Diodes Inc (DIOD) 2013 Q4 法說會逐字稿

Good afternoon and welcome to Diodes Incorporated's fourth-quarter and FY13 financial results conference call. At this time, all participants are in a listen-only mode.

(Operator Instructions)

As a reminder, this conference call is being recorded today, Tuesday, February 11, 2014.

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

Good afternoon, and welcome to Diodes' fourth-quarter and FY13 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 would 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, February 11, 2014. 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 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 a reconciliation of GAAP to non-GAAP items, which provides additional detail. 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, and thank you for joining us today.

I'm pleased to report another solid year of growth and of profitability for Diodes. We ended the year achieving 31% revenue growth, a 390 basis point improvement in non-GAAP gross margin, and a 92% increase in non-GAAP net income, which represents our 23rd consecutive year of profitability.

In the year, we successfully closed our acquisition of BCD Semiconductor in March, which was a strong contributor to our revenue growth and market share gains as a result of our extended analog product portfolio. The integration has been progressing well, and we still have additional cost savings to realize in the coming year, as well as increased cross-selling opportunities as design wins ramp throughout the year.

BCD, including new fab tool, negatively impacted our gross margin by approximately 120 basis points in 2013. Diodes margin without BCD was 30%. Moving forward, we expect to capture further synergies over time, as we improve loading of the manufacturing facilities, and transfer more products internally, to maximize operational and corporate efficiency.

For the first quarter, we were affected by greater than normal seasonality, due to weakness in the PC market, as well as cautious inventory management at distributors. Despite the prolonged weakness in the market, we have been able to gain market share across our business, due to our positive downwind momentum.

In the new quarter in mixes, we have a sturdy pipeline of designers, and expanded customer relationships across all regions and product lines. Also during the quarter, we improved our balance sheet by reducing our long-term debt by almost $20 million, and the inventory by $40 million. When combined with our reduced capital expenditure spending of 5% of the revenue for the quarter, we generated approximately $16 million of free cash flow.

Looking forward, we remain focused on achieving our goal of $1 billion in annual revenue, with more profitability, and the BCD acquisition has brought us one step closer toward achieving this goal. With that, I will now turn the call over to Rick to discuss our fourth quarter and FY13 financial results, as well as the first-quarter 2014 guidance in more detail.

Thanks, Dr. Lu, and good afternoon, everyone.

Revenue for the full year 2013 increased 30.5% to $826.8 million, from $633.8 million in 2012, due mainly to the acquisition of BCD Semiconductor.

For the fourth quarter of 2013, revenue was $211 million, a decrease of 6% from the $224.5 million in the third quarter of 2013, and an increase of 29.2% from the $163.3 million in the fourth quarter of 2012. The sequential decline in revenue was primarily due to greater than normal seasonality, as a result of continued weakness in the PC market, as well as cautious inventory management at distributors.

Gross profit for the full year 2013 was $237.8 million, or 28.8% of revenue, compared to $161.6 million, or 25.5% of revenue in the prior year. Non-GAAP gross margin for 2013 was 29.4%, which excludes BCD purchase price adjustments.

For the fourth quarter of 2013, gross profit was $60.8 million, or 28.8% of revenue, compared to the third quarter of 2013 of $69.6 million, or 31% of revenue, and fourth quarter 2012 of $43.2 million, or 26.5% of revenue. Gross profit margin declined sequentially due to lower wafer fab loadings, as the Company reduced wafer inventory to align with expectations for the fourth and first quarters.

GAAP operating expenses for the fourth quarter were $52.8 million, or 25% of revenue, compared to $49.3 million, or 22% of revenue last quarter, and $39.7 million, or 24.3% of revenue in the fourth quarter of 2012. Operating expenses in the fourth quarter included a $5.3 million non-cash goodwill impairment charge related to the acquisition of Eris, and $900,000 of retention costs related to the BCD acquisition. Excluding these charges, non-GAAP adjusted operating expenses were $44.6 million, or 21.1% of revenue.

