Diodes Inc (DIOD) 2012 Q3 法說會逐字稿

Good afternoon, and welcome to the Diodes Incorporated third quarter 2012 financial results conference call. At this time, all listeners 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, Thursday, November 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' third 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 which 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, November 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's statements during this conference call we refer to net income attributable to common stockholder 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. I'm pleased to report our third consecutive quarter of growth in which revenue grew 5% sequentially despite the slowdown in the general market. Our new product initiative and the past design win effort drove further market share gains as we continue to increase sale of our product used in smartphones and tablets. Gross margin improved slightly in the quarter, but remained under pressure primarily due to the weak global economy. Although we are gaining market share for our more advanced packages as supported by the capital investments we made in the second and third quarters, we are still underloaded on our standard packages. The unstable demand environment also caused pricing to weaken in the quarter and the product mix to be less favorable than we had anticipated. However, our cost reductions and manufacturing efficiency improvements were able to largely offset those factors. As I have stated in the past, improvements in the demand and pricing environment are key factors in our ability to transition available capacity to higher margin products at a more rapid pace, which has been restrained by the slow economic recovery.

As of September 1, Diodes acquired over 50% of the outstanding shares of Eris Technology Corporation. Through this relationship we look to leverage Eris' assembly and test equipment automation capability. This should help reduce the impact of the China labor cost increases in the future. And then more recently, on October 29 we were pleased to close our acquisition of Power Analog Microelectronics, PAM. The company has a product portfolio including Class D audio amplifiers, DC to DC converters and LED backlighting drivers. Our rationale of acquiring PAM was for its advanced analog product portfolio, strong technical teams and a strong customer relationship, including those that allowed Diodes entry into Japan. Even with the narrow technology and product portfolio they have been able to secure a couple large multi nation customers as well as targeted regional ones.

The current revenue contribution for Diodes is not material, but we believe there are significant long-term growth opportunities as we leverage Diodes' infrastructure and technology, as well as our sale channels and customer relationships. This is a perfect example of our efforts to use acquisition as an effective way to expand our SAM. With that, I will now turn the call over to Rick to discuss our third quarter financial results and the fourth quarter guidance in more detail.

Thanks, Dr. Lu, and good afternoon, everyone. Revenue for the third quarter 2012 was $166.6 million, an increase of 4.6% over the $159.2 million in the second quarter of 2012 and an increase of 3.7% from the $160.6 million in the third quarter of 2011. Revenue was up sequentially, primarily due to strength in Asia and market share gains.

Gross profit was $43.6 million, or 26.2% of revenue in the third quarter of 2012 compared to $41 million, or 25.8% of revenue in the second quarter 2012 and $45.2 million, or 28.1% in the third quarter 2011. As Dr. Lu mentioned, gross profit margin improved marginally over the prior quarter due to the benefit of new product initiatives and manufacturing efficiencies, largely offset by product mix and a soft pricing environment. Total operating expenses for the third quarter were $36.1 million or 21.7% of revenue. This compares to $34.1 million, or 21.4% last quarter which excludes a $1.4 million gain on the sale of assets and $31.8 million, or 19.8% of revenue in the third quarter of 2011.

Looking specifically at selling, general and administrative expenses for the third quarter, SG&A was approximately $25.8 million, or 15.5% of revenue compared to $24.8 million, or 15.5% of revenue in the second quarter of 2012 and $23.4 million, or 14.6% of revenue in the year-ago quarter. Investment in research and development for the third quarter was approximately $9.1 million, or 5.5% of revenue compared to $8.2 million, or 5.2% of revenue in the second quarter 2012 and $7.3 million, or 4.5% of revenue in the third quarter of 2011. We continue to increase our investment in R&D to further advance our new product initiatives.

Total other income amounted to approximately $1.9 million for the third quarter primarily, due to a gain on the Eris stock in the amount of $2.3 million, which was partially offset by foreign exchange losses. On August 31, Diodes acquired over 50% of the outstanding shares of Eris. Prior to acquiring a controlling interest, we had accounted for the investment under the fair value method of accounting, but as of September 1, we had begun consolidating their financial results.

Income before income taxes and noncontrolling interest in the third quarter 2012 amounted to $9.4 million compared to income of $8.6 million in the second quarter of 2012 and $11.1 million in the third quarter of 2011. Turning to income taxes, our effective tax rate in the third quarter was 5.4%, which includes the benefit of a return to provision adjustment of approximately $500,000 and was below our guidance of 7% to 13%. GAAP net income for the third quarter was $8.6 million, or $0.18 per diluted share compared to GAAP net income of $6.7 million, or $0.14 per diluted share in the second quarter of 2012 and GAAP net income of $10 million, or $0.21 per diluted share in the same quarter last year. The share count used to compute GAAP diluted EPS for the third quarter was 47 million shares.

