focused on executing our growth model, and have the investment and capacity in place to support our further expansion. The flexibility of our business model has allowed us to constantly deliver profitability, gain market share, and even grow revenue during the down economic cycle. I believe this strategy will continue to produce growth rates that exceed our addressable market as we have constantly done over the past several quarters and years. With that, I will now 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 2012 was $144.7 million, a sequential increase of 1% over the $143.3 million in the fourth quarter of 2011, and a decrease of 10.5% from the $161.6 million, in the first quarter of 2011. Revenue was up sequentially due to general improvements and end market demand late in the quarter. Gross profit was $33.7 million or 23.3% of revenue in the first quarter of 2012, compared to $35.5 million or 24.8% of revenue in the fourth quarter of 2011. And $57.4 million or 35.5% in the first quarter of 2011. Gross profit margin continued to be impacted by weak pricing environment, a higher mix of lower margin products, and our decision to strategically reduce lower margin finished goods inventory. Total operating expenses for the first quarter were $28.3 million or 19.6% of revenue, including a $2.1 million gain on sale of assets.

Without consideration of this gain, operating expenses were $30.4 million or 21% of revenue, compared to $30.6 million or 21.4% of revenue last quarter, and $29.1 million or 18% of revenue in the first quarter of 2011. Looking specifically at selling, general and administrative expenses for the first quarter, SG&A was approximately $22.1 million or 15.3% of revenue, compared to $22.6 million or 15.8% of revenue in the fourth quarter of 2011. And $21.4 million or 13.3% of revenue in the year-ago quarter. Investment in research and development for the first quarter was approximately $7.2 million or 5% of revenue, compared to $6.9 million or 4.8% of revenue in the fourth quarter of 2011, and $6.5 million or 4% of revenue in the first quarter of 2011. We continue to increase our investment in R&D to further advance our new product initiatives. Total other income amounted to $800,000 for the first quarter.

Looking at interest income and expense, we had approximately $172,000 of interest income on our cash balances and approximately $123,000 of interest expense. Also included in total other income was a $200,000 foreign currency gain and a $400,000 increase in fair value associated with our ARA stock investment. Income before income taxes and non-controlling interest in the first quarter of 2012, amounted to $6.2 million, compared to income of $4.1 million in the fourth quarter of 2011, and $25.1 million in the first quarter of 2011. Turning to income taxes, our effective income tax rate in the first quarter was 10%, which is below our guidance of 17% to 23%, due mainly to a change in profitability by country. GAAP net income for the first quarter was $4.9 million or $0.10 per diluted share, compared to GAAP net income of $3.1 million or $0.07 per diluted share in the fourth quarter of 2011, and GAAP net income of $19.7 million or $0.42 per diluted share in the same quarter last year.

The share count used to compute GAAP diluted EPS for the first quarter, was 46.9 million shares. First quarter non-GAAP adjusted net income was $4.1 million or $0.09 per diluted share, which excluded net of tax, approximately $800,000 of non-cash acquisition related intangible asset amortization cost, and a $1.6 million gain on the asset sale. 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 $2.3 million net of tax, of non-cash share-based compensation expense. Excluding share-based compensation 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 first quarter was $13.4 million.

Net cash flow for the quarter was $47.2 million, due primarily to a draw down on a $40 million term loan. And free cash flow was a $1.5 million increase in cash, including $6.6 million in CapEx for our Chengdu site development. Turning to the balance sheet, at the end of the first quarter we had approximately $177 million in cash and cash equivalents. Working capital was approximately $368 million. At the end of the first quarter, inventory was approximately $134 million, a $6 million decrease from the approximately $140 million in the fourth quarter of 2011. Inventory days improved to 118 in the first quarter, compared to 119 days last quarter.

Inventory in the quarter reflects an $11 million decrease in finished goods, partially offset by a $4.1 million increase in raw materials, and a $1 million increase in work in process. At the end of the first quarter accounts receivable was approximately $140 million. And AR days improved to 86 compared to 87 last quarter. Capital expenditures in the first quarter totaled $15.8 million, which included Chengdu CapEx of $8.2 million. Including $6.6 million paid for during the quarter, and $1.6 million remaining in accounts payable. Excluding this amount, CapEx was 5.2% of revenue.

