Diodes Inc (DIOD) 2013 Q1 法說會逐字稿

Welcome to Diodes Incorporated first quarter 2013 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 call is being recorded today, Thursday, May 9, 2013. I would now like to turn the call to Leanne Sievers of Shelton Group, the Investor Relations agency for Diodes. Leanne, please go ahead.

Good afternoon. Welcome to Diodes' first quarter 2013 financial results 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. 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; therefore, we refer you to a more detailed discussion of the risks and uncertainties in the Company's filings with the Securities and Exchange Commission. In addition, any projections as to the Company's future performance represent Management's estimates as of today, May 9, 2013. 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 to non-GAAP items, 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 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 will turn the call over to Diodes' President and CEO, Dr Keh-Shew Lu. Dr Lu, please go ahead.

Thank you, Leanne. Welcome, everyone. Thank you for joining us today. I'm pleased to report that Diodes achieved record quarterly revenue despite the typical seasonal softness in the quarter and the slowdown at certain key OEMs. Our sequential revenue growth was due to the result of our continued design win momentum, as well as one month of revenue contribution from our acquisition of BCD. Additionally, non-GAAP gross profit margin, which excluded our inventory valuation adjustment related to the BCD purchases. It improved 60 basis points sequentially and was attributable to our updated guidance due to revenue increase in the higher margin region of North America and Europe, a better than expected manufacturing recovery following the Chinese New Year holiday, lower gold price and a more favorable product mix.

Also during the quarter, we finalized our acquisition of BCD on March 6 and the integration to-date has gone smoothly. This transaction was immediately accretive to earnings, excluding purchasing price accounting adjustments. We already have begun working through to adapt the BCD new product outflow to our internal assembly [specificity]. It will start the conversion to internal production in the fourth quarter this year. We expect the conversion of maturity of the product that can be converted into internal production to be finished by the end of this quarter next year. We expect to begin benefit from the cost saving synergies of the expansive analog offerings based in the fourth quarter of this year.

Overall, I'm pleased with the progress we made in the quarter in terms of design win momentum and the integration of our recent acquisition. I believe the first quarter sets the stage for continued growth and margin improvement in the second quarter. With that, I will now turn the call over to Rick to discuss our first quarter financial results, as well as second quarter guidance in more detail.

Thanks, Dr Lu. Good afternoon, everyone. Revenue for the first quarter 2013 was $177 million, an increase of 8.4% over the $163.3 million in the fourth quarter 2012 and an increase of 22.3% from the $144.7 million in the first quarter 2012. The sequential increase in revenue was primarily due to one month of revenue contribution from BCD, as well as the result of our continued design win momentum. GAAP gross profit for the first quarter 2013 was $46.2 million or 26.1% of revenue. As previously disclosed in our mid quarter guidance press release on March 7, our guidance did not include the impact of any BCD purchase price accounting adjustments. Based on our subsequent initial evaluation of BCD's acquired assets, GAAP gross profit for the first quarter 2013 included an inventory valuation adjustment related to the BCD purchase totaling $1.8 million.

Excluding this amount, non-GAAP adjusted gross profit was $48 million, or 27.1% of revenue compared to GAAP gross profit of $43.2 million or 26.5% in the fourth quarter 2012 and $33.7 million or 23.3% of revenue in the first quarter 2012. The 60 basis point sequential improvement and the favorable upside versus our updated guidance and gross profit margin was due mainly to increased revenue in higher margin regions, a better than expected manufacturing recovery following the Chinese New Year holiday, lower gold prices and a more favorable product mix. GAAP operating expenses for the first quarter were $42.4 million or 24% of revenue, which included approximately $900,000 of items related to the BCD acquisition and $1.9 million related to amortization of acquisition intangibles, compared to $39.7 million or 24.3% of revenue in the fourth quarter 2012 and $28.2 million, or 19.5% of revenue in the first quarter 2012.

Excluding acquisition-related costs, amortization of acquisition intangibles and the gain on the sale of an asset, operating expenses on a non-GAAP basis for the first quarter 2013 were $39.6 million or 22.4% of revenue, compared to $36.5 million or 22.3% of revenue in the fourth quarter 2012 and $29.2 million or 20.2% of revenue in the first quarter 2012. Looking specifically at selling, general, and administrative expenses for the first quarter, GAAP SG&A was approximately $30.4 million or 17.2% of revenue, compared to $28.7 million or 17.6% of revenue in the fourth quarter 2012 and $22.1 million or 15.3% of revenue in first quarter 2012. Non-GAAP SG&A was $29.5 million or 16.7% of revenue, compared to $27.2 million or 16.6% of revenue in the fourth quarter and $22.1 million or 15.3% of revenue in the first quarter 2012.