Looking specifically at selling, general, and administrative expenses, SG&A was approximately $32.8 million for the fourth quarter, or 15.6% of revenue, compared to last quarter of $33.8 million, or 15.1% of revenue, and $28.7 million, or 17.6% of revenue in the fourth quarter 2012. Investment in research and development for the fourth quarter was approximately $12.5 million, or 5.9% of revenue, compared to $13.6 million, or 6.1% of revenue last quarter, and $9.3 million, or 5.7% of revenue in the fourth quarter of 2012.

SG&A plus R&D combined equaled 21.5% of revenue, which was slightly up from last quarter, but down 170 basis points from fourth-quarter 2012 at 23.2%. Total other expense amounted to $1.7 million for the fourth quarter.

We had approximately $1.4 million of interest expense, and approximately $300,000 of interest income. Income before income taxes and non-controlling interest in the fourth quarter of 2013 amounted to $6.3 million, compared to the income of $17.5 million in the third quarter of 2013, and $6.6 million in the fourth quarter of 2012.

Turning to income taxes, our effective income tax rate for fourth quarter and full-year 2013 was approximately 45% and 37.5% respectively. Our full-year effective tax rate was impacted by non-taxable goodwill impairment charges in the fourth quarter, and a discrete China tax audit adjustment of $5.4 million, as discussed in the first-quarter 2013 results. Excluding these two items, the effective tax rate was 24.4% and 20.6% respectively.

GAAP net income for the full year of 2013 was $26.5 million, or $0.56 per diluted share, compared to $24.2 million, or $0.51 per diluted share last year. 2013 represented our 23rd consecutive year of profitability. The share count used to compute GAAP diluted EPS for 2013 was 47.7 million shares.

Non-GAAP adjusted net income for the year was $50.1 million, or $1.05 per diluted share, which excluded, net of tax, $7.9 million of items related to the BCD acquisition, $1.1 million of restructuring costs, a $2.7 million net of non-controlling interest non-cash goodwill impairment charge related to the acquisition of Eris, $6.4 million of non-cash acquisition-related intangible asset amortization costs, and $5.4 million due to a China tax audit adjustment. Compared to non-GAAP adjusted net income of $26.1 million or $0.56 per diluted share in 2012.

For the fourth quarter, GAAP net income was $6.2 million or $0.13 per diluted share. Compared to the third quarter of 2013 GAAP net income of $13.6 million, or $0.28 per diluted share, and fourth quarter 2012 GAAP net income of $4.1 million or $0.09 per diluted share. The share count used to compute GAAP diluted EPS for the fourth quarter of 2013 was 47.9 million shares.

Fourth-quarter non-GAAP adjusted net income was $11.3 million or $0.24 per diluted share, which excluded net of tax, $800,000 of retention costs related to the BCD acquisition, a $2.7 million net of non-controlling interest non-cash goodwill impairment charge related to the acquisition of Eris, and a $1.6 million of non-cash acquisition-related intangible asset amortization costs. We've included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income, which provides additional details.

Included in the fourth-quarter and full-year 2013 GAAP and non-GAAP adjusted net income was approximately $2.3 million and $8.8 million respectively net of tax, 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 in the fourth quarter, and $0.18 for the full year.

Cash flow generated from operations for 2013 was $109.9 million, and $32.1 million for the fourth quarter. Net cash flow for the year was a positive $39.5 million, and a negative $7.6 million in the fourth quarter, primarily due to the pay down of $20 million on our long-term debt.

Free cash flow for 2013 was $62.8 million, which included approximately $47.1 million of capital expenditures. Free cash flow was $15.8 million for the fourth quarter, which included $16.3 million of capital expenditures, and a reduction of inventory by approximately $13.9 million.

Turning to the balance sheet, at the end of the fourth quarter, we had approximately $197 million in cash and cash equivalents, and $23 million in short-term cash investments. Working capital was approximately $493 million. At the end of the fourth quarter, inventory decreased by $14 million to approximately $180 million, compared to approximately $194 million at the end of third quarter 2013.