As we mentioned last quarter, we expect to complete the construction of our Chengdu facility by the end of the second quarter. We currently plan to begin outfitting the building in the second half of 2012, with equipment additions being made in line with market requirements. For 2012, excluding Chengdu building expenditures, we expect CapEx to be at the lower end of our 10% to 12% revenue model. Depreciation and amortization expense for the first quarter was $15.8 million. Turning now to our outlook. In terms of second quarter guidance we expect revenue to range between $155 million and $164 million, or up 7% to 13% sequentially. We expect gross margin to be 26% plus or minus 2%.

Operating expenses without consideration of any gain on sale of assets, are expected to be slightly lower than first quarter on a percent of revenue basis. We expect our income tax rate to range between 7% and 13%. And shares used to calculate GAAP EPS for the second quarter, are anticipated to be approximately $47.2 million. With that said, I will now turn the call over to Mark King.

Thank you, Rick and good afternoon. As Dr. Lu and Rick mentioned, revenue for the first quarter increased 1% sequentially, led by improvements in Europe and North America where we saw growth in both OEM sales and POS in the quarter. Asia was down primarily due to typical seasonality in the computing and consumer markets. However, we continue to increase revenue for our products used in smartphones and tablets, as we began to ramp a number of new projects during the quarter. Both of these products helped to partially offset seasonality across the broader consumer market, and we ended the quarter with only a slight decline in this market. Products for smartphones and tablets continue to be strong growth drivers for Diodes, and we are well positioned with our customers as we further expand our content in these end markets.

We also saw solid increases in the industrial segment across all regions, and in the automotive segment in North America and Europe. As expected, channel inventory declined another 3% after declining 8% last quarter. Turning to global sales, Asia represents 77% of revenue, Europe, 12%, and North America, 11%. Our end market breakout consisted of consumer representing 34% of revenue, computing, 26%, industrial, 20%, communications, 16%, and automotive, 4%. Now turning to new products, we continue to execute on our new product initiatives, with highlights during the quarter including the continued expansion of our discrete products for tablets and smartphones, as well as specific developments for the fast growing LED-TV market. We also further expanded our standard logic products, and although the revenue contribution is still small, we are beginning to generate significant revenue momentum for this product family.

Overall, design win activity and the design pipeline, remains strong across all regions. Looking specifically at our discrete product line, we continue to make progress in delivering value to our customer base in a wide range of applications. Our product introductions totaled 95 new products, across 13 product families, which was the highest number of quarterly product introductions in the past three years. Diodes continues to target the LED-TV market, where our market share in back lighting and other power management applications, continues to increase. As a result, our Vjt and SBR devices now have a growing presence in many of the leading TV manufacturers in Korea and China, with these products being developed and characterized specifically for these applications. Also during the quarter we further demonstrated our commitment to advancing innovation of our discrete products with the launch of a range of relay drivers on our proprietary new Smart Vjt platform.

Target applications include inductive load driving in automotive and industrial applications, as well as a wide range of other high volume applications including telecommunications, TV, white goods and computer peripherals. These solid state DC relay drivers improve the reliability of inductive load control circuits and provide a robust driver interface by acting as a buffer between sensitive logic circuits and 3-volt to 6-volt DC inductive relay coils. Additionally, we continue to expand our MOSFET family of products with new offerings in the low profile DFN2020-6 package, with an off board height of only 0.4 millimeters and a very small footprint, these devices provide industry leading performance in a package that is 50% thinner than competing solutions. Notable design wins for our discrete products during the quarter were for tablets and notebook computing, smartphones, adapters, telecommunications and white goods, all high volume applications with potential for further growth.

Turning to analog new product introductions, we released 25 new products across five product families. New products highlights included the expansion of our portfolio of high current USB power switches, specifically optimized for USB 3.0 requirements. We continue to see outstanding market acceptance for this product line with another quarter of significant design wins in particular for notebooks, LED-TVs and set top box applications. We also gained further momentum with our emerging family of power switches targeted for use in hot swap applications, such as HDMI ports including a major win in a market leading game console. We also released two new two-phase pre drivers for brushless DC motor controls, targeted for fan and blower motors in the computing market. These feature-rich devices enable excellent performance with flexible control, motor protection and reduced system level EMI, making them very attractive new product offerings.

