Diodes Inc (DIOD) 2012 Q2 法說會逐字稿

Good afternoon and welcome to the Diodes Incorporated Second Quarter 2012 Financial Results Conference Call. At this time, all participants are in 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 is being recorded for replay purposes, Wednesday, August 8, 2012. I would now like to turn the conference over to Leanne Sievers of Shelton Group, Investor Relations. Leanne, please go ahead.

Good afternoon and welcome to Diodes' Second Quarter 2012 Earnings Conference Call. I'm Leanne Seivers, 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 Merhl. 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. 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, August 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, GAAP 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. Now, I'll turn the call over to Diodes' President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.

Thank you, Leanne. Welcome, everyone, and thank you for joining us today. I'm pleased to report that revenue in the second quarter grew 10% sequentially, driven by improved demand across all our geographies and end markets, as we continue to gain market share. The quarter benefited from the [ranking] of new projects for our products used in smartphones and tablets. While Diodes is very well-positioned, as you may recall, we achieved stronger seasonal results last quarter, which proved to be the low point in demand cycle. This above-market growth has resulted in market share gains and serves as the basis for continued growth in the second and third quarters. Additionally, margins improved in the second quarter as we began to slowly shift our mix to higher margin products, while also benefiting from our new product initiatives and efficiency improvement.

When the demand and pricing environment improves, we can continue to transition available capacity to higher margin products to further enhance our product mix and margins. At the end of the quarter, we've completed the construction of our (inaudible) facilities. We have begun the process of obtaining final acceptance of the buildings and are now installing power, which may take 9 to 10 months. We plan to close our (inaudible) and move it to the new facility and start production mid-next year. Further equipment additions to the building will be met in line with market requirements. This facility will be an important asset for our future growth and expansion. As we look to the second half of 2012, we are approaching the challenging environment cautiously as we began to see demand moderate in June and the growth in China is proving to be softer than expected.

That said, we still expect to achieve (inaudible) growth in the third quarter and have met target category expenditures in our Shanghai facilities to increase capacity for specific package and products. We remain focused on increasing design win activities, capitalizing on the introduction of new products, and overall efficiencies. With that, I will now turn the call over to Rick to discuss our second quarter financial results and third quarter guidance in more detail.

Thanks, Dr. Lu, and good afternoon, everyone. Revenue for the second quarter 2012 was $159.2 million; an increase of 10% over the $144.7 million in the first quarter 2012 and a decrease of 6.2% from the record quarterly revenue of $169.8 million in the second quarter 2011. Revenue was up sequentially due to continued improvement in demand across all of the Company's geographies and end markets. Gross profit was $41 million, or 25.8% of revenue in the second quarter 2012, compared to $33.7 million, or 23.3% of revenue in the first quarter 2012, and $55.6 million or 32.8% in the second quarter 2011. Gross profit margin improved sequentially due to a greater mix of higher margin products, combined with the benefit of manufacturing efficiencies. Total operating expenses for the second quarter were $32.7 million, or 20.6% of revenue, including a $1.4 million gain on sale of assets. Without consideration of the gain in the second quarter, operating expenses were $34.1 million, or 21.4% of revenue, compared to $30.4 million or 21% last quarter.

This compared to $30.3 million, or 17.8% of revenue, in the second quarter 2011. The increase in operating expenses above our guidance was due primarily to an approximately $1 million bad debt reserve, or about $0.02 per diluted share, related to an Asian distributor that was terminated. Without consideration of the gain on sale of assets and this bad debt reserve, operating expenses would have been 20.8% of revenue in the second quarter. Looking specifically at selling, general, and administrative expenses for the second quarter, SG&A was approximately $24.8 million, or 15.5% of revenue, compared to $22.1 million, or 15.3% of revenue, in the first quarter 2012, and $22.6 million, or 13.3% of revenue, in the year-ago quarter. Investment in research and development for the second quarter was approximately $8.2 million, or 5.2% of revenue, compared to $7.2 million or 5% of revenue in the first quarter 2012 and $6.5 million, or 3.8% of revenue, in the second quarter 2011. We continue to increase our investment in R&D to further advance our new product initiatives. Total other income amounted to approximately $250,000 for the second quarter.

