Diodes Inc (DIOD) 2013 Q2 法說會逐字稿

Good afternoon and welcome to Diodes Incorporated's second-quarter 2013 financial results conference call. (Operator Instructions). As a reminder, this conference call is being recorded today, Wednesday, August 7, 2013.

I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead.

Good afternoon and welcome to Diodes's second-quarter 2013 financial results conference call. I am Leanne Sievers, Executive Vice President of Shelton Group, Diodes's investor relations firm.

With us today are Diodes's President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Rick White; Senior Vice President of Sales and Marketing, Mark King; and Director of Investor Relations, Laura Mehrl.

Before I turn the call over to Dr. Lu, I'd like to remind our listeners that management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore we refer you to a more detailed discussion of the risks and uncertainties in the Company's filings with the Securities and Exchange Commission.

In addition, any projections as to the Company's future performance represent management's estimates as of today, August 7, 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's website at www.Diodes.com.

And now, I'll turn the call over to Diodes's President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.

Thank you, Leanne. Welcome, everyone, and thank you for joining us today. Our second quarter was highlighted by the achievement of record revenue and the continued gross margin improvement. Revenue grew 21% sequentially and 35% year over year due to our past design win momentum and the new product initiatives, combined with our first full quarter of BCD Semiconductor. We achieved this sequential growth despite the slowdown at a certain major OEM customers and the continued weakness in the PC market.

With the addition of BCD, we have further broadened our product portfolio and increased our market share, especially in aerospace. Also, during the quarter our non-GAAP gross margin improved to 30.3%. The 320 basis point sequential improvement was primarily due to a more favorable product mix, though gold prices, copper wire conversion, as well as our cost reduction efforts.

Furthermore, the integration of BCD has been progressing well as we move ahead of schedule in transferring BCD product into our Shanghai packaging facilities. We now expect to complete the transition by the end of the fourth quarter.

In addition to our continued revenue growth and the gross margin improvement, our cost controls are helping to move operating expense toward our target model of 20% on a non-GAAP basis. As a result of those collective factors, we reported solid earnings growth and generated strong cash flow in the quarter.

In summary, I am pleased with the achievements we have made across our businesses from both a sales and operational perspective. We expect to further capitalize on our acquisition of BCD and to deliver additional improvement in the third quarter as we continue to successfully execute on our business model.

With that, I will now turn the call over to Rick to discuss our second-quarter financial results as well as third-quarter guidance in more detail.

Thanks, Dr. Lu, and good afternoon, everyone. Revenues for the second quarter 2013 was $214.4 million, an increase of 21.1% over the $177 million in the first quarter, and an increase of 34.6% from the $159.2 million in the second quarter 2012. The sequential increase in revenue was due to the first full quarter of revenue contribution from BCD compared to only one month in the prior quarter, as well as continued design win momentum and market share gains.

GAAP gross profit for the second quarter 2013 was $61.3 million or 28.6% of revenue. As previously disclosed, our GAAP gross profit included $3.7 million of an inventory valuation adjustment related to our BCD acquisition.

Excluding this amount, non-GAAP adjusted gross profit was $64.9 million or 30.3% of revenue, compared to non-GAAP gross profit of $48 million or 27.1% in the first quarter 2013; and GAAP gross profit of $41 million or 25.8% of revenue in the second quarter 2012.

The 320 basis point sequential improvement was due to a more favorable product mix, lower gold prices, copper wire conversion, and a continued benefit of our cost reduction efforts.

GAAP operating expenses for the second quarter were $51.1 million or 23.8% of revenue, which included approximately $2.3 million of amortization of acquisition intangibles; $1.5 million of restructuring expenses; and $1.1 million of acquisition-related retention accruals; compared to $42.4 million or 24% of revenue in the first quarter 2013, and $32.7 million or 20.6% of revenue in the second quarter 2012.

Excluding amortization of acquisition intangibles, restructuring expenses, and acquisition-related retention accruals, operating expenses on a non-GAAP basis for the second quarter 2013 were $46.2 million or 21.5% of revenue, compared to $39.6 million or 22.4% of revenue in the first quarter 2014; and $32.7 million or 20.6% of revenue in the second quarter of 2012. The increase in operating expenses reflects the first full quarter of BCD.