Inventory days were 115 in the fourth quarter, compared to 113 days last quarter. Inventory in the quarter reflects an $8.4 million decrease in raw materials, a $3.6 million decrease in work in process, and a $1.9 million decrease in finished goods. At the end of the fourth quarter, accounts receivable was approximately $192 million and AR days were 84 compared to 77 last quarter.

Capital expenditures on an accrual basis for 2013 totaled $44.3 million, or 5.4% of revenue. Fourth-quarter capital expenditures were $10.9 million or 5.2% of revenue, which is at the low end of our reduced CapEx spending target range of 5% to 8% of revenue. Depreciation and amortization expense for the fourth quarter was $18.7 million.

Now turning to our outlook. For the first quarter of 2014, we expect revenue to range between $205 million and $213 million, or plus 1% to minus 3% sequentially. We expect gross margin to be flat with fourth quarter at 28.8%, plus or minus 2%.

Operating expenses are expected to be flat with the fourth quarter, excluding the goodwill write off, at approximately 22.5% of revenue, plus or minus 1%. We expect our income tax rate to range between 19% and 25%, and shares used to calculate EPS for the first quarter are anticipated to be approximately 48.2 million.

With that said, I will now turn the call over to Mark King.

Thank you Rick, and good afternoon.

Revenue in the quarter was down 6% sequentially, primarily due to a global reduction in distributor POP, which was down 7.3%, with North America and Europe being impacted at a higher percentage. Distributors in all regions focused on inventory management, as inventory declined another 6.5% sequentially. OEM sales were down 1% and distributor POS was up 1.7%. Global channel inventory remained in line, and under three months.

In terms of our end markets, consumer represented 34% of revenue, communications 23%, computing 22%, industrial 18%, and automotive 3%. All segments were down, with the industrial segment being down the greatest percentage, due to declines in North America and Europe, followed by computing. The consumer and communications segments were the strongest performers in the quarter, relative to the third quarter.

Design activity continued to be strong across all regions, product lines, and end equipments. Cross-selling opportunities with BCD are increasing, contributing to a solid pipeline of designs and expanded customer engagements. In particular, we are seeing a significant increase in global activity on LED drivers for bulb replacement with the new BCD products.

We also achieved record quarter for our logic products, growing more than 50% sequentially due to key wins in smart phones. It was also a record quarter for our SBR products from our broad applications in end equipment, and we also had a very strong quarter on load switches and DBS products.

Turning to global sales, Asia represented 83% of revenue, North America 9%, and Europe 8%. In terms of new products, Diodes further expanded its broad-based product offering for a ride range of markets and applications.

Discrete product introductions totaled 98 new products across 21 product families. We continue to target high-volume consumer portable devices, including smart phones, tablets, and energy-efficient power adapters, while also offering products targeted at industrial markets for applications such as LED lighting, solar, touch screens and power supplies.

We also increased our focus on the high-growth automotive electronics market by launching a broad range of MOSFETs and rectifiers, designed to meet the requirements for ruggedness, reliability, quality, and performance. During the quarter, we launched new products from our industry-leading Trench SBR platform, with expanded devices, which enabled quick charger designers to meet efficiency and operating temperature requirements, without the need for expensive redesigns.

Conventional SBR devices were also developed for thermally-demanding, small form factor, portable smart phone adapter applications for leading manufacturers. In addition, Diodes launched a miniature bridge device for wireless charging applications, and further enhanced the reach of our technology by launching automotive versions of our SBR rectifiers.

Diodes reached a milestone in the quarter, with the launch of the first 60 volt MOSFET from its new state-of-the-art split gate process. This new platform reduces both on resistance and gate charge by almost 50%. These split gate MOSFETs also provide further penetration to the charger, adapter and power supply applications.

Also, during the quarter, we expanded our new Performance DBS portfolio with the release of a wide range of products, including devices in ultra miniature chip scale packaging and DFN packages for the portable market. To further increase our content in the automotive market, Diodes launched the first in a range of new protection devices designed specifically for automotive applications.