Income before income taxes and non-controlling interest in the second quarter 2012 amounted to $8.6 million compared to income of $6.2 million in the first quarter 2012 and $23.4 million in the second quarter 2011. Turning to income taxes, our effective income tax rate in the second quarter was 10%, which was within our guidance of 7% to 13%. GAAP net income for the second quarter was $6.7 million, or $0.14 per diluted share, compared to GAAP net income of $4.9 million, or $0.10 per diluted share, in the first quarter 2012, and GAAP net income of $18 million, or $0.38 per diluted share, in the same quarter last year. The share count used to compute GAAP diluted EPS for the second quarter was 46.9 million shares. Second quarter non-GAAP adjusted net income was $6.4 million, or $0.14 per diluted share, which excluded net of tax approximately $800,000 of non-cash acquisition-related intangible asset amortization costs and a $1.1 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 second 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 diluted share. Cash flow from operations for the second quarter was $16.8 million. Net cash flow for the quarter was a negative $8.4 million, due mainly to a $9.5 million payoff of a short-term line of credit and free cash flow was $4.5 million increase, including $12.3 million in capital expenditures. Turning to the balance sheet, at the end of the second quarter, we had approximately $168 million in cash and cash equivalents. Working capital was approximately $373 million. At the end of the second quarter, inventory was approximately $138 million, a $4 million increase from the approximate $134 million in the first quarter 2012. Inventory days improved to 105 in the second quarter compared to 118 days last quarter.

Inventory in the quarter reflects a $1.8 million increase in raw materials and a $1.6 million increase in finished goods, while work in process remained relatively flat. At the end of the second quarter, accounts receivable was approximately $150 million and AR days improved to 83 compared to 86 last quarter. Capital expenditures in the second quarter totaled $15.2 million and $31 million for the first six months of 2012. CapEx in the second quarter included $1.4 million for the Chengdu building construction. Excluding this amount, CapEx was 8.7% of revenue compared to 5.2% of revenue last quarter. For 2012, excluding the Chengdu building expenditures, we expect CapEx to be at the lower end of our 10% to 12% of revenue model. Depreciation and amortization expense for the second quarter was $15.6 million.

Turning to our outlook, as Dr. Lu mentioned, we are approaching the second half of the year cautiously, but remain focused on executing our profitable growth model. We expect revenue in the third quarter to increase to a range between $162 million and $170 million. We expect gross margin to be 28%, plus or minus 2%. Operating expenses in the third quarter are expected to be 21.4% of revenue, plus or minus 1%. We expect our income tax rate to range between 7% and 13% and shares used to calculate GAAP EPS for the third 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 was up sequentially, driven equally by all regions across our end markets. Growth was led by computing, which was coming off a seasonally low first quarter. Consumer also grew sequentially, due to strong increases from smartphone and tablets, partially offset by weaknesses in LED TVs, which we expect to rebound in the third quarter. We also achieved broad-based growth in the industrial markets in North America and Europe, following solid increases last quarter across all regions. POS sales were up 13% sequentially, while OEM sales were up 6%. Distributor inventory was down 1% and global inventory is in line and under three months.

Turning to global sales, Asia represented 77% of revenue, Europe 12%, and North America 11%. Our end market breakouts consisted of consumer representing 32% of revenue, computing 27%, industrial 22%, communications 16%, and automotive 3%. Our achievement of solid revenue growth in the quarter was primarily driven by new products as we further benefit from new product initiatives and increased content with customers. We continue to make significant advances on our SBR and MOSFET products, specifically in solutions for portables, power, and lighting, and we also saw strong gains on bipolar transistors in the quarter. We achieved record revenue for our CMOS LDOs, made further advances with our L&D controllers for DVS applications, and grew our logic products by 3X as we gain additional revenue and design momentum. Overall, design win activity remains strong across all regions and we have a solid pipeline going into the second half of the year. In the second quarter, our discrete product introductions totaled 54 new products across 14 product families.

Diodes once again proved its commitment to penetrating high-growth, high-volume applications with product releases focused specifically on the portable segment. We are targeting a wide range of devices including smartphones, handsets, and tablets by leveraging our packaging expertise to create new wafer-level chip scale package platforms. These efforts further reinforce our position in miniature package devices and confirms Diodes' leadership in power density and space savings. The launch of our family of WL-CSP MOSFETs is an important milestone in Diodes' development of both wafer and packaging-level technology. These devices are developed specifically for the portables markets, in particular for smartphones and tablet PCs. We anticipate significant adoption of these devices and ramping volumes in the second half of the year. Diodes will use this technology as a springboard to further develop product families across our entire discrete portfolio in the coming quarters.