Looking specifically at selling, general, and administrative expenses for the second quarter, GAAP SG&A was approximately $35.1 million or 16.4% of revenue, compared to $30.4 million or 17.2% of revenue in the first quarter of 2013, and $24.8 million or 15.5% of revenue in second quarter 2012.

Non-GAAP SG&A was $34.2 million or 16% of revenue, compared to $29.5 million or 16.7% of revenue in the first quarter, and $24.8 million or 15.5% of revenue in the second quarter 2012.

Investment in research and development for the second quarter was approximately $12.1 million or 5.6% of revenue on a GAAP basis, and $12 million or 5.6% of revenue on a non-GAAP basis. This compares to first quarter 2013 R&D expense of $10.1 million or 5.7% of revenue, and $8.2 million or 5.2% of revenue in the prior-year quarter. Total other income amounted to $277,000 for the second quarter.

Looking at interest income and expense, we had approximately $1.2 million of net interest expense, which was more than offset by currency gains, mainly in China. Income before taxes and noncontrolling interest in the second quarter was $10.5 million on a GAAP basis and $19.1 million a non-GAAP basis, which excludes the above-mentioned acquisition adjustments and other items. This compares to GAAP income of $4.3 million in first quarter 2013 and $8.6 million in the second quarter 2012.

Turning to income taxes for the second quarter, our tax rate was 14%, including a discrete book-to-tax provision adjustment. For the third quarter we expect our estimated effective tax rate to range between 18% and 24%. The increase from our previous guidance is due to the amount and the movement of profit between various taxing jurisdictions with differing tax rates.

GAAP net income for the second quarter was $8.6 million or $0.18 per diluted share, compared to a GAAP net loss of $1.9 million or negative $0.04 per share in the first quarter, and GAAP net income of $6.7 million or $0.14 per diluted share in the prior-year quarter.

Second quarter non-GAAP adjusted net income was $15.5 million or $0.33 per diluted share; which excluded, net of tax, $4 million of items related to the BCD acquisition; $1.8 million of noncash, acquisition-related intangible asset amortization costs; and $1.3 million of restructuring costs. The fully diluted share count used to compute GAAP and non-GAAP earnings per share for the second quarter was 47.5 million shares.

We have included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income, which provides additional details. Included in second-quarter GAAP and non-GAAP adjusted net income was approximately $2.1 million net of tax of noncash share-based compensation expense. Excluding the share-based compensation expense, both GAAP and non-GAAP adjusted diluted EPS would have improved by $0.05 per share.

Cash flow generated from operations was $29.8 million, and free cash flow was $22 million for the second quarter. Net cash flow was a positive $13.3 million for the second quarter.

Turning to the balance sheet, at the end of the second quarter we had approximately $214 million in cash and cash equivalents. Working capital was approximately $467 million.

At the end of the second quarter inventory was approximately $187 million compared to $182 million last quarter, including BCD. Inventory days were 110 in the second quarter compared to 115 days last quarter. Inventory in the quarter reflects a $7.2 million increase in finished goods and a $2.1 million increase in raw materials due to the addition of BCD, and a $4.7 million decrease in work in process.

At the end of the second quarter Accounts Receivable was approximately $182 million, and AR days were 75 compared to 82 last quarter.

Capital expenditures for the second quarter were $8.1 million or 3.8% of revenue, including $2.9 million for BCD. This compares to 4.3% of revenue in the first quarter, excluding the expansion of our Shanghai sales and design center. We expect capital expenditures to range between 5% and 9% of revenue for the remainder of 2013, which includes BCD and Chengdu. Depreciation and amortization expense for the second quarter was $18.9 million.

Now turning to our outlook. For the third quarter of 2013 we expect revenue between $220 million and $230 million, or up 3% to 7% sequentially. We expect GAAP gross profit margin to be 30.3%, plus or minus 2%.

As a reminder, the non-GAAP purchase price accounting adjustments in cost of goods sold were completed in the second quarter. Included in the third-quarter gross margin guidance is the impact of a disruption in manufacturing operations in one of our Shanghai wafer fabs due to an incident in our landlord's power station that caused a power outage to the fab.