These TBS products replace conventional automotive protection with significantly improved performance and small form factors, designed specifically to meet automotive inspection and reliability requirements. The first product has already achieved a significant automotive design win for a major vehicle manufacturer.

Turning to analog new product introductions, we released 78 new analog products across 8 product families. New product highlights include the release of three new high-efficiency class D audio amplifiers, for a range of speaker applications from portable consumer electronics to high-power small enclosure speakers for computing and docking stations. These devices offer high signal-to-noise ratio, and differential inputs to help eliminate noise, and use a filter-less output architecture to provide high performance at a lower system cost.

We also expanded our portfolio of AC to DC power devices with over 10 new offerings of primary assigned switches and controllers for applications such as power adapters for consumer products and home appliances, as well as chargers and adapters for smart phones and tablets. The new products include a Green-Mode PWM controller that offers power saving operation in applications such as set top boxes and appliances, high frequency switches for charges and adapters, and low-power primary side switches for cell phone chargers.

In addition, we released a new high-performance LED driver for dimmerable retrofit and lab applications. This device provides a wide range of dimmer compatibility, and can achieve ultra-low dimming, down to 1%.

Other noteworthy product releases include a self protective resettable electronic fuse designed for applications such as disk drives, a fully-featured single-chip reversible DC motor driver, and a family of low drop-out regulators for use in cell phones, smart phones and tablets. From a design win perspective, we continued to see strong market acceptance for our AC to DC and LED driver product lines. We secured major LED wins across multiple retrofit applications in consumer product backlighting, as well as AC to DC wins for mobile chargers and adapters, including adapters for large consumer products like set top boxes.

Our LDOs were also very active, with multiple design wins in flat panel TV, desktop and notebook computing, as well as a high-profile gaming platform that also included our USB power switches. Also, during the quarter, our audio amplifiers gained further traction in several TV platforms, and we expanded our standard linear and standard logic business with market gains across several China-based communication and consumer product applications. Our hall sensor devices also continued to see solid acceptance in tablet applications, driven by smart covers and tablet accessory market growth.

In summary, we are pleased with our continued advances and market share gains across our business with the addition of the BCD product portfolio. We are expanding our content at existing customers and gaining multiple entry points with new customers.

We had a growing pipeline of design wins, and have gained significant momentum in applications such as LED lighting, including retrofit and backlighting, portable consumer devices, chargers and adapters, as well as AC to DC power devices. We also continue to gain traction in smart phone, tablet, and LED TVs, which have been great markets for Diodes' products. We are confident that as global markets improve, our past design win momentum, new products, and expanded customer relationships, positions Diodes well for future success.

With that, I'll open the floor to questions. Operator?

(Operator Instructions)

It looks like our first phone question will come from Steve Smigie with Raymond James.

Dr. Lu, I just want to say congratulations on a pretty solid year there, and some nice margin performance as we started this year. I was hoping you could talk about growth following up on this past year. Given the new products that you've been releasing and design wins, would it be fair to say that you would anticipate 2014 to be another year where you could likely outgrow the market?

Steve, first, thank you for your comment. Second, that is our goal.

We always said that our goal to grow 2X faster of our competitors. So that is our goal and I think we are on the track to doing that. Anyway, yes.

Great. Thanks. As we think about bringing in or filling up the capacity at BCD plus utilization, how should we think about gross margin throughout the year? I know you only guide one quarter, but it would be fair to argue that it's likely that, given those factors, we should see generally improving gross margins throughout the year?

Well, yes. It is definitely yes. And it is expected when we buy BCD, we know they just start to ramp their fab 2 in February last year. So when you have a new fab, start from general output and you ramp it up, you always going to have a gross margin -- GPM percent problem.

And what we do or what they have been doing is try to move some of the fab 1 loading into the fab 2 and Diodes can load in fab 1. And this process has been very smoothly executed, and even we say, in our speech, we actually negative impact by the BCD, and the majority is really coming from the fab loading.