Other notable launches in the period that showcase our packaging expertise aimed at space-constrained portable devices, including Low VF Schottkys in the tiny DSN 0603 package, a low VF SVR bridge rectifier, and the ultra-small DSN 3030 package, BJTs in the miniature DSN 10006, a functional array ASMIC for wireless charger applications, and a range of duel ultra miniature BJTs and switching (inaudible) in the SOT-963 packaging. In addition to our strong design wins for the portable segment, we also achieved significant wins in computing, LED TV, solar, consumer goods, and automotive applications; confirming Diodes' position as an innovative, broad-based supplier of discretes. Turning to analog new product introductions, we released 28 products across 4 product families. New product highlights include the expansion of our line of Hall Effect switches with the release of the AH-1892. This device is the market's smallest omnipolar hall sensor and offers user selectable sensitivity and a micro power sleep mode, making it very attractive for portable battery-operated equipment such as cell phones, ultra books, and tablets.

Further expanding our support of the consumer market, we also released the AP9060, an overvoltage clamp designed to protect the latest generation of power management for portable applications such as smartphones and USB, on the go-enabled handheld devices. Also in the consumer product space, we had continued design win momentum for our LDO USB power switch (inaudible) standard linear product, as well as major wins for our DC to DC converters and cable modem systems. Leveraging our strong system-level knowledge in support of the satellite receiver and set-top box market, we released the ZLPM 8000 series of devices. These cost-effective, feature-rich and highly efficient devices offer reliable and innovative LNB power management and control solution within the set-top box. New product acceptance and early revenue was very promising across our satellite products during the quarter. Turning to our logic products, we released two new families of LDC devices to complement and deepen our range of single, dual and multi-gate LDC products.

These devices support a wide array of computing and consumer applications. We are seeing continued market interest for our expanding logic portfolio and secured two significant design wins in support of tablet applications that will ramp in the back half of the year. We are very pleased with the progress we have made on this new product family and are encouraged by the large volume design opportunities we have secured for these products to date. As we look to the third quarter, we expect to continue to grow revenue and gain market share, in spite of the market environment. We remain focused on ramping new projects for our products used in smartphones and tablets and also expect to benefit from the rebound in LED TVs. We believe our profitable growth model will continue to produce above industry average returns and produce consistent value to our shareholders. With that, I'll open the floor to questions. Operator.

(Operator Instructions) Stephen Chin, UBS.

Nice job on navigating the tough macroenvironment currently.

Thank you.

A couple questions on your end markets, in particular, the industrial end markets where you mentioned North America and Europe were pretty healthy and strong and I think the growth there was pretty broad. Can you talk a little bit more about how your products are positioned in those two regions in particular and also how Asia was faring as well? High end versus low end products, or is it products going into factory, power management, for example?

The industrial market, I would say it would be in our high-end product areas. I think it's really pretty broad based, everything from security and smoke to climate control and various other industrial-type things. It's pretty broad-based when you look at the size of the accounts in North America. If you look into Asia, it's pretty much power-based and probably more focused in the adapter base for portable markets.

Okay. Got it. Also, how are the demand trends for the telecom and automotive business going into Q3?

I think that telecom business seems a little bit softer. Again, our exposure is pretty broad-based in that and really roughly only 16% and automotive appears pretty strong, but obviously that's our smallest segment.

Just one last question, either for Rick or Dr. Lu. In terms of the CapEx that you're spending on Shanghai, in terms of the new capacity for new packaging types, I understand that that's mainly for new product. Once we get through the high demand of Q3 and starts to enter Q4, will that capacity be somewhat idle going into Q4 because of seasonality or are these new product sets where you're expecting there to be fairly steady demand exiting the year?

SKE will be very steady demand because those new product. We have been doing a lot of design wins and therefore, it will continue that capacity demand will continue, and we might need to continue putting up the capacity. If you know what we tried in the past, we have been it driving smaller and thinner and another one is better power efficiency. Those are products we putting up, like a power 5, like our SOT 323, those can be very thin or very power efficiency. Those are thin, and that's our future. We believe the demand will continue so I don't think the capacity will be idle.