Investment in research and development for the first quarter on a GAAP and non-GAAP basis was approximately $10.1 million or 5.7% of revenue, compared to $9.3 million or 5.7% of revenue in the fourth quarter 2012 and $7.2 million or 5% of revenue in the prior year quarter. The increase in R&D, reflects our additions of BCD. Total other income amounted to $500,000 for the first quarter. Looking at interest income and expense, we had approximately $850,000 of net interest expense, which was more than offset by currency gains mainly in Europe. Income before taxes and non-controlling interest in the first quarter was $4.3 million on a GAAP basis and $9 million on a non-GAAP basis, which excludes the above mentioned acquisition adjustment and other items. This compares to income of $6.6 million in the fourth quarter 2012 and $6.2 million in the first quarter 2012.

Turning to income taxes, GAAP income tax expense was $6.6 million and included a $5.4 million China tax audit adjustment for the 2011 tax year. As previously disclosed, the China government audited the high-tech Company status of our largest China subsidiary for 2009, 2010 and 2011, which had utilized a preferential tax rate of 15%. On April 11, we were notified by the China government that they had completed their tax audit and concluded that we owed additional tax related to the 2011 tax year in the amount of $5.4 million. GAAP net loss for the first quarter was $1.9 million, or $0.04 per share, compared to GAAP net income of $4.1 million or $0.09 per diluted share in the fourth quarter 2012 and GAAP net income of $4.9 million or $0.10 per diluted share in the prior year quarter. The share count used to compute GAAP earnings per share EPS for the first quarter was 46 million shares.

First quarter non-GAAP adjusted net income was $7.5 million, or $0.16 per diluted share, which excluded, net of tax $2.5 million of items related to the BCD acquisition, $1.5 million of non-cash acquisition related intangible asset amortization costs and $5.4 million related to the China tax audit adjustment. The fully diluted share count used to compute non-GAAP earnings per share for the first quarter was 47.2 million shares. We have included in our earnings release, a reconciliation of GAAP net loss to non-GAAP adjusted net income, which provides additional details. Included in the first quarter GAAP and non-GAAP adjusted net income was approximately $2.1 million net of tax of non-cash share based compensation expense. Excluding share based compensation expense, the GAAP net loss of $0.04 per share would have improved by $0.05 per share. Non-GAAP adjusted net income of $0.16 per diluted share would have improved by $0.04 per diluted share.

Cash flow generated from operations was $31 million. Free cash flow was $15 million for the first quarter. Net cash flow was a positive $43 million for the first quarter, including approximately $20 million of BCD's cash at the end of the quarter. Turning to the balance sheet. At the end of the first quarter, we had approximately $200 million in cash and cash equivalents. Working capital was approximately $453 million.

At the end of the first quarter, inventory was approximately $182 million, including $40 million of BCD inventory. Excluding BCD, our inventory of $142 million was down approximately $12 million from the fourth quarter 2012, mainly due to a decrease in finished goods. Inventory days were 115. Excluding BCD, days decreased to 112 in the first quarter, compared to 119 days in the last quarter. At the end of the first quarter, accounts receivable was approximately $172 million and AR days were 82, compared to 87 last quarter.

Capital expenditures for the first quarter were $13.2 million, which included $5.6 million related to the expansion of our Shanghai sales and design center. Excluding this amount, capital expenditures were 4.3% of first quarter revenue, compared to 5.6% in the fourth quarter. We expect capital expenditures to range between 5% and 9% of revenue for 2013. Depreciation and amortization expense for the first quarter was $17.6 million.

Now, turning to our outlook. For the second quarter of 2013, we expect continued growth with revenue increasing to between $206 million and $218 million, or up 16% to 23% sequentially, including the first full quarter of revenue from BCD. GAAP gross profit margin, which will include approximately $4 million related to an inventory valuation adjustment pertaining to inventory acquired as part of the BCD purchase, is expected to be 27%, plus or minus 2%. Non-GAAP gross profit margin, excluding the inventory valuation adjustment, is expected to be 29%, plus or minus 2%.