We also introduced two new general illumination LED drivers, each offering a wider operating RAM, for expanded market opportunities. Our newest high accuracy LED driver has been designed to handle a broad range of applications, including those subject to the greatest variance of input voltage, such as automotive lighting and 12-volt AC power systems. Whereas our recently released AL8807 buck topology driver offers 36-volt operating range, and supports 24-volt AC lamps. Also during the quarter, we achieved new LED lighting design wins across a wide range of applications including offline lighting, flash lights, underwater lamps and smart meter displays. In terms of our logic product family, we continued our emphasis on expanding this product line with the release of 10 very popular quad and hex LVC functions, offered in 14-pin TSSOP packages.

We have begun to generate significant revenue momentum for this product family, and secured several major logic design wins in computing and hand held consumer markets, representing a very large volume opportunity for these products. As we look into the second quarter, we expect improvements in demand across all our geographies will drive strong growth in the quarter. Distributor order rates are expected to increase further in North America and Europe, while channel inventory is expected to continue decreasing. We also anticipate continued ramping of new projects for our products used in smartphones, tablets, and LED-TVs, where Diodes is very well positioned in these high volume markets. We believe our continued focus on new product initiatives and robust design win activity, positions us for upside for the remainder of the year. With that, I'll open the floor to questions. Operator?

(Operator Instructions) Steve Smigie with Raymond James.

Dr. Lu, you guys had very nice growth in the June quarter, and I just was wondering if you could give us some discussion on where we are in the cycle. I guess I'm getting a little bit, given the strong growth in June, can you still get strong seasonal growth into September? Do we have that kind of strength at this point in the cycle, or is it still too early to see seasonal better growth in September?

Hi, Steve. We know our seasonal cycle is 1Q typically is lower than 4Q, and second quarter is going up, and third quarter will be another jump, then fourth quarter depends on the market situation, could be slightly down or slightly up, then go to next year, it go down again. Now, fortunately, this year even most the market went down, we are able to take advantage of the market and ship out our finished good inventory which was built in the fourth quarter but we know slow down and we actually have excess capacity so we build those units and we are able to ship those units out and gain the market share and get growth. And second quarter we continue that market is warm but it's not really very hot. We are able to due to capacity and our new product efforts, we are able to significantly gain the market share. And we just believe go to the rest of year, we'll try to, like we have been doing, but I can tell you in second quarter we performed better in seniority, and better in our [FAM score]. Now, third quarter, we don't know yet. So we cannot really make too much comment on third quarter.

Okay. Thank you. And I guess similarly, on gross margin, there was some I think difficult pricing near term and you guys were making some effort to work down some lower margin product. So it seems that, again, as we go forward, I mean, you have a very nice jump in gross margin here in June but then going forward throughout the rest of the year it seems like you should continue to get gross margin gains as you get better utilization, as you no longer have the significant pricing impacts and as you start to mix in some better products. Is that sort of a fair way to think about it?

Yes. Let me put in more detail. In the past at the last conference call I point out the four key issues affect our gross margin. One is ASP dilution and ASP pressure still continues, but we think in move forward that ASP pressure will be reduced and we should be able to keep the ASP. But whatever the pressure in the past, you go down in semiconductor business, it's just very difficult to go to raise the price and we are not -- we do not have any intention to go to raise the price. But this I can say, that ASP pressure move forward, we're going to be much more stabilized than the last two, three quarters. Second thing is the product mix.

Due to the demand soft, start from probably June last year, I already start talking about we are moving our product mix to utilize our excess capacity, and that excess capacity is still there until probably 2Q we are able to backfill some. But we do not really or seeing it going to be backfilled full in the second quarter. Therefore, we are not moving our product mix. The product mix will keep the same thing. Now, the third one I think is equipment utilization, and equipment utilization in 4Q, we take advantage of that equipment utilization and we know first quarter due to the Chinese New Year, due to the shortened people, shortened working day, we're going to have -- we will not be able to yield as increment. Therefore, we built in ahead some of the units to use in our utilization in 4Q.