But these situations have been improved quite a bit, and fab 2 continues ramping up, and while now we are not really able to transfer our load into fab 1 yet, due to the customer qualification. But I expect this year we will start to move that, and at the same time, the cross-sell in by Diodes team to sell BCD product going pretty smoothly, and if we -- when we continue ramp and gain the market share with BCD product, then obviously it will be help the load in fab 1.

Great. Thank you. And then just a couple end market or product questions. On the end market side, auto is a few percent of revenue now, but it sounds like there's some nice wins.

Any chance auto could get to something, 5% or more of revenue this year? And then on the logic side it sounds like some good success there. When does logic become 5% of revenue as well?

I'll take that one. On the automotive side, I don't think we are going to be able to get to 5% this year.

But we have a very detailed and long-term plan to grow our automotive business over the next two to four years, significantly. So we put a team together that focuses on automotive and drive that business area in very specific product areas, so we have a lot of emphasis in that area. So we think that will be a growth driver going forward.

Regarding logic, I think we continue to make progress. We continue to design in products. We have some of the newest and state-of-the-art products out there.

I think it's just a matter of time. It's a very mature market, so mature markets take longer to make a big impact in.

But I would say that we will be a major player in the logic market over the next few years. I think the progress will continue to add value and impact our revenue over time.

Great. Thank you.

Our next question will come from Gary Mobley with Benchmark.

Congrats on some good OpEx management in the fourth quarter. I'm assuming that is what helped drive much of the EPS upside.

I know you were forecasting OpEx to be about 22.7% of revenue, with the midpoint of revenue guide higher than what you hit. So it looks like you might have operating expenses about 5% or so below your forecast. What drove that negative variance?

Well I don't know about 5%, but we were down a little bit, by just mainly controlling expenses, travel, and we haven't replaced people that we don't really need, so we've had a real tight control on operating expenses from overhead, and from a people standpoint, from an overhead standpoint.

Okay. I know you've been in disclosing BCD revenue in your SEC filings. Do we have to wait for the 10-K to come out to get the number for the fourth quarter, or can you share that with us on the call?

You will need to wait until the 10-K comes out.

Okay. But let me ask it this way. Was a down a like amount for the rest of the business?

BCD. Hang on just a second.

We are not really tracking that carefully between Diodes and BCD, because what we really want to is one company, so when I talked to the sales guy, when we're talking about the design win, we try to not separate BCD versus Diodes. We encourage our people, especially across our US and Europe sales team, to try to sell BCD product. But Rick can give you the number.

I have a couple follow-up questions if you don't mind.

It was down about 4%.

Okay very good. Thank you for that.

Similar as the whole business.

And thinking about your gross margin, it's understandable why your gross margin decreased 220 basis points sequentially in the fourth quarter. I know you had lower loading, because you are trying to burn off some inventory, and on top of that, you had lower sales. But I'm assuming that you will be operating with a higher load in the first quarter, in anticipation of a seasonal uptick in Q2 revenue, so why is the gross margin for the first quarter not expected to be up more than a sequential basis or will that benefit, as I just mentioned, show up in the second quarter?

Gary, let me answer this question. I think if you remember, last quarter when we do the conference call, we mentioned 4Q revenue -- I mean CP going to be down because we deduced that wafer fab loadings were in line to 4Q and 1Q of business.

Then after that, we see that 1Q is not as bad as what we expected, because typically, we have been talking 1Q is down 5% and now we get the guidance of midpoint is down 1%, so you can see, we started realizing 1Q revenue is not as bad as we expected. Therefore we turned on more wafer output in the wafer fab, and that is the reason we keep the updated guidance of increase our GPM percent.

Then you're talking about 1Q. 1Q is more in the back-end because our back-end is all in China, and the Chinese New Year is a big factor, Chinese are down, and people went down, people on vacation is always, every year, always impact our performance in our output in the back-end.

So in a similar sense this year -- Chinese New Year come, and we have people take a long vacation, reduce people, and the output will be lower than 4Q, and therefore you get hit by the output, lower output, and that's why the GP went down. So when you wafer fab loading went up in 1Q, your back-end loading went down, or go down in 1Q.