In early second quarter 2013, we announced a restructuring of our UK development team and a closure of our New York sales office. We expect that these actions will be completed in second quarter. Restructuring costs, included in the second quarter 2013, are expected to be approximately $1.7 million and will provide savings going forward of approximately $3 million per year. GAAP operating expenses are expected to be 23.6% of revenue, plus or minus 1%. Non-GAAP operating expenses, excluding amortization of intangible expenses, restructuring expenses and BCD retention bonus accruals are expected to be 21.3% of revenue, plus or minus 1%.

We expect our income tax rate to range between 14% and 20%. Shares used to calculate GAAP earnings per share for the second quarter are anticipated to be approximately 47.4 million. For more detail on the outlook, please see our press release. With that said, I will now turn the call over to Mark King.

Thank you, Rick. Good afternoon. Our achievement of 8.4% sequential growth and record quarterly revenue was driven by strong increases in North America and Europe, which recovered from a very weak 3Q and 4Q, as well as one month revenue from BCD. The industrial and communications sectors improved in both of these regions, while computing was slightly better than expected with some expansion in Wi-Fi modules. Although, the consumer market was softer, we continue to execute our strategy and capitalize on our strong position in smartphones and tablets, with new products and design wins in both devices and chargers.

OEM sales for the quarter were down 8% and distributor POS was up 8%. It was a strong quarter for POP as distributors began anticipating market improvements and started building required inventory, especially in North America and Europe, where inventory had been reduced to minimum levels. Distributor inventory rose 4% after two consecutive quarters of decline. Global 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 break out consisted of -- consumer representing 31% of revenue; computing, 29%; industrial, 19%; communications, 17%; and automotive, 4%. With the completion of our recent acquisitions and differences in market sector reporting, we plan to redo and align our market sector definitions in the second quarter.

In terms of new product and design wins, we had a strong quarter with another revenue record on CMOS LDOs along with positive momentum in DC/DC converters, LED backlighting, audio, call centers and SBRs from a broad based market. Design wins also remain strong and we have a solid pipeline of designs going forward. Starting with Discrete, product introductions totaled 25 new product across 10 product families, representing a wide range of application segments and markets. There were several important new products introduced for the high volume portable market space. These were complimented by products targeting at computing, consumer and industrial applications worldwide.

Of particular note, is a device launched using Diodes' proprietary SBR technology, which demonstrates leading class performance in thermally demanding, small form factor, portable adapter applications. This product was designed, prototyped and ramped for full volume production in one quarter for our leading Asian manufacture of mass market portable devices. This rapid product ramp is a good example of Diodes' superior application know-how, design agility and manufacturing flexibility. We expect further development in this technology area in the coming quarters.

Also targeted at the portable market space, Diodes further expanded its range of miniature DIOFET packet devices, with additions to the thermally and space efficient DFN 10-006 package. These new devices comprise a range of MOSFET, Schottky and [TDS] products developed specifically to meet the needs of several of the world's leading portable device manufacturers. Also during this quarter, we introduced the first two devices in a range of regulated transistors created for telecom, networking and tunnel-over-ethernet application. These devices minimize footprint by reducing component count and increasing power density, which are two of Diodes' core strengths.

Turning to analog new product introductions, which now include products released by BCD. We introduced 115 new products across 6 product families. New product highlights, include the release of several new primary side regulators and a primary side dynamic accelerator targeted for portable chargers and power adapters. The AC/DC power area is an exciting new product space that the acquisition of BCD has opened for Diodes. During the quarter, we secured 18 significant new AC/DC wins for mobile charger application. Also during the quarter, we added several new DC/DC buck converters, including several synchronous high-speed 3-amp devices intended to support portable consumer equipment powered from lithium ion battery.

We racked up several design wins for set-top box, modem and flat panel TV with our family of recently released 2-amp and 3-amp, light load, high efficiency buck converters. With the addition of the low-voltage converters, boost converters and DC/DC controller, from our recent PAM and BCD acquisitions, Diodes now offers a broad and effective DC/DC product portfolio. This includes a family of low-voltage converter with a strong position on several miniature Wi-Fi module reference designs.

We also expanded our line of LED backlighting driver with the addition of 5 families from PAM and BCD. Our newest linear LED driver provides a simple cost effective solution for low current LED lamps that are ideally suited for monitors and flat panel TVs. In addition to backlighting, we secured wins in the off-line space with several dimmer and retrofit bulb applications, as well as general illumination wins in automotive and industrial space for our M16 retrofit bulbs.