The power outage occurred on July 26, causing some work in process inventory to be scrapped and approximately one-half month of output to be lost. Power has now been restored to the manufacturing operations.

GAAP operating expenses are expected to be 22.5% of revenue, plus or minus 1%. Non-GAAP operating expenses, excluding amortization of intangible expenses and acquisition-related employee retention accruals, are expected to be 21% of revenue, plus or minus 1%.

We expect our income tax rate to range between 18% and 24%. And shares used to calculate GAAP earnings per share for the third quarter are anticipated to be approximately 48.3 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, and good afternoon. Second-quarter revenue was up 21% sequentially at record levels, driven by strength in Asia as a result of design win momentum and share gains, including 3 months of BCD. North America and Europe combined were up slightly after a very strong first quarter.

We continued to increase share as well as new design win revenue at Asian smartphone manufacturers, while LED TV also showed strength. The growth in both of these markets offset continued softness in PCs.

Generally speaking, the industrial and automotive sectors remained relatively consistent in both North America and Europe.

Distributor POP was up 33%, and distributor POS was up 28%. The solid growth in both POP and POS was driven by several new project ramps getting supported by the channel during the quarter.

In addition, we had a full quarter of BCD revenue, which runs 90% of its business through distribution, as compared to 1 month in the first quarter. Distributor inventory rose 13% with the addition of the BCD channel inventory. Global inventory is in line and remains under 3 months.

OEM sales, which were up 3%, were negatively affected by the slowdown at certain key OEM customers as well as the ongoing softness in the computer sector.

Turning to global sales, Asia represented 82% of revenue; North America and Europe each represented 9%. In terms of our end-market breakout, as I mentioned last quarter, we realigned our market sector definitions in the second quarter to more accurately reflect our business following the recent acquisitions of BCD and PAM.

We utilized the product classifications of the world semiconductor trade statistics, WSTS, and will continue using this guideline going forward. And therefore, the percentages are no longer directly comparable to prior quarters. These numbers are preliminary, and we will continue to refine them. So they should be used more as a guide rather than an absolute.

As a result, the breakouts of the second quarter consist of consumer representing 32% of revenue; communication, 23%; computing, 22%; industrial, 20%; and automotive, 3%. Major end equipment changes were smartphones and cellphones are now under communications rather than consumer; tablets are in computer, also from consumer; and lighting now falls within industrial.

In terms of design wins, activity once again remained very strong across all regions and end markets. We have a solid pipeline of designs as a result of our expanded customer engagements. There are also significant cross-selling opportunities emerging with the addition of the BCD products, and we are very encouraged by the initial response from customers.

On the product side, it was a record quarter for BCD AC to DC line. Diodes also had a very strong revenue quarter on DC to DC converters, CMOS LDOs, and SBR products, along with positive momentum in Hall sensors, MOSFETs, and protection devices across broad-based markets and end equipment.

On our discrete products, introductions totaled 50 new products across 14 product families, addressing a wide range of applications, segments, and markets. We continued to focus a significant portion of new product development at high-volume portable device markets, in particular for smartphones and tablets, including energy-efficient power adapters. In addition, other development efforts were specifically aimed at the automotive market, where ruggedness and reliability is key.

Speaking of the portable adapter market, we were pleased to launch the first devices from Diodes's proprietary new Trench SBR technology, aimed specifically at this market. These new devices enable adapter designers to meet the stringent efficiency and temperature requirements imposed as part of the consumer green initiatives. Within weeks of being introduced, we secured multiple significant design wins that actually began shipping in the quarter, which is a testament to Trench SBR's performance.

Diodes also continued to leverage its expertise in the miniature packaging for portable device market by launching the world's smallest BJT devices packaged in the tiny DFN0806 package. These are complemented by chip scale package Schottky and MOSFET devices.

Diodes also launched this quarter our first range of SBR products targeted specifically at the automotive market. Our SBR technology has a reverse Avalanche capability that is between 3 and 10 times higher than competing devices, resulting in greater protection in harsh auto environments. Its enhanced ruggedness and reliability is a major advantage when compared to conventional technologies.