Third quarter non-GAAP adjusted net income was $9.5 million, or $0.20 per diluted share, which excluded, net of tax, approximately $900,000 of non-cash, acquisition-related intangible asset amortization costs. We've included in our earnings release a reconciliation of GAAP net income through non-GAAP adjusted net income which provides additional details. Included in third 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 from the third quarter was $17.6 million. Net cash flow was breakeven for the quarter and free cash flow was a negative $1 million, due mainly to $18.6 million in capital expenditures during the quarter. Without the capital expenditures in Chengdu, free cash flow would have improved by approximately $3 million.

Turning to the balance sheet, at end of the third quarter we had approximately $168 million in cash and cash equivalents. Working capital was approximately $385 million. Inventory was approximately $158 million, a $20 million increase from the approximate $138 million in the second quarter of 2012. Inventory days were 111 in the third quarter compared to 105 days last quarter. Inventory in the quarter reflects an $8.2 million increase in raw materials and work in process combined and a $12.1 million increase in finished goods. Finished goods inventory increased due to building ahead of product because of a China national holiday during the first week of October and the inclusion of $3 million of Eris inventory. At end of the quarter, accounts receivables is approximately $157 million and AR days were 85 compared to 83 last quarter.

Capital expenditures in the third quarter totaled $17.9 million and $48.9 million for the nine months of 2012. CapEx in the third quarter included $3.2 million for the Chengdu building construction. Excluding this amount, CapEx was 8.8% compared to 8.7% of revenue last quarter. For the full year, we expect CapEx to be at or below the low end of our 10% to 12% of revenue model, excluding the change in building expenditures. Depreciation and amortization expense for the third quarter was $15.8 million.

Turning to our outlook, for the fourth quarter of 2012, we are expecting a seasonally down quarter with revenue ranging from $160 million and $167 million including $3.5 million of revenue contribution from PAM and Eris, or down 4% to flat sequentially. Gross margin is expected to be 25% plus or minus 2%. Operating expenses are expected to be 23.5% of revenue plus or minus 1%. The anticipated increase in operating expenses over the third quarter is due to the inclusion of PAM and a full quarter of Eris. We expect our income tax rate to range between 7% and 13% and shares used to calculate GAAP EPS for the fourth quarter are anticipated to be approximately 47 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 by strength in Asia and continued market share gain. Growth was led by advances in the consumer segment, primarily due to continued increases from smartphones and tablets as well as a rebound in sales for LED TVs. Despite the industry reported weakness in PC segment, we actually saw a sequential increase in computing, specifically in notebooks at certain customers as a result of our new product and share gains. Another bright spot in the quarter was the automotive market in Europe even though the region as a whole was down in the quarter due to continued economic uncertainty. North America also declined sequentially due to weakness in the industrial segment. Globally, key US sales were up 5% over the second quarter and OEM sales were up 4%. Distributor inventory continued to decrease and was down 4% and inventory remained in line and under three months.

Turning to global sales, Asia represented 79% of revenue, North America 11% and Europe 10%. Our end market breakout consisted of consumer representing 33% of revenue, computing 28%, industrial 19%, communication 16% and automotive 4%. Our achievement of revenue growth in the quarter was primarily driven by new products as we continued to gain market share and increased content at our customers. We extended our positive momentum for our STR and MOFSET products, specifically in solutions for portables -- portable power and lighting. We also achieved another quarterly revenue record for our CMOS LDOs, as well as strong revenue and design momentum for our power management, scanner, linear and logic products. In the third quarter, discrete product introductions totaled 25 new products across 15 product families. We continue to validate our position as a leading supplier of broad based discrete components for high growth, high volume applications.

During the quarter we built upon our new chip scale packaging technology platform that we announced last quarter. In addition to our MOSFETs CSP devices, Diodes has now released our first SDR and Schottky devices in this important new packaging technology, once again demonstrating leading power density and space saving performance. These first CSP and SDR devices are an important development for Diodes as it demonstrates the technology's application to a wider range of product families and further underscores Diodes' commitment to the creation of broad range of sub-miniature devices to support our customers in the mobile communications and portable markets. We expect to ship a very significant volume of these CSP devices to key customers in the fourth quarter.