Then in the first quarter, we ship out those inventory and you know we put -- we reduced our finished good inventory about 20% and it's not stacking the channel because the channel inventory actually going down too. So those help us to improve the utilization and that's why we focus second quarter our GPN percent will be improved because utilization will be improved too. Couple conversion, we still working on it, but it's not going to be very quickly because the one we can convert, which is general market we have converted but for the major customer they typically won't convert it until the next model year or next design. So that one is going to be slow until we get it. So those four effects which affect our GPN. The one we can really improve is utilization. ASP pressure will be real -- we are no longer going to be chopping the price but you are not going to raise the price to improve the GPN.

Great. Thank you very much.

Your next question comes from the line of Harsh Kumar with Stephens Incorporated.

Yes, it's Richard in for Harsh Kumar. Congratulations on the quarter and the guidance. I just had a few housekeeping questions. For the tax rate, should we expect the 7% to 13% for the full year? And then what is your strategy for OpEx as well?

The tax rate will be that, at that rate, 7% to 13% for the year. That's our projection right now. For OpEx, with the revenue growth, basically our model is to allow OpEx to go up at about half that rate.

SG&A.

SG&A, I'm sorry. SG&A, that's right, to go up about half that rate. So if revenue goes 10%, the SG&A would go up 5%. R&D, we allow to grow at the same rate. That's kind of the model that we're after.

That's great. Thank you for the color on that. And then the other question I had is last year you had some -- the labor situation in China impacted the Company. After the Chinese New Year, did you see any of that again this year, or what steps did you take to kind of solve that problem this year?

Well, the situation actually is similar because that phenomenon in China, it just (inaudible) a lot of people go home and just don't come back. But this year we take some precaution because we know going to be happen, we are not going to repeat the same problem as last year. So like I mentioned, we take the -- since we have excess capacity in 4Q last year, which actually build ahead some of the commodity units to use in that capacity. And that's why you see in 1Q we ship out finished goods, and that's what we have been doing. Second thing is, we pay more attention so we hiring the people ahead of the Chinese New Year, so this year we start from December last year, we already start to hire the people, get started getting training and, therefore, this year in 1Q we are much smoother than last year.

That's great. Thank you. I'll jump back in the queue.

Your next question comes from the line of Chris Longiaru with Sidoti & Company.

My first question's for Mark. Can you elaborate a little bit more on what you're seeing in Europe and what areas there are weak and what areas might be surprising?

Well, Europe is probably the most uncertain market that we're experiencing, although our first quarter was quite strong in Europe relative to fourth quarter. We had a major inventory adjustment in the channel in the fourth quarter, that continued some small decrease but with an actually improved order rates and improved POS rates in Q1. Second quarter is in line with our guidance. I think I mentioned in the speech that we expect continued improvements in Europe, although in the last two weeks we get a little bit more nervous as we're seeing a little bit of adjustment, possible adjustment in the Euro that could have some impact. So I think it's a little uncertain but we don't see dramatic change in the order rates.

The key thing, how many percent of our revenue is in Euro instead of US dollar.

12%. Actually probably of the 12%, probably 10% of it is in Euro.

And what's the -- in terms of the --?

-- More concern because if Europe, due to the reduction of the France, and the -- make the Europe very weak, then it would affect us because the revenue would go down.

In terms of that weakness, how much just in relative terms, how sensitive is that revenue to the shift in the Euro? Can you give us an idea?

Well, I mean, the only thing -- about 10% of our revenue globally is in Euro's, so the impact of that percentage change whether go to 128 or 130, that's where the impact will be.

We really don't know what will be the Euro exchange rate versus US, but that is the one -- if US significant Euro ratio change, that cause us a problem.

Just in terms of utilization, because now you're starting to add capacity again, where were you last quarter and with the added capacity, what is your number going to look like for June? I would imagine it would be a little bit lower?

Well, we're adding capacity at the area which is newer and advanced package because that's the area our new products start to ramp. So when we say we adding the capacity, that is the area, to support the new product, support new design wins, but from the commodity area which is majority of capacity, we still not fully utilized yet.

Okay. Okay. And so all these new products have a little bit of a higher gross margin too than the corporate average, I would imagine?