Also new this quarter were additional devices in a range of regulator transistors created specifically for telecommunications, networking, and power over ethernet applications. And we expanded our TVS portfolio, introducing our first-ever 0.5 pF unidirectional devices suitable for USB 2.0 and HDMI application.

Now turning to analog new product introductions. We released 43 new products across 7 product families during the quarter. New product highlights include continued expansion of our Standard Logic products. During the quarter we announced the addition of standard chip register and decoder logic ICs to our standard high speed CMOS logic families. We also released our first family of voltage translators.

In addition to these new product introductions, we announced several exciting new miniature packages to serve the Standard Logic market. First, our DFN1409 package offers the space-saving efficiency of chip scale packaging with the benefits of improved cost effectiveness and ease of handling.

Then our new DFN0808 package is one of the world's smallest logic package and allows Diodes to offer highly advanced packaging of our single-gate logic product lines. Similarly, the DFN0910 is one of the world's smallest six-pin logic packages. These very small packages are well suited for use in cell phones, tablets, and e-reader markets.

From a design win perspective, specifically as a result of these new packages, we secured 2 significant wins in smartphone market for our single-gate low-voltage products and our dual-gate advanced ultra-low power logic products.

We also saw significant design win strength for our analog products in the flat panel TV market, with new sockets won across several product families, including low dropout regulators and load switches. We were also pleased to see growing traction for our audio amplifier products in AC to DC PWN controllers in the target application space, strengthening the value of our recent acquisition of BCD and PAM.

Also during the quarter we saw strong design win growth for our AC to DC primary side controller products in mobile phone chargers and power adapters, with specific strength in cell phones. We further expanded our position in the AC to DC market with the release of 3 new secondary side controllers.

Building upon our strong momentum in WiFi modules last quarter, we continue to see strong design win activity with our low-voltage DC to DC converters. More consumer applications are including WiFi connectivity, including TVs, set-top boxes, as well as printers and other desktop peripherals. With this increased adoption of WiFi functionality, we are seeing a sustained interest in our DC to DC converters in WiFi module reference designs.

We are very encouraged by the progress we are making with our expanded product lines and new product opportunities generated by our recent acquisitions. With that, I will open the floor to questions.

(Operator Instructions). Steve Smigie, Raymond James.

Dr. Lu, looks like another good quarter here. Looking forward to the guidance, it looks like, as it is with your guidance, EPS is ahead of the Street; but it also seems like there was some additional potential benefit that you would've had. The gross margin had that power plant issue. Can you talk about what magnitude of impact the gross margin was hit by from that -- the power plant?

Well, since the power outage just happened July 26, and so -- it just back to install the power one week later, which was last Friday. The power just gradually come back.

Then it took time to ramp the equipment and requalify the equipment, then put it into production. That is why we estimate we would lose the output for about a half a month. And obviously, it is not completed recover yet. So we really don't have the final number, but I would say somewhere around 0.5% to 1.0% GPM problems. But we don't know for sure yet.

Okay, great. Thanks. And should we assume that there's also probably some sort of revenue impact here to the third quarter because of the disruption here in your manufacturing?

It is, but we tried to -- since we still have two months to make it up, and with flex cycle time, with assembly cycle time, I am hoping that is minimal. But like I said, it just happened. We are assessing the damage of everything.

So very difficult right now for me to say. So we just put a conservative number that we have. And when we go to the update guidance next month, then we will have a much more clear picture.

Right. Makes sense. Last question, just for the reported quarter, I think you guys did relatively well coming in above the midpoint -- or coming in above consensus in the face of the computing weakness out there.

I know you mentioned some new design wins ramping and some share gains as well. Is there one or the other of those that was more significant in your being able to outperform here?

I think it was both -- I think that the new design wins were share gains. Okay? So I think they are kind of one and the same. So we had some pretty significant new projects that came in in the quarter that were quite helpful to us.

Okay, great. Thanks a lot. Appreciate it.

Gary Mobley, Benchmark.

Could you share with us whether the book-to-bill ratio for the quarter was above 1.0 or below 1.0?

I would say it is above 1.0.