Other notable launches for our MOSFETs include applications for LED TV backlighting, fan motor control, power supplies, computing and the emerging wireless charger market. All of these devices represent a diverse range of thermal and space efficient packaging that is designed to meet the stringent demands of these applications.

In terms of design wins for our discrete products, Diodes secured some important wins in the quarter, specifically in computing, telecommunication, power supplies and portables markets. The broad base of these design wins across many application areas will be a key foundation to Diodes' growth in the coming quarters.

Turning to analog new product introductions, we released 61 new analog products across four product families. New product highlights include the release of a new family of 2.5-amp high side power switches that further expand our very successful portfolio of devices optimized for USB and other Hot Swap applications. These devices provide a complete protection solution for portable and high performance consumer applications. In addition, we achieved continued design win momentum and market share gains with our expanded USB power switch portfolio. Also during this quarter, we secured major wins in the computing segment for both desktop and notebook applications, multiple wins in the consumer space for set-top boxes and the communications segments for network gateway.

We also continued to expand our LED driver family during the quarter and released five new drivers, including a 60-volt lineal LED driver, a wide dimming range driver and a high efficiency buck LED driver. Our newly released adjustable linear driver, the AL5812, has an extremely wide operating voltage range and offers world class accuracy for driving long LED strings in signage and linear fluorescent TA applications. We saw major LED driver design wins in both TA and dimmable MR16 retrofit applications.

As I had mentioned earlier, our CMOS LDO product line achieved another quarter of record revenue and generated continued design win momentum with significant wins for DVD players and PC motherboards. In addition, market acceptance of our synchronous high voltage DC to DC converters continued with wins in LED TV and set top boxes. Notable sensor wins included notebook in the computing space, [e-needering] in the industrial space and personal care appliances in the consumer space.

We also continued the aggressive expansion of our standard logic product portfolio during the quarter with the introduction of a family of 42 new ultra low power single gate logic devices. This family offers the most popular single gate logic functions in an advanced ultra low power CMOS process and are ping compatible with industry standard parts. In addition to offering standard packaging, we also released these devices in the industry leading DFN 1010 and DFN 1410 packages for valuable space savings in portable consumer electronics such as cell phones, E-readers and tablets. As a result of our focus and commitment to standard logic, our customer base now exceeds 500 customers including tier 1, EMS and mass market customers.

In summary, although the global environment continues to create uncertainty, we remain focused on further expanding our content with key customers and gaining market share. In addition to our strong design win momentum for the portable segment, in particular smartphones and tablets, we continue to leverage our innovative packaging expertise to further reinforce our leadership in power density and space saving devices. We are also encouraged by the large volume of design win opportunities we have secured for our logic products to date, which will be a key driver of growth for Diodes in the coming quarter. And finally, we believe our recent acquisition of PAM will further expand our analog stand for additional revenue opportunities in the future. With that, I'll open the floor to questions. Operator?

Thank you.

(Operator Instructions)

Your first question comes from the line of Steve Smigie from Raymond James. Please proceed.

Great. Thanks a lot, congratulations on a good quarter on a tough environment, particularly on the computing where everybody else seems to have been hit pretty hard. Was hoping you could talk a little bit about how you see this next few quarters playing out. Obviously, things are soft here. I guess a number of your comparables indicated that there's some amount of inventory workdown setting up a possible Q1 recovery, not necessarily from demand, but even just from inventory level. Would you have any color on how you see the next couple quarters playing out? Thanks.

Well, Steve, thank you for the comment. We really don't know what will be happen in the 1Q, because for us it's too far away, okay? But for the fourth quarter, we know the general market is tough, okay? And, unfortunately, due to our past design win and past market share gain activity, we still project later than it appears of the growth. People typical look at somewhere quite low, but we only be looking for flat to minus 4%.

Right. Thanks. Can you talk about your mobility business a little bit more? You've been investing there in awesome design wins on the call today. What percentage of revenue is that now, and is there a certain goal or target you're hoping or at least working towards for the coming year?

Steve, we don't really -- we really haven't broken it out by mobility. We lump our mobility and those things in our consumer section and frankly, we probably just haven't gotten to that level of granularity in where we are. But clearly, that's a focus. It's always been one of our smaller segments within our consumer base, and we see a lot of opportunity in some of the sub-miniature and some of our CSP devices and some of our logic devices to really expand our revenue in those areas. So, it is a key focus for us, but I can't define it for you at this point.