Great, thanks.

Harsh Kumar, Stephens Inc.

Dr. Lu with the softness you talked about in China and also the macro environment, how confident are you guys about the ability to shift the mix up given the conditions that exist?

Okay, I think I might take this opportunity to explain about our GPM percent improvement. If you look at, from 1Q of 23.3% GPM to second quarter of 25.8%, and now we forecast third quarter, 28% plus minus 2, we're going to continue to improve our GPM percent and that's how I've been talking about the GPM percent affected by four factors. One is ASP. We now are seeing, is it just is normal season ASP decline? No, typically we are running about, I think I've been talking about in the past, 2% a quarter. That kind of normal ASP drop, we don't see a significant drop like in the past.

Second one is the product mix improvement. In the second quarter and forecast in the third quarter, most product mix improvement is coming now due to the new product or new project ramped production. Third one, I think what I've been talking about is gold wire conversion, that is because the gold price is stable, therefore, it's not getting worse. But the improvement from that, it's very slowly due to now we are waiting for the major customer to convert and typically they are very slow and very careful. Then the fourth one is our manufacturing and productivity improvement or we say manufacturing utilization those kind of areas, it continues. We continue to see the improvement in cost reduction continue driving the cost reduction and implement that and therefore, you are able to cover the ASP drop, perhaps the improvement we forecasted. I think we continue our effort and we will continue to see this kind of GPM percent improvement in the third quarter.

Very helpful, Dr. Lu. That was really helpful. Dr. Lu, if I can ask you for your guidance, how booked are you from a coverage angle or just what is your backlog, 80% booked, 70% booked? Just any help.

Most of our products is not really by the book. Like a lot of stuff we put in a hub and our direct customer, they just want to us put four weeks or six weeks inventory in the hub. They use it, then they come to tell us. We don't really use the order or the backlog to drive in our business.

Harsh, I think our coverage is pretty typically the way it is normally quarter in and quarter out.

Fair enough. Then Dr. Lu, I noticed that the OpEx is creeping up a little bit. You talked about new products and R&D efforts there. Is this the new normal rate that we should think of in the 21% or would you kind of help us out and give us some goal of what we should think long term?

Okay. This is a good question, because our model is still targeted at 20% operational cost. Sometimes it will be up slightly, sometime it will be low, and at this time we due to some special mass costs, some special R&D costs, our GPM, our R&D supposed to be 5% from 1Q. It's now 5.2%, so slightly up and this just, sometimes you cannot control the mix, but we have been driving the new product, new project, new technology, so I'm still talking 20%. Sometimes 21%, could be, and I think we forecast in third quarter should not be changed.

Fair enough. One last one for Rick. Rick, most other companies take out option expenses, stock comp expenses when they do non-GAAP. I noticed now for several quarters, you guys have it in there. It's about a $0.20 difference between your numbers and everybody else's numbers. Can you just explain why that happens?

Sure. The SEC, back in 2008, sent us a letter and their request was that any recurring expense needs to be not excluded from our non-GAAP reporting. They specifically said that share-based or stock-based compensation was recurring on a quarter-by-quarter basis, and that we should not take that out. Since 2008, we have had our reporting -- we talk about the $0.05 difference between GAAP and non-GAAP. Both of them would be higher if we added back this $0.05.

If you wanted, you can just say GAAP result, the share-based compensation is $0.19 and non-GAAP that's $0.19.

That's fair. Thanks, guys.

Steve Smigie, Raymond James.

First question, Dr. Lu, your guidance is up about 4% sequential. I've seen some of the comps guide about flat and I think Fairchild's may be up about 2% if I look at TI and I back out some of the wireless stuff, their analog, by my math, is up about 2%. I would say it's a pretty good guide in this environment. Would you say that the guide here, the guide is more a function of share gains or meaning, you knocked competitors out of the slots or is it more you've been putting out a lot of new products due to your R&D investment and so you've been gaining some pretty big design wins or some other factor? Just how should I be thinking about that? Thanks.

Steve, thank you for the good comments and we continue gaining market share, no doubt in my mind. That gained share actually is coming from the new products, new design wins, and new projects in our customers. Even the market is not growing as fast as what we expected or as everybody expected, but due to the new projects, new design wins, we are able to grow faster than everybody else, faster than our competitors and that's why we gain market share.