Turning to our home sensor portfolio, we released a line of sensitivity selectable micro power hall switches that are offered in miniature, low profile CFC packages. These devices are designed specifically for battery powered consumer applications such as cell phones and tablet PC. Sensor design wins during the quarter, included several DC fan motor sockets, open/close position sensors for notebook computers, a medical position encoder socket and an energy metering application. During the quarter, we announced the expansion of our standard logic product line with more package options added to our 4 families of high-speed and advanced high-speed CMOS parts. These new devices are widely used in computing, consumer electronics, domestic appliances, building controls and industrial automation application.

Additionally, the new logic families cover a wide voltage range from 2-volts to 5.5-volts, which means they will support legacy applications and can be tailored for low voltage and low power applications as well. In summary, the first quarter represented significant progress and advancement for Diodes. We completed our acquisition of BCD to compliment our recent acquisition of PAM. These acquisitions significantly increased Diodes' presence in the analog market with expanded product portfolio and have also expanded our sales and customer footprint. Coupling them with Diodes' new product and design win momentum, positions us well for long-term profitable growth. With that, I will open the floor to questions. Operator?

(Operator Instructions)

Steve Smigie, Raymond James.

I wanted to say congratulations on the great report and guide here to impressive margin improvement there. Dr Lu, I was hoping you could talk a little bit now about BCD, as you've had it in house for a little while. Have you had any customer response on potential cross-selling opportunities? Does it seem like that's going to be some decent revenue leverage there?

Thank you, Steve.

Yes. I think, number one, the consolidation, it looks like pretty good. Everything is smoothly doing. We still have further work to be done. But here today everything is doing well. Second, yes. We get a pretty good feedback from customers, especially with BDC product compliment with Diodes' product. We provide a much bigger scale of the product portfolio to our customer. This kind of one-stop shopping is really help our customer. Our customers really feel very good. So the feedback from our customer about the synergy -- the sale synergy, I'm still very happy. In the speech, we talking about -- we think we can start to have a cross-sell synergy realized in 4Q this year. Because it takes time to get customer the design win. In, win and go to production.

Great. Thanks. On the margin side, can you talk a little bit about how you are thinking about gross margin? You have BCD in? I think the margins at the end of the day weren't that different. So I'm going to guess, we should see probably, if revenue keeps creeping up here, that we would see some margin leverage. So I guess the question is, will you keep seeing continued margin leverage? Just to sneak one last one, can you give some guidance on or thoughts on how a tax rate looks going forward? Post-June it seems a little higher than you used to have. Thanks.

Okay. I probably cannot give you the particular specific number because we are not really deduce it other than second quarter numbers, okay? But need that you realize in the 1Q, BCD [swept two] It just started to ramp it up in January, okay? So we still, in the ramp-up mode in the second quarter. That under loaded ramp-up is going to be negative impact to our GPM percent. But move forward, I think we already started working on off loading or codify BCD product into Diodes' SKU assembly. I think we say in our speech, the off load will be started in 4Q this year and maturity of what we want to move will be probably completed by end of 1Q next year. Therefore, this will be for sure, improve our GPM percent in the future.

At the same time, we are looking at move our Diodes' analog wafer loading into the BCD. We already identify where we can move our wafer into the BCD. But, of course, it takes time to codify. The process is almost -- is already there. We just need to codify it and do the PCN and the customer accepts that wafer for change. Then you will be start to able to offload our analog wafer into the BCD fab. So, again, it won't be immediately impacted in 2Q, 3Q, but farther down the line. It depends on when the customer acceptance and we needed it as convert. I think in the future, it will be greatly impact our GPM percent improvement.

Okay. Rick any thoughts? Is it the tax? You guys guided for June, is that more of what we should be thinking as the rate going forward? Or is a one-time rate above normal?

No. No, that tax rate where we said 14% to 20% is going forward, not just a second quarter rate. It would be for the rest of the year.

Okay, great. All right, congratulations again. Thank you.

Christopher Longiaru, Sidoti & Company.

I'll add my congratulations. Great quarter, great guide. My question is -- my first question's for Mark because I was just a little bit confused. Essentially, you said that consumer was weak, but that the -- basically the cell phone guys like HTC Samsung made up for some of that weakness? Is that what I'm to understand?

I think that would be a good assumption.

Okay. Then, just in terms of the expenses going forward. So you have some restructuring charges on a GAAP basis. Do those go away as we move on past June? Then will you talk about the restructuring saving about $3 million in annual costs? Will we start to see that in the September quarter?

Well, the answer is yes. Okay? The destruction is happening now --

Restructuring --

(laughter) The restructuring --

Not destruction (laughter).