Okay. Last question was just on R&D. What sort of number are you targeting as a percentage of revenue at this point? You're obviously adding more analog products. Does that continue to go up? Do you continue to increase investment to achieve more growth in that area, or is it just sort of keep on the similar rates, as you've been doing in some recent quarters? Thanks.

Well, our R&D (inaudible) 5% of the revenue, and it's just because, if you cut the PG or take out in a couple more quarter, that costs go up. And so it's very difficult to get exactly because the take out, typically you take out one quarter but you don't take out the other quarter, that make a big difference, okay? But (inaudible) still at the 5% of our revenue and we feel tried to maintain in that kind of label.

Great. Thanks very much.

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

Hi, guys.

Hi, Gary.

You guys in the past have generated gross margins in the mid- to upper 30% range, and on a revenue base, not much different than what you just generated, closer to $180 million. Ad so I guess most people fear, including myself, with industry capacity clearly ratcheting down in the third and even more in the fourth quarter, and you as a Company investing aggressively in your Chengdu facility, I'd like to get a handle on what your capacity addition plans are. And should we think now of Diodes as being the Company growing twice the market growth rate, maybe growing more than that? And then as well, is the new normal for gross margin mid-20% gross margin to perhaps the upper 20% range?

Okay. Let me answer several questions one by one. Number one, Chengdu facility. I think we actually slow down the Chengdu expansion. We finish the building and -- but try to facilitate and the capital equipment is all on hold, okay? So, we are not really, other than the building we need to -- we finish it up. We are not really spent too much money now of putting the facility and [mofi] in there, and equipment-wise, other than pattern 9, we do not order any equipment yet. So, we are waiting for the power come in and then after that, we probably may power next year if the market turn. If market don't turn, then we'll play by ear, but this moment we are not really putting any capital equipment or mofi into Chengdu facility.

Second, let's talk about Shanghai facility. We continue put it in the capital the area of our new package, which we don't have the capacity for it. And fortunately, we have a very good design win on our CSP, our DN1060, a lot of those very tiny small package which is gaining the momentum, but that's the area we do not have enough capacity and so we put in the capital equipment for that area. And if you look at the Standard package area (inaudible) or even some of the QFN, those area since the market's really slow, our revenue from that area is not really growing, okay? That real growing is really coming from very -- the new and advanced package and of therefore, we really -- our GPN was hurt because that standard packaging is not fully utilized. It's underloaded. But if the market turns, if the market turns, then that area should be started loaded, your utilization will going up. Then your GPM going back up.

Our other point, I think I kept the point out in the past, is the gold wire. This quarter, gold went up again, okay? Even when we -- our output for the gold went down, not this quarter, I mean third quarter, okay? Our output for gold went down. Our couple conversion going up, but unfortunately, the gold price actually went up in the third quarter, and that cause us the GPM not really recover as fast as we can. So, there's a stable area that we're talking ASP and we're talking about your utilization, we talking about gold. Gold, though, is the one hurting us, but I believe is when the market start to turn, when we convert more or our customer allow us to convert when they start to convert into the next design or next new part of or next equipment or convert into the couple wire next year, our GPM will be start to improve significantly again.

Okay. Well, appreciate the detail there. Last question for me, I'm actually out of pocket. My flight just landed, so I apologize, I haven't had a chance to review the press release in great detail. But could you break out the organic growth comparisons for the third quarter, without contributions from acquisitions as well?

Well, I think we already said it, the (inaudible) coming from Eris and coming from PAM is not materialized, okay?

In the third quarter, PAM was not included at all and we had one month of Eris, so it's basically immaterial.

Yes.

All right, great. Thanks, you guys.

Your next question comes from the line of Christopher Longiaru from Sidoti & Company. Please proceed.

Hey, guys, congratulations on the performance in a tough environment.

Thank you.

My question has to do more with, you talked about just global economic weakness kind of pressuring price a little more. Can you talk about that in relative terms to what you typically see this time of year? And if you have any kind of visibility going forward on that, that would be great.

Okay. Let's talking about third quarter. Typically, in semiconductor cycles, third quarter supposed to be a very good quarters, okay? And unfortunately this year, the third quarter really didn't grow as fast as in the past, okay? So, that create a price pressure. And then you go to fourth quarter. Typically, is 5% down, but this quarter you only see the announcement is quite visible. Fortunately, at Diodes we predict the low to 5% down -- the low to 4%, okay? So, we are better than our peer and then better than in general, but the market is really soft.