Okay. Specifically, in some of your commentary, you've talked a lot about mobility, a lot here about smartphones and tablets. It's been a few years since you started focusing on that, but it was even maybe three and a half, four years ago, it was just a totally new business to you. Could you give some color, if not a percentage, on how much that is of your business or at least talk about to a certain extent how much of your growth you expect to get from one of these tablet handset products? If you could talk a little bit, would you say it's fair to say you are strongly positioned on the two leading handset and tablet companies right now?

Steve, I'm sorry, another thing I cannot really talk about. Mark, if you can make some comments?

I think that the portables market in our early days was not a strength of Diodes. When we were growing up, cell phones was a very big focus of all the broad line semiconductors and so we tried to focus on secondary things; at that time it was cameras, LCD TV and so forth. As we progressed and as our scale has gotten much bigger, we've come much more focused into those market places. Our entry in those areas is broad-based, both from product and customer base. You look at our consumer number, it's quite strong, but it's pretty broad-based also.

We don't really like to talk too much about specific end equipment and percentages of those end equipments and those things, but there's obviously volumes in smartphones at various customers. There's a lot of opportunity in tablets. There's a lot, I guess, I sometimes cross over between ultra book and tablet, so that kind of confuses the issue a little bit. I think that's about as granual (sic) as we want to get in that area. But if you look at some of the products we've come out, for all those segments that new hall sensor, the 1892, that's a perfect device for us in that area. As we've expanded into MOSFETs and hall sensors, and as we start to get into miniature and small and thin, obviously those markets become very key to us.

Okay, great. If I could sneak one more in, could you talk a little bit about how we should be thinking about tax rate in calendar 2013? Is it reasonable to think you would continue at roughly the same 10% tax rate you've been seeing so far this year?

No, I don't think so. I think that we will go back. If you look historically, Diodes' tax rate was around 17% or 18% and I would think in that 2013 we'd be in the upper 15% to 20% range.

Okay. Great.

That's our guess right now.

Okay. Thanks. Congratulations on a good quarter and tough environment.

Sujeeva de Silva, ThinkEquity.

With the manufacturing transitions that you're doing in the back end, is there any gross margin uplift coming as you transition some of the production around your back end facilities in the next few quarters from now?

We will continue. I think we continue and we will continue our product productivity improvement and cost reduction. What we hope is that activity going to be overtaking the ASP decrease. If we continue doing that, we will continue able to show GPM percent improvement.

That makes sense. For the weakness in China that you saw, can you talk about which end market you may have seen that in more so or was it broad-based?

Well, it's more broad based, because when we -- in China business, we exit two coming from the China business. One is the OEM, who view for global companies. Those slow down some due to the global economy, but at the same time, the internal, the domestic consumption is actually slow down, too, and therefore, we see the China market slow down.

In some of our key end equipments, we're starting to see the global players make a much stronger position, which is kind of pushing back some of the more local Chinese suppliers, say in TV and so forth. They're trying to make a stand or something, but they were seeing a shift where the global players are more aggressively building and some of the secondary players are softer.

Got it. My last question, can you just remind us what the fourth quarter seasonality for revenue is typically and whether this year you think it would be a typical year or there are some tail winds to that? Thanks.

We don't really give the forecast on the fourth quarter. You just need to look at the season similarity, typically fourth quarter.

Historically what's that been? Just so I understand.

Historically, it's flat or slightly down.

Great. Thanks.

Somewhere between 0 to 5%. Down somewhere between that. That's seasonally.

Thanks, guys.

Gary Mobley, Benchmark.

I wanted to start with a question for Mark. Mark, did you say that distributor inventory was down 1% sequentially as of the end of the June quarter? I think you mentioned inventory in the same channel, distribution is approximately three months. Was that roughly flat sequentially, or perhaps down or up?

No, the inventory was down 1%, and so it was down 1%, and, yes, it's slightly under three months globally.

Okay. Three months, you're referring to both hub inventory as pulled by OEMs and then as well as distributor inventory, right?

No, I'm talk about distributor inventory. We considered hub inventory basically as our inventory.