It's happening now. Yes. In the coming quarter, it will be a benefit, that $3 million a year. It will benefit from now on.

Got it. Just from a gross margin prospective, BCD, was that about 22%? For gross margin, when they were on their own -- So it looks like the incorporation of that month might have actually hurt your gross margin in the short term because you haven't had a chance to bring that in house? Is that accurate?

Well, I cannot comment the percent. But like I said, yes, it will be hurting us in the average. But for long term, it is going to be helping us. I cannot comment on the number, okay? But, yes, it's because of the under loaded and the ramp-up on the step two. Step two is at zero last year. It started ramping up in January. It takes time to ramp-up.

Gary Mobley, Benchmark.

I wanted to hone in on the gross margin. If you look at the midpoint of your gross margin guide for the June quarter, it is about a 300 basis point sequential improvement. How much of that is a function of better fixed cost coverage, better depreciation expense coverage? How much is attributable to you picking and choosing which opportunities to chase? In other words, selling only the highest margin products? How much has to do with the continual conversion to gold bond wiring? Thank you.

Okay, great. We really don't separate all this one, because they give me the forecast, I consolidate, then we're doing this. So it's very difficult for me to say how much is due to what, what, what. But what you have uncovered is all truth. Number one, I have been talking about gold price. The gold price going down in 1Q and it continue going down from average point of view. We make some assumptions for 2Q and obviously 2Q going to be cheaper than the average of the 3Q -- of the first quarter. So gold price is helping us.

Second, output more. It's because the business is going up. You can see the growth. That's so, because 1Q is a slow quarter for us. Because the second quarter growth, the gold is up. It will be in put -- I mean, profitability of our making function due to this unloading factor.

Number three, product mix. When the business is start to getting better, we are moving our mix to the better for us. So that is the result. The price stability, I think we already see in the price stabilize. I'm not saying increase. Don't misunderstand me, when I say stabilize, is we have expect, I think in the past, certain percent of the price drop every quarter. As long as it's within that kind of a price curve, our productivity improvement should take care of that and then it gives us a better GPM percent. So I think whatever you have been seeing, talking about a problem affect us, those are four factors. Yes. Now, it's tending to be good for us. So that's what happening.

Okay. I was just hoping to get a couple follow-up ratios as well and the percentages? Looking forward, what is the split between analog and discrete? Looking into your June quarter guidance, correct me if I'm wrong, but is that assuming about 5% organic growth? Then last, Mark, if you can share with us the book-to-bill ratio for the quarter? That's it for me.

Well, Gary, we really, since we don't separate analog from the discrete, I cannot really talk about how many percent. From a growth point of view, again, since we don't separate BCD from Diodes, so I cannot tell you. But one thing you just need to guess for yourself, BCD give the guidance on 1Q. What will be in the 1Q. That is the public information, you take that, you assume some percent. Then from there you can figure out your own. But since, we do not disclose any separation between analog [pictures] to discrete, we don't separate from BCD from Diodes, I cannot disclose that.

On the book to bill, we don't really get into the real details of that. But I would say it's obviously above 1 based on the guidance. It looks -- we're pretty well positioned for the second quarter.

Shawn Harrison, Longbow Research.

I wanted to get back to the comments about distribution in terms of Point of Sale increasing and inventory rebuilding. Where do you think you are in terms of distributors adding inventory? Will you see them build more inventory this quarter? How long can we see that go on for?

I don't know, I think that, again, it was a pretty strong quarter, but we had actually -- our inventory had gone down to amazingly low levels. So our inventory in the channel in North America and Europe was very, very clean and solidly positioned in Asia. So I think that -- but we were also very happy with the POS growth in that quarter. There was a big recovery in both North America and Europe in POS in the third and fourth -- from the third and fourth quarter. So we think it's good.

I just came back from the EDS show and everybody is cautiously optimistic going forward about where the Business is going. Nobody really wants to commit. But I think that the clear indication is that they feel comfortable investing as they see opportunity to do so. So I think we'll continue to see opportunities to position product for future POS growth.

Mark, are you seeing lead times expand for your products? I guess that could be a driver for distribution [if you need] more inventory.

We're seeing a little bit of words about lead time extensions on some of the lowest level commodity products. I think people -- a couple of guys are trying to firm up their backlog a little bit. But I don't think anything excessive.