What's a general annual ASP decline for you versus what you're seeing now? Can you comment on that at all?

In typically, I have been talking about that several times in the past. If you are [shim] mix independent is about 2% a quarter going down. That's typical.

Okay.

Okay? And like last year or beginning of last year and then part 2010, the market is so good, the price is actually not changed that much, okay? Now this time, we actually (inaudible), we are better than typical, but it is still more than what I expected, because I thought third quarter should be good.

Because of the inventory levels still being fairly healthy. Would that be correct?

Well, our customer you're talking about?

Yes.

Well, you can say that, but it just -- the price pressure is still very high. Typically, when the market is soft, our customer know how to squeeze, okay?

All right. That's all very for now. Thank you, guys.

Thank you.

Your next question comes from the line of Vernon Essi from Needham. Please proceed.

Thank you very much, and nice guide in this environment. I was wondering, and I want to congratulate you also on the purchase of power analog. And Dr. Lu, I was wondering if you could expand upon that and give us an understanding of your revenue footprint in Japan? In your filings, there's really no presence at all and obviously, I would assume that's going to get you some multi-national experience or exposure over in Japan. Can you give us an understanding of how that might play out for you in terms of your relationships in that region and what you're serving right now?

Okay. Typically, Diodes in history, we really don't have any revenue from Japan. We kind of -- because Japan typically does the -- you have allowed the Japanese company occupy that, and it's difficult for us to get into Japan. So, we focus our effort in US, Europe and Asia, and you can see when we break it out, we hardly sell anything in Japan because we basically not in Japan, okay? But I think the way I feel is everything is changing. I think Japan company start to feel lot of pressure. They really need to start to procure their component from outside. If they try to buy from Japan company, they probably start to going to get pressure on their end equipment. And we see that as opportunity for us start to develop the revenue on the business inside Japan. And PAM provide this opportunity because with a small product portfolio, they are able to get some business from Japan and they have couple of very good disti. We can utilize it, okay? So, we try to take the opportunity to participate into the Japan market.

And if you were to give us understanding, have you already started those conversations as a result of this acquisition? And do you see progress already occurring, or is this more of a 2013 effort?

Well, I'll let Mark King answer this question.

We already have our Asian -- the leadership of our Asian team in Japan this week as working with those distributors to start setting up preparing for to us go. One of the key things about it is just it forced us to have an investment in Japan. So, now that we have two people there, we can sit down and do it. Sometimes getting started and deciding to hire those people in Japan is a first big step. So, we have some people there, people within our Company are familiar with those people, so that gives us some advantages. We have already established distributor bases in some of the -- some of the distributors that we had already been looking at in the past, so I think it all worked out pretty well for us.

Mark already tell you there are two people from PAM in Japan, and one of them working for me before (laughter). So, I think this is good opportunity for us. We know him well and we know his capability, and this is a good opportunity for us to start to develop Japan market.

You seem to know everybody, Dr. Lu.

(Laughter) He working for me when I was in my previous company.

Okay. Just moving on, my last question here on the automotive front you had a really nice growth sequentially. And it looks like that might actually be a record quarter for you, and you said you had strength in Europe. Was there any specific product that was more successful or any specific reason for that, that strength?

I don't think it was a record, but it bumped against our 4% high. And, what we see in some of our designs in the higher end cars are doing pretty well. Actually, the lower end cars where we're not as present have been pretty soft in Europe. So, we just -- it was kind of a broad based product area that we saw some -- broad base where we participate, we saw some strong numbers the last quarter.

Okay. And just for the record, on a dollar basis, I think it's a record, but I --

It's a really small -- okay, on a dollar basis, yes, right. The record on the dollar basis.

Yes, you're right.

The percentage of our segment thing, we've been just here once before.

Right, right. Okay, thank you.

Yes.

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

Hi, Steve.

Hi, Dr. Lu. Thanks for taking my questions. A couple items I wanted to go through. Firstly, on the top line, just in terms of the new products that you were talking about like package products and other new innovative products, what does the demand look like for those products going into early 2013? Because you mentioned that there might be good mobile customer exposure there and just wondering if there's a good steady flow of new products ramping into next year.

I would say that as the market demand goes, we're having a strong quarter this quarter. We'll see where the demand is in the first quarter. They are predominantly consumer oriented, so again, the demand window is relatively short. All in all, from a design win perspective and a positioning perspective, we think those products are doing quite well for us.