All right. Very good. I appreciate the fact that your gross margins are improving roughly 250 basis points sequentially for the first three quarters of the year, but if I look at your revenue expected for the third quarter, call it $166 million, I compare that to what you're generating in previous years, your gross margin expected in the third quarter is about 500 basis points below prior levels. My suspicion is you have a lot more capacity now, your utilization is lower. Could you share with us what your quarterly revenue run rate would need to be, to be at 100% utilization? If not that explicit number, maybe you can share with us what the utilization rate was for the June quarter?

If you will compare to last year, I think there's several things you need to put in consideration. One is ASP and last year second half ASP dropped quite dramatically and, therefore, from that point of view, you lose the GPM percent. Second thing is the product mix. I think the second half of last year, due to the underloading, we moved our product mix downwards, and now we are stable, and we gradually improve, but it's not back to that level in the second quarter last year yet. Third, it's the gold price, still higher than first half of last year. It's stabilized but not really going down yet. Then the productivity, we continue our productivity improvement.

When you're talking about the loading, yes, we are not fully loaded yet and we still put in the capacity to support the high end new product, new packaging, which is the one we don't have enough capacity, but we are not 10% to 12%, at the high end of 12%. We are now the capacity expansion, capital expenditure is somewhere at the low end of that 10% to 12% and the reason we need to still continue, put that capital is to support newer package or new projects. We still have capacity to support if the market really come very hard and we still have enough capacity to support.

Okay. Assuming you don't equip your Chengdu facility at a rapid rate, what sort of revenue run rate, on a quarterly basis, do you think you can do right now? Do you think you can do $200 million in revenue without adding any additional capacity in Shanghai?

That number, I don't know. I didn't go through a calculation yet. It's really (inaudible) ASP. If the market is low, then even the same capacity, the ASP is low, the revenue will be low. It's very difficult to tell us, but we have enough space in Shanghai to support if we need it to put more capital to support.

Chengdu, you don't count it on production until next year, because I think in my speech, I talking about now we are putting out power and it take about 9 to 10 months. Then after the power we put out equipment, we start to qualify (inaudible), you are not really looking for capacity of Chengdu until second half of next year. We are planting enough space and we have enough capacity to support us, but I cannot really tell you how much revenue it will support because it's really depends on ASP.

Understood. Last question for Rick, just to be clear, on your operating expense guidance for the third quarter, that 21%, that includes GAAP R&D and as well, GAAP SG&A and then last, it includes amortization?

Yes, that's right. Those three pieces, right.

All right. Very good. Thanks, guys.

Vernon Essi, Needham & Company.

I was wondering could you go back to the end market discussion. Just curious what drove the uptick in the computing side? For clarification purposes, earlier you made a comment talking about tablets and I'm wondering if that's included in the computing bucket or do you put that in the consumer side?

In the consumer side. The uptick is because we had a soft first quarter seasonally, so that was why it grew the fastest, because it was off the most in the first quarter.

You're talking computers and it's high shortage in the first Q. If you look at 1Q, how the shortage caused the consumer market slowdown and saw uptick is really just because it's back to normal.

It was the fastest growing in raw dollars.

Okay. Rick, a gross margin-related question, but just to refresh me on your CapEx plans, going into next year, basically this facility will go on-line. I'm just curious, do you expect a big change in your depreciation amount on a quarterly basis or will that change much from the $16 million run rate you've been at?

No, because the plan is that when we start building out Chengdu with equipment, the equipment that we put into Shanghai will be minimized. Basically we'll shift from Shanghai to Chengdu and so there won't be that much change in the depreciation itself.

All right. That's helpful. Thank you.

Christopher Longiaru, Sidoti & Company.

Can you talk about inventory in the channel a little bit and where that is, where it was relative at the beginning of when you reported the first quarter?

I don't have the first quarter. Let me see. Maybe I do. I don't have it there. It was down 1%. It was kind of where we expected it to be. It was pretty much POP and POS were relatively flat in the quarter. Maybe POS was slightly higher as a percentage. I expect it to continue to decline in this quarter and we think it's in pretty good shape. North America, and Europe traditionally run at between three and four, and Asia runs at two to 2.5 so probably it's at 2.4, and North America and Europe, traditional spots. I think we're in pretty good shape.

What was utilization?

On what?

What was the fab utilization?