Okay. And Mark, you mentioned the distribution inventory being up 13%. Could you clarify whether that was a quarter-over-quarter comparison? And I'm assuming that was clouded by BCD as well.

Most of that was just adding the BCD inventory into the mix.

Do you have any sense of what the organic growth rate in the distribution inventory would be?

I would say, to be honest with you, I didn't even really look at it. They gave me a total number. So I can't give you an estimate, Gary. But I wouldn't say it would be very high.

Okay. And just to clarify -- maybe if you can just tell me if I'm in the ballpark. The organic growth adjusting for the BCD contribution -- was that somewhere in the neighborhood of 5% to 7% sequential for Q2?

From Q2 versus Q1?

Yes.

Organically it is about 5%. Yes, it is about 5%.

Okay. That is it for me. Thanks, guys.

Thank you. And you know the reason is because supposedly second quarter is a good quarter for us. But this year, computer market is not as strong as in the past. And we have very significant revenue from the consumer market -- I mean, computing market.

But we're still happy, because 5% over first quarter, and you know first quarter is a very strong quarter for us. So with a very strong first quarter, then we are able to grow 5%? I think we are happy with even the soft computer market.

Christopher Longiaru, Sidoti.

Congratulations on the gross margin guide, considering this power outage.

Thank you.

So my question actually has to do with -- is there any recourse against the landlord or anything you're talking about in terms of future payments that would maybe inflate either your gross margin in the December quarter or future quarters, or possibly deflate your operating expenses? Can you comment on that?

Well, you know we are in the age of negotiation for the next rental contract. So yes, you can demand on those, but you know, it is not that easy for landlord to pay us back.

So basically, it means you are going to try your best.

Try our best.

We always try our best.

Okay. My other question just has to do with -- in terms of just on the communications side. You talked about just a little bit of slower order rates. Can you talk about the trends there over the course of the quarter, and how it looks through July?

Obviously, by our guidance we see some improvements into July, and I think into the third quarter and into the second half of the year in some of our key customers. So I think basically it is in line with our guidance.

And then just in terms of the tax rate continuing to come down a little bit, should we still be modeling 20% for the year, Rick? Or should we think of that more in the mid-teens range?

No, I think you need to push it up more to the 20%, 21%. That is where the effective tax rate midpoint is for the third quarter.

Okay. That's all I have. Thanks, guys.

Thank you.

Tristan Gerra, Robert W. Baird.

The slowdown that you mentioned at certain customers, could you remind us how big they are as a percent of your revenue, and maybe some commentary around the content you have at those customers?

We don't really want to get into that detail, but we don't have any customers that are over the 10% range. So I think that's as far as we want to get into the detail of that.

Okay. And then in terms of the transfer of BCD's packaging to your Shanghai facility, how much room do you have left for BCD products at that facility? And then is it going to be all of BCD's products, or just part of it? And then finally, if you could give us some sense of how much that will benefit gross margin.

Okay. Number one, not all the BCD packaging they used we are able to produce in SKE. Like TO-92 -- we don't have that package inside Diodes ourselves. So the number -- that package we weren't able to.

And then some of the package we started to qualify, but not all the customers will allow us to change that easily. So what we tried to -- what we do, we say, is we will do all of the qualification, all the PCN, by end of September. And then assume 3 months PCN change. And then we should be finished our conversion by end of the year, which we hope is one quarter ahead of schedule.

But I won't expect everything we want to pull in can pull in before end of the year.

Okay. And any benefit that you are willing to talk about in terms of your COGS?

What?

I was wondering if you would be willing to elaborate a little bit on the type of savings that you would expect from that migration in packaging for BCD.

Yes, it will be helped. But actually it helps us a little bit on our loading, but it is more will be helped BCD, because we will provide them lower costs than they are getting from outside.

Okay, thank you.

Vijay Rakesh, Sterne, Agee.

Good work on the gross margin side. I was wondering -- you mentioned product mix improvement in your prepared remarks, and you alluded to some smartphone wins or handset wins picking up. Can you give some more color on how much -- where the mix is now? How should we look at mix as you go out next one, two quarters with BCD or analog picking up?