Yes.

Okay. Great. That's all I had for now. Thank you guys.

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

Dr. Lu, I know you might not answer this question because you always try to emphasize expansion and gross profit dollars versus gross margin, but hoping to narrow you down on a number here. Now, in the past you've delivered gross margins as high as 38%, roughly, and now we're down sub-25%. I'm just wondering when we might get back to the low 30% gross margin level, and what the quarterly revenue level needs to be to achieve that goal?

Well, I think like I mentioned our gross margin percent is due to those four factors I mentioned about. So ASP pressure I think is there, is stop. So, we are not going to. The Q1 really is utilization. So we are looking at if the market's stable, then we can change our product mix to utilize the standard product, then we can improve our margin.

You asked me, that's not my focus anyway. My focus is on GPN dollar and as soon as we can continue improve our GPN dollar, we probably will continue try to gain market share and even 10%, 15% product, our GPN percent product business, why not take it. So I do not really spend the time or the focus in how do we get the GPN percent higher. More, how do we continue improve GPN dollar and, therefore, improve earnings per share.

Okay. Fair enough. With respect to your labor cost in China, it is my understanding that Foxconn has a large facility right across the street from Chengdu, and there's been a lot of highly publicized labor wage increases in China. So I'm just wondering what sort of labor price increases you're having to deal with on a year-over-year basis, and how that might trend for the balance of the year? And how impactful that is to your overall cost of goods sold?

Like I say, labor problem in China, nobody can escape from there, we just need to deal with it. But, fortunately, I think -- in the past, what I'm talking about is every 10% labor cost increase in China it affects us GPN percent somewhere around 0.5% to 1%. And that is really short-term because short-term, but then long-term you try to improve the productivity, you try to improve your utilization to offset that portion. So that's life. We stick with it, and we just need to work it out and it's not a major -- I wouldn't say it's a major because somewhere around 0.5% to 1% for every 10% improve, increase.

Okay. That's helpful. Mark, you mentioned a 3% sequential decrease in channel inventory for your parts out there, following an 8% decline during the fourth quarter. I would imagine your inventory in the channel always decreases sequentially in those respective quarters, so I'm just wondering if you can give us some relative metric like days of inventory to give us a better sense of what's out there in the channel?

I don't have the days in front of me. I think that we're probably globally just about, I don't know, 3.2 months. Which is probably pretty accurate. We probably have -- we'll probably see a little bit, probably flat to downish again in this quarter and then probably further down in third quarter as the demand increases. We're kind of in our pattern, actually, the end of the first quarter you might start generally seeing inventory ramping a little bit, preparing for later in the year. I'm not sure that ramping down in the first quarter is generally our trend. So I think we were a little bit over and people are still a little bit sensitive to inventory in the channel. So we'll be flattish to down, and probably down again in the third quarter slightly and then we'll start to normalize our pattern again.

Thank you, guys.

Your next question comes from the line of Suji De Silva with ThinkEquity.

Dr. Lu, in terms of the capacity I had, had the sense there was flexible around the low margin and the high margin products and I'm surprised you're having to add capacity at the high end. I thought you would just mix up as the demand improved. Can you describe where you're adding this capacity again?

Like I said, 18 at the newer and more advanced package, which is if you want to call, is high end or higher GPN type of capacity for the commodities spender in a capacity since it is still underutilized, we are not putting any capacity. As a matter of fact, some of the -- if I can convert some of the equipment for the supporting higher, then we will. But not everything you can convert. Tender, tester, (inaudible) you cannot convert.

You might say it's kind of a partial add. Some of the areas are very convertible into the new areas but some things we need different or maybe a different precision level than our historic product. So we're making sure that we position those so that we don't miss any of the upside demand opportunities that we see in front of us.

Okay. Maybe I can ask a different way. What percent of your capacity is specific to the lower margin products?

I don't think it's that easy to say. I just don't think we could really get into that kind of granulation. There's just areas that with certain packages that require certain different types of handlers and, or this that we're trying to make sure that we have upside capability on and as we go forward, this is the type of equipment that we'll buy. And our standard products will move towards this as we progress.