Fab utilization is, basically all fabs actually quite full, because some of the new products ramping up are coming from our old fab. Fab utilization is not an issue. We typically use like 80% is the (inaudible) we consider 80% is in the good or normal level and we are back to that. Assembly, like I said, we still depend on different package. The high end or newer package reach -- we are fully loaded. We still need to put in the capacity to support those ramp. Now, the commodity growth package, like commodities, those kind of package, we are underloaded, because we really don't want to deal in those kind of products.

Our objective is to round those up. Try to move them up the chain.

All right. That's all I have. Congratulations on the results in the tough environment.

Shawn Harrison, Longbow research.

Mainly a lot of clarifications, but I guess when looking at distribution into the September quarter, I don't think you commented in terms of what you would expect them to do with inventory. It looks like the decline in your inventory distribution has been waning or that decline has been lessening. Would you expect no further inventory drawdown of distribution in the third quarter?

I think that North America and Europe will stay relatively in this range and I think we'll see some drawdown in Asia.

Okay.

But I feel pretty comfortable. We're not seeing a big pressure on our inventory. We think our inventory is in pretty good shape and for the third quarter in Asia, I think our inventory is in the right place. I think that our inventory for North America and Europe in the right place for pretty much all quarters.

Okay. Then secondly, I was a little bit confused, maybe just heard this incorrectly. If the consumer (technical difficulty) 32% of sales for the quarter, that would imply sales are down -- was that almost high single or double digits year-over-year?

What?

The consumer electronics business. If it was 32% of sales, I think it was 34% of sales last year.

right.

Down high single or low double digits year-over-year, so I was just trying to triangulate what was the decline.

I'll to have run through all those numbers and maybe we can get back on it.

Because we don't have that reading of our consumer, is went down or something.

I think I'm just going off the stats provided last year, so maybe I have something wrong. Pricing environment, Dr. Lu, I just want to confirm that you think it's back to normal or a little bit less than normal, so we shouldn't expect the negativity we saw in the back half of '11?

The ASPs reduction?

Yes.

Yes. I think it's slightly better than normal season or normal quarterly ASP reduction.

Finally, for Rick, trying to get my model in terms of SG&A, at 21.4%, that implies a gap, $35.5 million of SG&A for the September quarter at the midpoint of your guidance, which would be up maybe $1 million sequentially, so I'm just trying to figure out where the inflation in SG&A be, or R&D?

You've got to remember that we let R&D go up based on the revenue. Since the revenue is going up, the R&D is going to go up and we do have small increase in SG&A. Whether that occurs or not, we don't know, but we're trying to be conservative.

You are going to be running R&D somewhere in the mid 8's, and SG&A of $25 million, $26 million?

That's right.

R&D running about 5% of the revenue and that's our goal and we continue doing that. Our SG&A possibly up more though it was 15% of revenue, and we are slightly higher now.

We have SG&A at 15.5% plus the amortization of intangible costs.

Okay. Thinking about the new designs, is the mix of new designs that you're winning or putting out on the market and things that you're winning, is that share different than your end market mix right now? Is it maybe much more based within the consumer electronics versus the split of revenues that we're seeing?

I think it's pretty broad-based. I think it would be very, very hard to -- I think it would be relative to the same split we're in now. We're very, very diverse and we have -- there's obviously some very big ones and then there's obviously just a multitude of smaller, more medium-sized. I would say that when it all comes out, we've been relatively consistent in our market mix for a period of time and I would say it would continue in this direction.

Okay. Thanks so much.

Tristan Gerra, Baird.

It looks like utilization rates are no longer really having a negative impact on the gross margin. If we assume a somewhat weak environment with top-line maybe flattish or up slightly over the next few quarters, when do you think you would get back to the type of product mix that you have in Q2, 2011?

All I could tell you would be really if the market's very hot, then but you know, since last year, when market started to slow down, the market's not really that hot or demand. We are gaining the market share, but if you look at the growth rate year-over-year, from semiconductor or from our same point of view, it's not really growing. If the semiconductor SAM back to 10% growth or our SAM, then we'll be able to double that number, then you can see the GPM will be improved dramatically, but the market's is not growing.