Well, you know, we measure our ASPs by two index -- one we call a mix dependent; one we call mix independent. From a mix independent point of view, that means the same product sells last quarter price; sales in last quarter versus -- exactly the same product sales in this quarter.

That actually is higher than -- that price drop is higher than our typical. I remember I mentioned in the past before, typically we look at 1.5% to 2.0% a quarter ASP drop. And this quarter is actually higher than that number.

But then we look at another index called mix-dependent, which means we don't care which customer; we just look at the total ASP regardless of the product type. That is mix-dependent. And actually from a mix-dependent point of view, we are happy, because ASP is actually going up. And that is why when we say GPM improvement, we credit that to the mix change, which means that ASP due to mix-dependent is in a positive instead of a negative range.

Got it. And you mentioned two wins on the handset side with your DFN/CSD packaging. Do you see more wins on that side or in some of the smaller packages going forward?

Yes, we think that that's a really strong point for us, and we think these sub-miniature packaging in our Logic series is going to be a big winner for us in the long run. So we think that we're right on the edge of the technology. We think we have the smallest stuff out there, and we think we're going to do very well in that sector.

Typically, that kind of product will give us a better GPM or better ASP.

Got it. On the utilization side, can you give us some trends -- what speed utilization is running in the last 2 or 3 quarters? And where is it now?

Well, we separate it into two categories, right? One is the most advanced in a new package, which is the one we are driving very heavily on the loading and on the -- winning the business. In that portion we are full. And that is where we still spend some capital money to increase the capacity for those kind of very small, very power efficient package.

For the standard commodity package, in the market it is still weak. And so our loading in that area from an assembly point of view, still somewhere around 75% to 80%. I don't know the exact number, but it's not really improved the loading, because that is an area we are not driving already.

And that is why when we say improve the mix, we are pushing more product out in the advanced package instead of out of a commodity package, which is lower GPM. And that is not where we focus our revenue at.

Got it. And last question, BCD. You are pulling it in, you said. You said you'd be done by what, first quarter? Or you think you will get it done earlier? How far is the BCD pull-n done here?

Well, I think we will start to benefit in probably September, but then a big benefit probably in Q4.

Got it.

Yes.

Great, thanks.

Thank you.

Vernon Essi, Needham & Company.

I was wondering if you all had any color now that you've got BCD sort of settled in as to what things might look like from a seasonality perspective in the fourth quarter. You usually tend to have a little bit of a decline. Is there any reason to think that might be a little bit different this year? Are there any trends that you can see now that might offset that?

Well, it is too early to be talking about fourth quarter. I'm trying to concentrate -- make my third-quarter guidance. And so, we are not ready spending effort to looking into the fourth-quarter business yet.

Okay. At least I tried there. A couple of questions for you, Rick. Wondering on the depreciation front, it was a little bit lighter than I would've anticipated in the second quarter. Should we expect it to go up a little bit more in the third quarter? Or is this about the run rate we should be looking at on a go-forward basis, at least for the time being?

I think this is about the run rate. We've cut our CapEx down to 5% to 9%, so I don't see any big increases. It may trend up a little bit, but this is about the run rate.

If you remember, our old business model is at 10% to 12% of our revenue, but since now we have still commodity packaging available, past available, we only spend the money in -- the three areas we will spend the money.

One is BCD, and you know BCD fab; two, still needs equipment to put it up. And then Chengdu is our future, so we need to start to do something for Chengdu. And then the third one will be those advanced package in our SKE. And if you look at -- we even consider all of those three together our guidance now is 5% to 9%. So you can see we have significantly reduced our CapEx expenditure.

Okay. And just moving to the balance sheet, Rick, the payables were up pretty sharply there; obviously, a good source of cash for you. What was the reasoning? And I assume that's probably going to come back to trendline. Or is there a reason it might stay up at this range, just looking at cash flow next quarter?

I missed what was up.

Payables, accounts payable.

Yes, I think the payables days were down, though. We had 3 months of BCD in there, and only 1 month of BCD last time. So it will change around as we move through time. But I think it payables days were down.

No, they were up? Okay. Payables days were up. I don't have that in front of me.