Okay. That's helpful. And then in terms of operating expenses, can we get a little more color in terms of how the guidance for -- or how that breaks out between the R&D and the SG&A side?

The guidance?

Right. For OpEx in terms of 23.5% plus or minus 1 percent. How does that break out between R&D and SG&A? Is it, a little more heavy on the SG&A side in terms of the headcount?

Well, our model is to have about 5% R&D, and if you look at our third quarter, we were at 5.5%. It's probably in that same range in the fourth quarter, maybe a little bit higher, and then we have the amortization of intangibles, that's about $1 million, $1.5 million. You can look at the history on that one. And then the rest will be SG&A.

Okay, got it. That's helpful.

Yes. But in the fourth quarter, I think we get the Eris and Japan --

Both are in there, right

Both is -- bad is more -- their cost is more than our model, okay? So, we just need to work the number down because they're a very small company, and so their R&D and SG&A is much higher than our model.

Right. And that's one of the reasons in the fourth quarter the R&D and the SG&A is going up higher than our model and higher than the third quarter.

All right.

And give us the time when we working that number down and when the revenue growing -- start to grow back up again, then we will go back to our model.

Just the last question or two here on the capacity side, and it's related to those two acquisitions. In terms of utilization rates in Q3, just directionally, was it flat or did it come down some more for your internal capacity excluding Eris in the quarter?

Yes. Like I say, utilization, if you just pure look at your utilization number, you will say utilization is up. But if you look at the separation between the advanced new package versus standard package, then the standard package is actually either flat or slightly down. Because our gaining the momentum is all in the high end in advanced package. So, this is what I'm talking about,. If you pure look at utilization, might be okay. We still put in the capital in second quarter, in third quarter, and we are not putting any more because I think we have enough capacity even to support the newer package, but standard package is still under pressure.

And just one follow-up on this. When you look at the number of dollars that you spent on the acquisitions (technical difficulties) Eris, how does that break look from a capital acquisition standpoint? The effective capacity that you have access to now, how does that compare to your historic spending on these (technical difficulties) amount of back end capacity? I understand that some of the capacity require periods more specialty packaging and high voltage-type parts. I know that's not a complete apples to apples comparison here.

Okay, number one, on every -- their capacity, we don't count their excess capacity, okay? And we just consolidate their P&L, so their capacity, we don't care.

With a minority interest, right?

Yes. And so the number one, and number two, their capacity is not the same as our -- we invest in Eris, an area we don't have the capacity. We don't have the (inaudible) okay? We are not buying Eris because buying the capacity. Eris is in the -- Eris capacity is in other package which we subcon, okay. And they are one of our subcon partner originally. The really, the benefit of Eris is this. They are very good at taking the -- at using the capital equipment to deduce the people's cost. And, we talking about IDP4. China, they were costs going up 10% to 15% a year, and I don't see the end in the near future. Therefore, we need to figure out a way to helping us to deduce the growth of the people cost, and one of the way is automation. And Eris provide me that kind of technology. Now, not right now, but in the future, we should be able to take that technology and help our expansion in Chengdu and therefore, we should be able to deduce our, you know, our people's cost in the future. But this is more important. Invest in Eris is more their technology, it's not their capacity.

Got it, okay. That's very helpful. Thank you so much, Dr. Lu.

Okay.

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

Good afternoon, gentlemen. In regards to your logic products, it's been a few years since you got into the space. Can you provide a sense of when logic could potentially become a 5% to 10% portion of your revenue? Is it in 2013, 2014, or even further out?

I don't think we can give that in exact detail like that, but I believe --

I'm asking only for a broad brush, Mark, nothing specific. It's -- the purpose of the question is to gauge your progress over there rather than getting a specific number.

I think that it's -- logic has a long term footprint from some major vendors, and my discussion in my thing about the customer count has been quite good. It's showing that we think we're making pretty good progress, and where our footprint is pretty good in our key customer base, okay? And now the mass market part's going to take us a little bit longer. So, I think we mentioned that we're starting to get -- the revenue is starting to get more significant and we're starting to get more and more momentum. We're pretty comfortable where we're going. Maybe taking a little bit longer than we expected because of the market situations that we've been involved in. Okay?

The next tight period will be a big, big launch for us. We've created a footprint that that will be our big launching pad for growth for logic. We're well positioned with packaging. We're building a product line. We're just getting our product line up to things. We've got some very advanced products now in our sub-miniature DFN package and so forth. So, we're very, very well positioned.