If the market improves on a slight basis, though, we'll be able to continue to grind through changing this mix up and that should drive us towards those margin improvements that you're looking for. We're very focused on what we're trying to sell and where we're trying to sell it and we have a lot of new product initiatives. It's going to fill up what we believe is some of the lower value products that we have out there. If there's no market out there that says we need to aggressively attack those lower end products because we see a big price increase, then naturally our mix under this will round into a better mix overall, which should be positive and drive us towards where you'd like to see us go.

Our biggest model, we really want to focus more on the growth instead of just the GPM percent. That's why I mention that over and over again. Our priority is growth, gaining market share, and we'll continue doing that. We did that and we'll continue to do that.

Great. That's very useful. Could you remind us what the mix is currently of analog versus discrete and what would be your target by end of next year?

We really never disclose this number and the reason is, we use this year the same back end capacity. They use the same kind of package so we sometimes prioritize based on need, based on customer, based on those, so it's very difficult for us to drive in to separate analog versus discrete, so we just don't separate those.

Okay. Directionally, though, is it a fair assumption that mix is going to improve? Is the R&D increase that you are guiding for, for Q3, how much of that is just one-time items versus an improvement in mix in terms of investing into higher margin products?

We're not talking about sometimes due to the mix, because masks very expensive. When you we are talking about 500,000 and 800,000 more in the quarter, two or three masks will make that difference and therefore it's very difficult for us to make the R&D -- the number exactly, because sometimes they deduce more or they deduce less. My biggest model is 5% of our revenue go to R&D and that's our goal and that's our model and we try to do that. Sometimes you might be 0.2% more. 0.2% is probably 300,000. 300,000 is only one or two mask sets. We introduce so many new product a quarter. Very difficult to control. I don't want to be caught trying to set 300,000 and slow down a new product. New product still number one priority.

One other thing is, just because it's analog doesn't mean it's more margin, too. Both discrete and analog both have equal opportunities for higher margin products.

Because it's packaging is where we're winning.

Okay. That's very useful. Thank you.

Vijay Rakesh, Sterne Agee.

What was your sell-in versus sell-through on your mix on revenues?

POP and POS were pretty much flat, I mean, they were equal.

No, I meant, does that recognize all revenues on sell-in?

Sell-out.

Sell-out, okay.

Sell-in, through the distributor.

All right. And I know you mentioned POS was coming down, the point of sales was coming down significantly. Are you baking that in with the guidance?

No, I said POS was up 13% quarter-over-quarter.

No, for the out quarter, for the September quarter, right.

I don't expect POS to decrease in the quarter. Our should be in line with our guidance directionally.

Got it. Okay. Last question here, when you look at the ASPs unusually soft. What is other mix, what are the other levers on the gross margin line trying to get back to last year's margin levels?

I think at the beginning of the call I make it four factors affect our margin. One is ASP. I said ASP still continue going down, but it's not as worse as second half of that year. It's going down better than that. We typically see 2% a quarter type of ASP drop. Second thing is product mix. I said product mix actually improved due to majority our new products, new projects ramp up the production.

The third one is gold. Gold conversion is steady, but it's not really increased significantly, because now we are waiting for the major customers to convert and major customer typically very, very slowly to convert to the gold wire. Then the fourth one is productivity improvement from our making function and I say those is really continue improved, and that's why we are able to change our GPM percent from 23.3% in 1Q to 25.8% in 2Q. Now we guide another 2.2% up plus minus 2%, and those are because our effort of manufacturing improvement.

Okay. Got it. Thanks.

Tristan Gerra, Baird.

Have you talked about the savings of Chengdu once it's ramping versus Shanghai?

I don't think we're talking about that yet because Chengdu won't be ramped up until second half of next year, so we still have one year away, so we are not. We know the labor costs will be low. But since they are capacity beginning will be lower, so the costs may not be as good, but labor costs will be cheaper. We do not really do any comparison yet. But, yes, for long run it will be major manufacturing facility for us. When they get to the bigger capacity, then they can be more cost effective.

Are the labor costs in that region lower than in Shanghai?

Right now? The labor today?

Currently, yes.

Yes.

And more stable.

Great.

Because Shanghai, most of the people come from inland, and Chengdu, most of the people coming from the province. That's the difference.

Great. Thanks again, very useful.

Ladies and gentlemen that concludes today's Q and A. Now let's turn the conference over to Dr. Keh-Shew Lu for closing remarks.

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

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