I'm showing an increase; it is pretty dramatic, at least on the formulas I'm using, although I'm probably not using an exhaustive method like you are behind the scenes there. But yes, I just was curious. I assume it's probably going to trend back a little bit on a go-forward basis.

Not a big deal. But finally, just wondering on the tax front, to follow up to a prior question, should we be thinking about this level going into 2014 in that 20%, 21% range? Or we expect that to moderate lower?

No, I think it's going to stay in that 20% to 21% range.

Okay. Thanks a lot, guys.

Harsh Kumar, Stephens.

A couple of questions. Rick, I wanted to clarify. Your press release says that your GAAP gross margins are expected to be 30.3%. Usually the non-GAAP margin is a little bit higher. We model non-GAAP when we model your Company.

Should I be thinking of a little bit higher number on the gross margin side? Or should I be thinking 30.3? And same question for taxes.

The gross margin, GAAP and non-GAAP, was only for the first quarter and second quarter because of the BCD purchase price adjustment. We don't normally have a difference between GAAP and non-GAAP. So those purchase price adjustments were finished in the second quarter. And going forward in the third quarter, GAAP and non-GAAP margin is the same.

Got it.

30.3%, okay?

Got it.

And the tax rate, the tax rate is approximately the same for both GAAP and non-GAAP standpoint.

Fair enough. Thanks, Rick. And then Dr. Lu, I know you talked about weakness at certain OEM customers. Was that the factor in the 3% to 7% guidance, which is a little less than seasonal? Or was it the fact that you had to leave revenues on the table, because you couldn't make enough because of the accident at the power supply power station?

I think -- we are talking about third quarter -- we are still affected by two factors. One is the PC market is not growing like in the past. And that, since we have 30-something percent of our revenue --

22%.

-- 22% of our revenue coming from computing market, it affects us, the growth. Because in the past PC is very strong in third quarters. This year PC is not that strong.

And another one is a couple of our OEMs is not very strong. They have some newer inventory in the second quarter. And so it affects us.

But overall we're still gaining the market share, because 5% is still a pretty good growth. Rather than the average.

No, totally. And Dr. Lu, what is the biggest driver to get to your target 20% operating margin goal that you have? What is the biggest thing you need for that to happen?

Well, I think ASP is one; and most important is not in our independent -- mix-independent ASPs. Most important is mix.

And then second one would be when the market started turning, we can start to realize our commodity type of packaging, and that loading will increase our profitability from our making function.

So if you ask me, those two is very important for us. High end advanced package, I think we are very happy with the progress. And we continue putting more capacity over there. But we still have a certain unrealized capacity due to the general market is still not as strong.

If you go to look at overall semiconductor, especially our same group, it's not really strong. And I hope when the market starts to turn, then we will grow our GPM percent with it.

Got it. And last question, Dr. Lu. In the past cycles you've been able to get to gross margin of -- this is a long-term question -- gross margin of 34%, 36%. Somewhere in that range; call it 35%.

You've got more analog now. You probably will have better utilization. Is it fair to think that you can get back at least there if not higher, Dr. Lu?

Well, you know, my business model is always 35%. Now when everything is in the right weighting, the right direction, last time we were able to get 38%. But our business model is 35%. And I am confident when the market really turning strong, we should be able to get 35%.

Great. Thank you, Dr. Lu. Congratulations.

Thank you.

Suji De Silva, Topeka.

Nice job on the quarter and the margins. My first question is about your smartphone tablet exposure. I know you have good share position at the tier 1s. If the market is stronger the next few quarters in the low-end smartphone market, can you talk about your share position there, A? And B, can you talk about whether it's the premium products that go into those devices, or maybe the more commodity products for you guys?

Well, Mark?

Okay. So I would say that historically our position is stronger in the tier 1s than it is in the tier 2. But I think you will see an emerging presence in the tier 2 in the coming quarters and in the focus -- as we focus more towards it. We like to focus on the leaders and then move to the second tier, so I think that's part of our strategy.

And I would say that it's a pretty good mix between products. But most of the smartphones in tier 1s use premium product. As we go to the tier 2 it will be more broad-based and maybe less sophisticated or slightly less premium than the tier 1s.