Okay. Then, Rick --

We are running our Business -- it's not really using the time of this. We use -- I think I can tell -- talk about our business model, is put a wafer in front of an assembly. So our assembly lead time is not high; therefore, our customers know, they just order when they need it -- when they're close to they need it. They don't give us a double order or that kind of thing. So I think I think our business model really take care of that kind of long lead time and ordering, double booking that kind of situation.

Got you. Then two brief follow-ups. Rick, maybe if you could give us the expected interest expense for the June quarter? Then also just in terms of with the better trends you're seeing in the Business organically right now, what does that mean for the packaging facility in Cheng Du?

Okay. So the interest expense for the second quarter is just going to be basically the first quarter plus a little bit more. I don't have that exact number here. We borrowed the money to buy BCD in January and February area, so it's going to be maybe a little bit more than what we had in our results. Tell me again, what was the other one about Cheng Du?

Just in terms of the organic environment being better. What does that mean in terms of just CapEx with the facility? Maybe bringing it online quicker? Anything of that nature.

From Cheng Du, we still not putting the expansion, aggressively yet. Because we still have under load situation in our Shanghai facility. But we are watching very closely, because you need certain lead time for the build up the factory. So we are now looking at what we need to do in Cheng Du in the timing, okay? But until today, we're still keeping our support online. We're running it, keep people under the training. Get ready. The building construction is already done. Whenever we are ready, we will start to put in the clean room and start to get it -- move the equipment from our part online to the manufacturing site.

Okay, very helpful. Congratulations, again, on closing the acquisition.

So one other comment about interest expense. If you look at our interest expense in the first quarter, it was about a little less than $1 million. So because we're going to have a full quarter of interest expense, it is going to be somewhere over $1 million, probably $1 million to $1.5 million, would be my guess.

Okay. Thanks so much, Rick.

Yes. Another thing I probably want to mention, you probably start to realize, when we're talking about capital expenditure, as a percent of revenue, we are no longer talking about it's occurring in Cheng Du. It just means from now on our capital expenditure in the Cheng Du is going to be part of the model. Okay? So if you look at -- when we look at capital as a percent of the revenue, our model, Cheng Du will be part of that now. Okay, so we are no longer treating Cheng Du separately.

Harsh Kumar, Stephens.

Dr Lu, congratulations on great guidance, good gross margin increases. I wanted to follow up on a couple of questions. First of all, maybe for Rick, why are the taxes going to be 17% versus historical? What's the big reason why they will stay up like this?

Well, if you go back historically, our tax rate has been anywhere between 15% and 20%. So, over the last year or so, we've been at less than 15% a couple of times. The reason is that we have had some losses in certain areas and that affects your tax rate. So you -- as moving forward, things seem to be improving.

GPM is improving.

Yes. GPM is improving. We went from 23% in the first quarter of last year to the 26% now. So things are improving, plus, as Mark mentioned, the revenue in Europe and the US is holding up pretty well, which is where you have high profitability, but you also have higher taxes there.

Fair enough. Just wanted to clarify that. Dr Lu, you gave a bunch of reasons for margin increases. You didn't want to get into the numbers, but I was curious, Dr Lu, if you could just say what's the biggest reason that's driving margins in the June quarter and even beyond? If you had to pick one out of the four or five you listed?

Well, obviously due to the realization and our productivity improvement in the making function going to be a biggest. Go up and down, okay? Yes. That's one of the reasons, but I won't just say that is really the major one, okay? Product pricing, I said stable, but it's not going to be up, so it's not going to help. It just stops the going down, right? The key thing really is when the business started going up, you're loading started getting improved. You can realize we are not putting that much of capital any more. Because if you go through last quarter and the fourth quarter last year, we have been distract our capital investment. That means our capacity is not going to be increased that much. That means our realization of the capacity going to be improved.

So you ask me, I want to tell you the truth. I'm like, no, I'm not tell you the truth. I just say to be seen asking what was the biggest factor, I would say, productivity improvement on our making function, put us the realization of our capacity. It's the key factor. That I think realization, it has been hurting us in the past. We are waiting for business turn and we can start to realize that capacity.

Fair enough. Very helpful Dr Lu. Then you talked about back end integration of BCD manufacturing. You said, you started that. Has a lot of that been done? Or are you just started it and it will take a few more quarters?

Okay. When we say started is we already set up the product, we want to convert internally -- off load to internally. Start to do the codification. You know the core, it take three months, okay? Then after you core, then you need to do the PCN to notify the customer. It takes another three months. Then for the small customer, they might allow to you convert it immediately. That's why I would say 4Q we'll start it. But some of the major customers, they just want more time to consider it. So, I said by end of 1Q next year, the majority of what we want to convert will be convert.