That is why we forecast the GP percent is flat. Because if wafer fab loading will go up, back-end loading go down.

Okay. I was just reviewing some notes and I know it is your goal, as you stated in the press release, to achieve $1 billion in annual revenue. It's my understanding that your goal is to achieve a 35% gross margin, perhaps at that revenue level.

But in order for that to happen, you need to have about 85% utilization at your BCD fabs 1 and 2. And I was hoping to get a gauge on where we stand now with the utilization rate of those two fabs and where you might expect to be by the end of the fiscal year.

Okay. Yes, that is our goal. One season down in revenue with total GPM percent, which is at 35%. But if you look at the loading today, I think Rick can give you that number --

In the fourth quarter the S fab 1, which is the older fab in Shanghai, was between 75% and 80%. It had a shutdown for maintenance, and we had planned that in, and that's part of the reduction that Keh-Shew talked about. In the first quarter, we think it's going to get back into the more normal range of 80% to 85%.

That's fab 1, right?

Yes, that's fab 1.

Fab 2--

Fab 2 is just continually going up, it doesn't have a utilization, because the output has just continued to go up from when it started in the first quarter of 2013, up until, through the fourth quarter.

These are the ones I'm talking about, we transferred the loading from fab 1 to fab 2, and then backfill fab 1, we try to move sales, try to get more sales for fab 1. We are not really able to transfer any internal -- any of subcon fab from externally to internal yet.

Because that needs customer approval. Now for the non-customer approval portion we start loading it but the customer approved portion we cannot move in.

I've taken enough time up. I appreciate the answers. Thanks.

Our next question comes from Christopher Longiaru with Sidoti & Company.

What it sounds like here though, is your utilization at S fab 1 is gone up, your outputs continue to grow at fab 2. Part of the reason for I guess the marriage between BCD and Diodes made sense, was that your packaging facility was underutilized, and you talked about gross margin permits over the course of the year. Can you tell us a little bit how that move of BCD into Diodes manufacturing, sorry packaging facility, is going, and how you expect that progression over the course of the year to continue?

Okay. From the packaging move from subcon or BCD products to Diodes internally, I think by end of fourth quarter we already qualified for whatever we want to -- we want to move. Maybe save a couple of the key customers, but you know, in BCD they have more in the small customer, they don't have that many of the key customers.

So I should say most of the ones we want to transfer we already qualified. Now we start the ramp in 4Q and 1Q because the capacity, people capacity, not economic capacity limitation.

We cannot really move everything, and the reason for that is the Chinese New Year and a lot of people go home, and not coming back yet. So the 1Q capacity is really driven by people, not driven by economy.

It sounds like to me then that you have a situation where your utilization is improving sequentially, you are ready to move things in-house, but the Chinese New Year is kind of inhibiting that move, and X the Chinese New Year, you probably would have guided that gross margin up slightly sequentially. Does that make sense?

Yes. In 2Q, it's already -- it's a picture of if. We don't know yet. We are not guiding it.

But if the picture is going up, loading go up, obviously, you will, if you look at our history, second quarter always stronger than 1Q. 1Q wafer fab is still underloaded, it's not fully loaded yet. But assembly, equipment-wise is still not fully loaded.

But people-wise, is for the year. Then they go to 4Q we have capacity to support upside. Equipment capacity to support upside.

And just did you give a book to bill at the end of the fourth quarter?

No, we didn't. But it was above 1. Above 1.

Great. I'll jump back. Thank you.

Our next question will come from Vernon Essi with Needham & Company.

Congratulations on the quarter, Dr. Lu. Was wondering, not to I guess rehash this gross margin question over and over, but I'm more concerned about the longer-term picture gross margin, and wanted to just address -- I see the story of course is being a utilization-based story. In my view, the higher your top line is going to be, the better your gross margin is going to be.