I think what we need is one of those -- we always kind of talked a good 3% to 5% growth over a consistent six quarters for our business, and all of a sudden that stuff tightens up because packaging is the base of all logic, okay, and that's where our strength is. We're kind of continuing to fight through it to key customer, and we expect that the market will help us become a key player in a very, very short period of time down the road. I hope that helps.

If you look at the logic business, only few customer, few of vendor put in the effort in this area. And so the key thing is when the shortage come, we'll be in the good position to gain the market share, okay? When in today's market it's difficult because people do not have a need to change it and this, you drop the price, which is not what we want to do, to drop the price to gain the market share. But when the shortage come, this the time for us to gain the momentum, to gain the market share. And we prepare for that so we continue introduce the new product, put in the logic product in the new package such as that when the time come, we are ready to ramp.

Okay, that's helpful, Dr. Lu. I think in general, your strategy has been to focus on synergistic gains. Can you say that your entry into the logic space has actually been helping your other discretes and your other small signal analogs?

Again, it all goes back to the strategy of having more span to serve our strong customer base, okay, within the package mix and in the technology range that we play in. So yes, I think it's -- frankly, I think the others is going to help logic, but in the long run, logic is going to help everything else, okay? I can't say that logic is driving anything else, but it's definitely giving us more to offer and giving us more talk points with our customer base.

Got it. In regards to Chengdu, as you said that today, when do you think Chengdu becomes any significant contributor to manufacturing? Is it 2014, 2015 or even further out?

Well, obviously, it would not be 2013. I don't know it would be 2014 or not. It really depend on how the market -- today I cannot even see what will be the market, it would be a booming market next year or not. I'm waiting for it. Get the building ready and then whenever the market turn, we are ready, okay?

It take about nine month one year to get the building ready. It take another nine months to one year to get power ready. I'm working on that, but then from the time I need it to put the moving in, to put the equipment qualify, it take six months. I make those long time items ready, and then whenever market start to turn, we can start putting the capacity. And at that time, we don't need to put a big one. See, power and building, you just need to make a big one, but when you start to doing, facilitize, moving in the capital equipment, you can do a small chunk by small chunk.

Got it, okay. And then in regards to inventory, do you expect in Q4 your inventories will come down, or do you think it will be mostly flat?

Well, the reason the third quarter inventory go up is really because we are facing October 1 to -- it's up nine days of the national holidays. This very long national holiday, okay, because it just, right, had the two weekend in the front, two weekend on the back. It's nine days. And so we need to put some inventory in our hub because it's not a custom to shut down, our customer will be in trouble. Third quarter inventory is really due to prepare the long holiday in, right, after October 1, okay? Then the first quarter (multiple speakers) what? No. Because you know the Chinese new year.

Every year the Chinese new year we're going to lose people and the holidays, a lot of people won't come back on time. So, every year we are fighting the same thing, right? And building this right before the Chinese new year people just go home and then after Chinese new year not -- everybody won't come back. They take time to come back, and therefore, we do need to be ahead in December to prepare for the Chinese new year. And so this is what we are doing. I'm hoping and I would expect probably fret if it go up or go down only too much. My plan is probably flat 3Q, because the same Chinese holidays, I do need to prepare for it.

Got it, okay. All right. Thank you very much.

Thank you.

Your next question comes from the line of Tristan Gerra from Baird. Please proceed.

Hi. Good afternoon. Last year in December, I think that across the industry there was some weakness relative to expectation in terms of the Chinese new year related demand. So, that was not a big -- the later part of December. Any visibility? What is your guidance implying in terms of Chinese new year demand or build?

Okay. The difference last year and this year is last year Chinese new year is in big part in January, so it affect all December. This year, the Chinese new year is a big part February, so our December probably won't get effect other than, like I say, I prepare the inventory, okay? So, we -- really the 4Q did not plan in any effect due to the Chinese new year.

Okay, okay, great. And did you mention what the total sell-in versus sell-through was in Q3? And what is your expectation in Q4, just looking at how there is basically some adjustment of inventories in the channel?

Yes. What I did talk about was the POS was 4% and the inventory was down 4%. I think we expect the channel to drive the inventory down again in Q4, but probably not significantly because frankly, our channel inventory is quite clean.

Great. Very useful. Thank you.

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

Hi. Can you hear me?

Yes, Shawn.

Hi, Rick, just a question for you before I have some bigger picture questions for you, Dr. Lu. The $1.9 million in other income, I'm sorry if I missed it, what was that in the third quarter and how should we project that going forward? And then also, just the full quarter CapEx expectation?