Great. That's very helpful. Then Dr Lu, at this time -- a couple of years ago you had a China labor problem, where you didn't have enough workers coming back. Anything noteworthy this time around? Or is everything going on plan?

It's all same way, the [Chamur] China labor shortage, China labor don't come back, I'm not seeing a major improvement, no. But since this is not the first time, this is the I think third or fourth time we see the problem. We ought to know how to handle it. The first time, two or three years ago, it took us by surprise. Now we know how to handle it so we prepare for it.

I think if you remember, last conference call, we said we build some inventory and by end of first quarter, prepare for Chinese New Year shut down. Then we now how to stage our people instead of all going the same time on the Chinese New Year. So, we already learn how to handle it. We can handle it each year better and smoother. That's why this time we said, better than we expected. It's just more experience to handle this. We prepare for it. We build the inventory in fourth quarter.

Fair enough, Dr Lu. Congratulations again. Thanks.

Vijay Rakesh, Sterne Agee.

Dr Lu, congratulations. Good gross margins, finally. (laughter)

(Laughter.) Thank you, Vijay.

I had a couple of questions. So, just looking at the OpEx side from BCD, do you think there are any levers there that should go through first -- second half this year, first half next year?

Number one, we are not doing any day off or anything. Okay? No, we want to keep everybody from BCD team. Because we believe their people is good people, it's really good and that's the reason we bought BCD. No, we are not going to reduce the headcount. But if you do look at -- if we can continue to grow the revenue, then as a percentage, it will go down. That's the way Diodes has been doing it in the past, is we keep everybody. We aggressively grow the revenue and bring the GPM percent, go back to our business model.

We did that when we had [Zetex] we did that in the past. We have a business model, R&D press SG&A at 20% of revenue. We would suffer at the beginning, start getting higher, then we said when the revenue started to grow that number will go down. We proved that in this acquisition. Now we're going to prove the same thing. We are doing the same way for the BCD acquisition.

Right. As you look at June quarter here, BCD was a little bit of a drag with underutilization. Do you think you will get a little bit more tailwind for the margin line with -- I saw those underutilization charges go away in the back half for BCD?

Well, I think, actually BCD going to be -- have more loaded in second quarter than first quarter. Because first quarter from January is zero. It starts to ramp. So 1Q, if you take the average, but we only consolidate much, but even though much, just third month into the rent. Fourth quarter and second quarter, they are going to be more and they will contribute more from the GPM percent, okay?

But don't forget Diodes is improving, too. So it may still negative impact us. But it's no longer a very significant. The move forward, when the loading starts getting better and -- both spread one and spread two, then when we start to produce a product for them, their costs go down, and at the end. They are going to be helping, or we should say the total together should be help each other.

Got it. Last question, on the back straight, it creeped up a little bit. I know you said somewhere in use from high margin -- high tax rate regions. It looks like you still have decent revenues coming from Asia still, right? As you look at next year do you still think tax rate stays at this level? Or it goes down? Or it's too far out to say?

I think it's too far out to say. It really depends on where the revenue is generated and where the profit is generated. The big difference is between US tax rates and the preferential tax rates in China, for instance.

And Taiwan.

And Taiwan, too, yes. Right. So too far out to say.

Lena Zhang, Blaylock Robert Van.

Add my congratulations as well. I understand that you guys don't quantify the gross margin drivers for Q2. But if you -- given the -- a pretty big Delta for Q1 results and guidance. If you could quantify the gross margin expansion drivers, that would be very helpful for the modeling?

Well, so the question is between the guidance and the results for the first quarter?

Yes. If could you quantify the gross margin expansion drivers for the Q1, that would be helpful.

So, I think Dr Lu went through that. We think a lot of that will have to do with productivity and utilization of our SAT assembly facilities as the volumes increase.

Okay.

In our speech, we already say, okay -- in our speech is productivity improvement is better than expected Chinese New Year recovery. I think that -- we put in the model of how the Chinese New Year going to be recovered, based on our past experience. The past is always -- when you go through the Chinese New Year, a lot of people go home and don't come back or come back late. That reduced the output.

When your output reduced in our making function is equal to the capacity empty, six causes there, capacity is not fully realized. Then your profitability significantly reduced. As I say in my speech, I said several things. One is the better than expected sale in the North America and the Europe, the high GPM area. But the key one we can say, Chinese New Year recovery, better than I expected, and some gold price -- gold price in the 1Q actually lower than 4Q or lower than now expected.