But obviously we see there's some emerging dynamics in these markets in mainland China that we are very, very interested in. And I think that our BCD acquisition and the additional sales force and coverage that we have there should help us in that long term. So I think we are well positioned to continue to exploit those markets as they emerge.

Great. And my second question is about gross margins and some of the tailwinds there. Can you talk about how far along you are long, Dr. Lu, on the copper conversion? And also moving any of Diodes' analog products over to BCD's fab. Can either of those be meaningful gross margin help in the next couple of quarters?

Well, I think if in a couple of quarters when the market has started to turn, I think our margin improvement will be there. And right now everything is really holding there. Gold price is no longer going down and no longer going up. So gold price is probably quite stable.

And copper wire conversion -- we convert most of what we want to convert. Now only one or two customers still are not ready for us yet, but the majority of our customers is already let us convert. And from BCD, like I said, we will start to ramp. We finish everything by the end of this quarter, and we will start to ramp, probably, big part of September; and then we will try to ramp whatever we can ramp by end of fourth -- end of this year. And then we will be -- a couple of key customers may not let us to convert. After that the majority of what we can convert will be converted.

So next year we will be -- if the market turns, then we should have a hope to significantly increase our gross margin.

Good to hear, Dr. Lu. And last question is it's hopefully not too soon since you closed BCD and got that integrated, but can you give us the updated thoughts on further acquisition at this point? Thanks.

Well, acquisition to give us another step of the growth is always in my strategy. And so I cannot talk about it until we are ready to make the announcement. But like I said, that's always one of my growth strategies, and I'm not going to give up that yet. Okay?

Okay, thanks, guys.

Shawn Harrison, Longbow Research.

Just two follow-up questions. I know earlier of the topic was broached upon the savings at BCD that -- from integrating it into your facilities. But how much of the margin improvement is that, exactly, for BCD? Is that 5 points? Am I being too aggressive in that type of assumption?

I don't think we have really quantified it.

Yes.

That much --

5%?

5%, I mean, on their share of --

No, no, no, no. 5% is too high.

Way too much.

Yes, 5% is way too much. Because their revenues are not that much compared with our total revenue.

I think he meant 5% of their percentage of the revenue.

5% of their percentage of the revenue, correct.

Okay. Okay, that could be. Like I say, we do not have the detailed number put in yet.

So think about, where it really helps is in the overhead absorption. Because we have to buy lead frames; we have to buy gold wire; we have to buy mold compound -- all those things that they are buying externally. So where it helps from a Diodes perspective is more units absorbing indirect overhead and indirect labor. So it is gradual as that stuff moves through the line. So it's not like it's just an immediate flip up.

Okay. And then --.

And then there's other advantages to it of consistency, capacity, quality.

Well, sure.

And all those other things, too. So there's a lot of motivational points in doing it beyond just the margin.

Right.

Got you. You have greater control of the supply chain.

Yes, correct.

Right. And one thing that Keh-Shew talked about earlier was the adoption into the assembly test area in the fourth quarter. So the movement of products into the BCD wafer fabs is going to take a lot longer than that. That won't be done until --

Next year.

Next year, right? So that is also an improvement. But a longer-term improvement.

Yes.

So don't get the two confused with we're going to be done in the fourth quarter, not with the wafer fab.

And all of those dynamics are rolled up into that 35% gross margin target?

Yes, sure.

Okay.

Plus a good market, plus strong pricing -- all the things that goes along with that.

That is more than fair. Then two brief follow-ups, I guess. I know that there was a restructuring announcement made last quarter -- it was, I think, about $3 million in annualized savings. How is that progressing?

And then the second question is with the good free cash flow here year to date, and what looks to be really good free cash flow in the back half of the year, how quickly are you looking to pay down your debt, Rick?

Okay, number one, the reduction is actually completed. Okay? It is completed. And so then, second, pay down the debts. Like I said, M&A is still one of the key strategies in me, so instead of paying down the debts, I might -- I will more focus on using that to do M&A.

That is more than fair. That's a good strategy. Thanks a lot, Dr. Lu.

Okay.

This concludes our question-and-answer session. I would now like to turn the call back over to management for closing remarks.

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

Ladies and gentlemen, thank you for your participation. You may now disconnect. Have a great day.