But you know, our new package we announced like PowerDI type of package. PowerDi type of package, I think those new package we announce, those is good package and advanced. If you remember our presentation, we are talking about (inaudible) move to the thinner, smaller package and (technical difficulty) type of package. PowerDi great example, and like other --.

Some of our historical -- most of our historical stuff is wire-bonded and some of our newer products use clip, which is a different type of -- gives a different type of performance and so on, so there's just portions of each area of the manufacturing that we need to add to position ourselves to capture this demand.

Okay. Quick last question on the second quarter, the guide. I think you said the inventories stay flat to down. Is most of the demand here sell through customers increasing demand or is it some restocking at the customers would this be? Thanks.

I would say it's through demand. I think we're going to be supporting demand in the quarter.

Yes. I think markets already say we expect the second quarter this inventory will continue going down so you could see based on that statement it should be sell through.

Perfect. Thanks, guys.

Your next question comes from the line of Ramesh Misra with National Securities.

First question in regards to balance sheet, I guess cash went up mostly because of this $42 million draw down. Can you tell me a little more about it? You just paid down your debt about three quarters ago. Now you're borrowing money again. What are your thoughts? Why? Why are you increasing --?

It's a flexibility issue. When you have $300 million or $200 million of cash from a convertible note, you have lots of flexibility and we paid that down and we just decided we wanted to have some additional flexibility for general corporate purposes, M&A, CapEx, if we wanted to do it, those kinds of things.

What are the terms on this debt?

The money is for expansion.

Sure. So that's part of the CapEx that we do. It's actually, it's just an adder to the credit line that we have with BofA anyway.

It's actually cheaper than --.

It's actually cheaper than a credit line. I think it's LIBOR plus 1.25.

Okay.

And the convert was like 2.25, and we're at LIBOR plus 1.25, so that's about 1.5, 1.6, something like that.

Cheaper money. So we just said take advantage of that.

Okay.

And using it.

Okay. Any thoughts in terms of acquisitions, M&A opportunities?

Well, we don't have any major M&A right now under-working.

Okay.

But we're still open to it. We're talking to investment bankers and everybody on a weekly or -- not quite a daily basis, but periodically. So we're open to it.

If the opportunity is there, we will take action. But right now we don't have anyone under contract.

Got it. In regards to Chengdu, Dr. Lu, you had, last quarter you had said that you're holding off on expanding capacity over there. You're still kind of continuing to add a little bit. Any update on your thoughts in regards to the build out of Chengdu?

I think I'll speak today we say, we finish the building by end of this quarter and then we'll start to do our -- to put the facility --.

To outfit the building with electricity, Murphy, clean room, that kind of stuff.

We're hoping just get it ready next year, because the power it take about nine months to 10 months. So I think we finish the building, we start to do the power line and we started getting ready so whenever the market turns, where we see really the need, then we can take advantage of that. And right now is long detail item like power we're going to start to do the power line, to bring the power in. So this is what we're doing.

Got it. In regards to the capital constraints in China and end demand in China, what are you seeing over there? Do you think the worst is now behind us over there, or is it still kind of a little bit murky?

This is very difficult question for me. I pay more attention to our market or our customer.

I would say the demand is rising as with the other regions in the second quarter. I don't think that there's any great march forward but I think that the demand is stable to up.

Okay. So you would feel a little better about China than Europe at this point in terms of just recent developments?

I mean, yes. I mean, I think Europe is -- it's swirling within its own economic turmoil and so the question is, is how people respond to that. I think the underlying issues really haven't changed that much. So we just have to see how everybody handles it going forward. And that will probably sort out in the next month or so.

Got it. And then finally, in regards to the industrial segment, well, at least here in the US we have been seeing more positive signs from the industrial market. In Europe, I guess since a lot of it is kind of export oriented to China, it's still kind of a little bit cloudy. So what are your thoughts and outlook in regards to the industrial end market going forward?

I think it looks pretty good. I think we're seeing some of the improvements that we've been talking about in North America have been driven by the industrial segment. Actually, we were up in all regions in the industrial segment in the first quarter, and I think we see solid advances in Asia in the industrial segment in Q2. We do a lot of business in power supply with our SBR products so we're making some good traction there and again, Europe is a big industrial marketplace so how Europe goes we'll see that going forward.