Yes. The $1.9 million was -- the gain was due basically to the fact that we had a gain on the Eris stock. And so that's not going to happen in the future because we changed the accounting from fair value accounting to consolidation as of September 1. So, take that gain out.

Okay. And then the CapEx?

CapEx in the 4Q will be very small because like I said, we put in the capacity, CapEx, in second quarter and third quarter for this growth in the new package, new design win. And we project now fourth quarter revenue go to minus 4%. Therefore, at mid point in the math too, so we really do not intend to put any new capacity in there. Other than the maintenance, those you typically need spend some money for maintenance and those. We're going to be very small on CapEx expenditures.

If you looked at the CapEx this year, we've said that -- in the third quarter, for instance, it was 8.8%. So, it's been below our 10% to 12% model basically all year long, and we're projecting that in the fourth quarter it will be the same or even lower than the 8.8%, right.

Okay. And then I guess a bigger picture question, Dr. Lu. It was alluded to a little bit this earlier in the Q&A, but some of your competitors that sell into the PC market either highlighted abnormal, anecdotally negative pricing during the quarter. Some maybe have even walked away from a lot of the business in that market. How would you characterize the computing market, both in terms of the competitive dynamic, the attractiveness, maybe the share opportunities if people are -- if competitors are walking away, given what looks to be maybe a negative growth market here for at least maybe the next few quarters?

Yes, now people are talking about computer market, but ultra book, ultrabook is not bad, okay? Maybe not as good as originally expected, but ultrabook is not doing bad. So, if you adding ultrabook and the notebook together, yes, it's still slow going down. But we take opportunity to gain the market share. And if you look at this and what Mark is talking about our market share, our percentage revenue actually of computing isn't from 27% of our total revenue in second quarter to 28% of our total revenue in third quarter. And you know our revenue is growing, so you get from that, you can see our computing revenue is actually growing.

Right. If you look at past quarters, our computing was up in the 32 -- into the 30 range. So, we've already shed some of the low end business on that part and what we're covering some of the other stuff, yes. I think that we're changing a little bit what we're selling in there, and some of our MOSFETs content is entering there. And so we have a little bit of better content in that than we had before and some of the commodity discrete.

That's very helpful. And I guess just as a follow-up, Mark, point of sale at distribution, have you seen any change through October in terms of that rate, whether it's steady, better, worse?

I think it's relatively steady through October. Obviously, this quarter is going to be a tight quarter for this. I think that really -- I think the POS will lag a little bit, and the POP will lag with it in certain areas. I think certain areas it's going to be a little bit more stable. So, I'm not sure. I do want to correct something I did say in Tristan's. Our global POS was up 5%, not 4%. I read the wrong number, I apologize.

Okay. And with that, you expect the gap between the POP and the POS to probably narrow as we come into the new year?

Right.

Based upon -- okay. Very helpful. Thanks so much.

Thank you.

Your next question comes from the line of Vijay Rakesh from Sterne, Agee. Please proceed.

Hi, guys, just only if you can give -- break off the revenue by segment? I think I missed it.

Revenue by segment, Mark.

Okay. By segment, computing is at 28%, consumer is 33%. Automotive is 4%, industrial is 19%.

Communication --

Oh, communication 16%

Oh, good. And same question was, just wondering if you would give some more color on the gross margin back to 25%. OpEx I know you mentioned it going up, but longer-term, it should come back to your models. What is the long-term OpEx (technical difficulties) if you could give color on both. Thanks.

When the general markets start to turn and the demand start to going up for our standard package. See, currently the demand for our new events package is very strong, but for other standard package, it's just like a global economic. It's very weak, okay? Therefore, our demand on our standard package really is not -- is very -- your utilization it's low, okay? And we're hoping when the market turn our standard package will start to grow. Demand will start to grow again, then your utilization go up. Then our GPM will be start to increase.

Is the GPM in the product mix or utilization of -- I know you said demand on the standard packaging was weak. So, is that, what, a product mix issue now?

Actually, all of those. Number one, couple wire conversion, number two, mix. Because it's underloaded, so we move to the low end of the mix, and number three, we are not fully utilized, so utilization. And then number four, ASP on the standard product have a pressure, too. So, I have been talking about GPM as an also four factor, and that four factor still there.

Got it. Okay, thanks.

That concludes today's Q&A portion of the conference. I would now like to turn the conference over to Dr. Lu for any closing remarks.

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

Ladies and gentlemen, thank you for your participation. Please have great day.