The mix is better, but you go back to the whole thing, the big one is still manufacturing. Manufacturing, productivity, because that's really if [my nightmare] I think in the last several quarters, or probably -- last year, the whole year, I'm saying we are fully -- we are not realized. We are not fully realized. Our capacity utilization is bad. 1Q is actually -- is not as good because of the Chinese New Year holidays.

Okay, thank you. Also, what was the utilization rates for Q1? What is your expectation for Q2?

I don't think we give that number. We don't give that kind of number, okay?

(Operator Instructions)

Stephen Chin, UBS.

Let me also add my congratulations on the acquisition and solid results. Yes. I had a few questions on the BCD analog wafer fab to kick things off. Then a couple on the demand side of things. With BCD's analog fab, can you talk a little bit about some of, the I guess, costs or maybe technology advantages that might give you, especially as you talked about converting some of your existing analog products from outside analog wafer foundries to the BCD internal process? Can you talk about the technology and the cost benefits of that?

Okay. Number one, BCD obviously located in China. It's well rounded by BCD. Their fab 1 is the cost is pretty -- I would say I'm very happy with their cost. So most our analog wafer is 6 inch, so BCD says 6 inch. Therefore, they don't have any penalty of the 6 inch, but by locating in China, with the BCD technology -- they do have a very good BCD process. That is going to help.

So from technology point of view, they provide me to move our analog product from our outside some and our outside foundry to go into our internal fab with very efficient, very cost effective fab. I'm happy with that. They do have the technology for us to realize their capacity.

Okay.

You create opportunity, another thing we create opportunity is they are under loaded, okay? So if we can start to move our stuff over there, it help both. Their cost will be even better because they are under loaded. We can get it cheaper, because they are very cost effective.

Steve, one of our biggest part of our models is manufacturing margin. (laughter) Okay? So they give us a lot of -- the same leverages that we had with our internal assembly from a wafer perspective. There's no foundry profit in there. So, the foundries we do business with, have to make a profit.

Got it. That's helpful. Then just one other thing really to that analog fab. I think before the deal closed, I think BCD previously communicated that the revenue capability of that new capacity was somewhere I think in the $75 million range, if I remember that correctly. I think they also had some targets, a time frame for when they think that revenue level could be achievable.

Is that still the case? If so as you parse it was there any expected business that was in the pipeline for filling the fab? If not, can all of the current Analog business that Diodes had -- the existing organic Analog business that you guys have, can that fill the majority of that?

Steve, I really don't know what is their previous announcement. Whatever you called, I really don't know. Because, I don't pay that much attention to the past. Okay? All I know is their fab 1 today is under loaded, Important for me is loading to help to get fab 1 loaded. Number two, they are moving their fab 1 loading to their fab 2 because fab 2 is started, and they really need to get fab 2 ramped up and get loaded, especially fab 2 have better equipment, better process and they can support our customer better.

So basically, what we would really do is move some of the BCD high-end product into the fab 2 to help the fab 2 loading. At the same time, we are moving Diodes' product, which can be loaded in fab 1. We are loading to fab 1. This is going to be -- each benefit. Now, if fab 1a, current equipment fully loaded, then I'm ready to put another step of the equipment to make it up fab 2a fully loaded. So fab 2a currently still don't have all the equipment to be fully realized that space. Okay?

But they don't need it now. But when fab 2a start to loading up fully. Then we'll put the capital equipment to get 2a fully loaded. Then later on, if the business is still going up, if we still need the capacity, then we expect 2b. We can open it up and put the capacity in there. So you just place and step by step and look at the loading, look at the requirement. Really look at how the business progress.

Got it. That's very helpful. I thank you very much for that color. Then, just last question, probably for Mark, on the demand side. Just wanted to see if most of the distributor related demand that you're seeing, is that purely inventory restocking? Or do you actually have the -- have some sense on or some commentary on actual growth in end demand that the distributors are seeing?

I think we saw growth in both. Actually, the POP grew, say in North America and Europe, faster than the POS. But the growth rates on POS were very positive. They're coming off very, very soft POP quarters, the last two quarters. It's required -- the inventory level got to a point where it really required them to invest greater than POP. It should level pretty good but the growth rate in POS was quite impressive in Q1 versus Q4 and even Q1 over Q3.

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

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect. Have a great day.