Okay. All right. Thanks very much, folks. That's very helpful.

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

I just wanted to follow up on smartphones and tablets, a lot of conversation in the beginning of the call, the growth there, and the growth outlooks. What percentage of revenues do those products represent right now and maybe where could they run over the next 12 months as a percentage of sales?

We really don't break that out. But as you can see, our consumer sector, we're 34%. We're 34% consumer. So that's a strong segment for us, along with smartphones, tablets, LED-TVs, also a strong thing. So we don't really break out those two categories as a percentage of revenue.

Okay. I mean, is it something that we could over the next 12 to 24 months approach even half the consumer business? I'm just trying to get an idea.

I really don't think we're going to dissect that.

I guess second follow-up, just on end demand. We talked about kind of I guess what's good and some questions within Europe. Maybe any end products that you're selling into or markets that we're just not seeing the upturn yet.

In Europe specifically, I mean, I think we've seen some decent expansion in our business in the automotive sector. Maybe a little bit in the consumer sector in some TV applications and so forth. And I think the industrial segment actually did in Q1, increase over Q4. I was kind of -- when I said I wasn't sure, I was really talking about the outlook for Q2.

Okay. And I guess maybe just the notebook PC market in general, expectations for the rest of the year, is it -- are we going to see growth or are you kind of a little bit more tempered?

No, I think that we'll see -- I think we'll see muted growth in that segment for the balance of the year or through its normal cycle.

Okay. And then just one final follow-up. Rick, the tax rate being lower for this year, as we move into '13 was this kind of a permanent structural shift in terms of where taxes will be, or does it rise maybe as end demand continues to improve?

Well, I think in general our tax rate has been higher historically and I would think that we would move back more to the historical perspective going forward next year and beyond.

Okay. Very helpful. Thanks so much.

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

I have a couple questions on the end markets, so for Dr. Lu or for Mark. I guess going back to the commentary on smartphones and tablets, was wondering if you could talk -- give us a little more color on I guess what products growth in those two end markets or product areas are helping the drive? Is it more commodity discretes that you're selling to those products or is it customer specific discretes or potentially any increase in analog content in those smartphone and tablets?

I think that we're strong, I think we've seen a lot of action in our bjt products. I think we've seen a lot of action in our MOSFET products. We're seeing -- we see that marketplace as a strong place for our logic business. So we're trying to attack with our product line across the board. Yes, we sell commodity products into that area, but we're very much more focused on our premium product in those end equipments.

Okay. And then also as far as notebook, I guess following up to the previous question on notebooks, any comments on how demand surrounding new product cycles such as Intel's Ivy Bridge and maybe even comments a little further into and looking out into Q3 for example around back-to-school. Any comments around longer term demand, or medium term demand and also PC demand in other areas such as Asia?

To be honest with you, we kind of follow that month-to-month. The notebook cycle is not something you can -- I don't know, we don't see it predictable outside of what we see in the next 60 to 90 days. And we see some improvements in the sector. We see opportunities for our growth in those sectors through new design wins and new products that we have going into that product in our USB switch area and some logic areas and then the MOSFET product area. So overall demand, sometimes when I look at our revenue versus the overall demand, I'm really more focused on what I see our revenue flow to be and I see some growth opportunities there. Not as much -- I don't have -- watch the unit output quite as much. Other people might have a better vision of where that's going to be six months out.

Okay. And just one last one on ASP pressures that you mentioned earlier. Is that expected to abate in the current quarter or in the second half and was this -- is this because of competitors that started to cut pricing in order to move product or is it some of your direct customers are looking for more pricing concessions? That would be helpful.

Customers are always looking for price concessions. That's their job. And yes, when utilization's down, there's ASP pressure. And as people get out of mix, they sell things that they don't normally sell. So yes, we believe and we hope that demand stabilizes and as we go to even nominal growth, that ASP pressures will be alleviated. We always have ASP pressure. Our goal is to change our ASP mix as well as the improved market should help that situation.

Great. Thanks, Mark.

And at this time I'd like to turn the presentation back to Dr. Lu for closing remarks.

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