One thing I am wondering, though, and I guess it's just listening to Mark go on about all the different products that you're introducing, a lot of those would be sort of in the 40% gross margin plus bucket. Wondering how much mix could possibly impact your gross margin in 2014, or is the revenue contribution from these products so nominal that this is really more an 18 months to two-year out sort of situation, where mix might be a bigger factor?

Okay first let me answer the capacity issue, and if our margin is significant, and affected by wafer fab loading, by assembly loading. If you remember back to fourth quarter, we actually -- GPM up to 31% in third quarter, and that really still has the BCD loading issues. Okay, so if you are thinking that in third quarter, we're up to 31%.

We go down to 28.8%, because wafer fab loading, we cut it down intentionally, and then this quarter, we guide into 28.8%, and it's because the Chinese New Year again. So moving forward, those factors should be improved because of Chinese New Year is gone, loading should be continued because in business, if the market cooperates and the business go up, our loading will go up, and at the same time BCD fab loading will be improved.

Then the gross margin, if we go back to third quarter, then third quarter last year, 31%. It should be able to -- I'm not giving any guidance yet, but I'm just -- to let you know, if our revenue goes back to third-quarter revenue then GP should be better than that, because the loading factor should be improved. Okay, from mix, I'll let Mark to answer that, but --

So we have a significant amount of new product, with definitely a better margin profile than some of our historic products. So we obviously, beyond utilization, we are working on our margins through mix improvement and new products, and just better stuff that will draw higher ASP, will drive a greater margin.

So we feel like we have a lot of different drivers of our margin going forward. But timing of those quarter-in and quarter-out is not necessarily clear yet, but I think we have a lot of opportunity ahead of us.

Additional, don't forget, we have reduced our CapEx, and last year we dropped 4% or 5% from our historical 10% to 12% of the revenue. Last year we go down to -- and we started guiding 5% to 8% or 9% of our revenue.

So when you start to reduce CapEx, your depreciation is going to be relatively -- as a percent of revenue. Going to be reduced, then automatically you will improve your GPM percent.

So when we started changing our model from 10% to 12% of CapEx to 5% to 8%, or 5% to 9% of CapEx, that CapEx reduction will automatically improve the depreciation as a percent of revenue, and then you will improve the GPM percent. So these are the facts, as we are working very hard to work our mobile 35% and I believe we should be able to get there.

And I appreciate by the way the answer. I see the math. I'm not doubting that you can't get there, especially on the revenue targets you've outlined, and I think the math works for your gross margins in the first quarter.

This is a delicate way of providing feedback, it might be helpful for us to know what proportion of revenue is sort of new product related. I don't know how you want to define that, however, so we can track the progress of that and the revenue mix, to see if it's actually impacting the gross margin, or if it still just basically a function of loadings and top line versus overhead?

We used to report our new product revenue but then we determined that some -- each one of the products had a different period to ramp, and then some of our products that would look like the revenues are ramping very hard, took three years to ramp, then they ramp and are still ramping. Okay so we thought that figure became a little bit distorted, so we stopped reporting that.

We had a significant new product, and the one other area that -- with the reduced CapEx, reduced CapEx and reduced units drives mix. Okay, so we've been pretty free with units for a few years here now, and the units probably are going to start to get tighter and tighter as the year goes on, if the market grows at even a reasonable rate. So we're hoping that the change in the strength in our CapEx will help us drive a better mix, which will drive a better margin rate.

In the past when you have excess capacity then you try to say I need to move the mix downward to capture those capacity, the yield levels at capacity. And since the last year, I make a decision I don't want to chase the volume anymore, because at the end, we are reaching our goal of one billion, so we don't need to -- that change in the capacity. That is why we change our business model, and with that, then you don't have that much of capacity, and then you have no need to change the mix to loading the factory.

Okay, I appreciate, that's the longest first question I think I've ever had, I appreciate all the answers there. My quick follow-on, Dr. Lu, any outlook you have on the health of the electronics market in China.

You're probably one of the better crystal balls than anyone that we usually speak to. So what is your take on how the outlook is there going into the first half of 2014?

Well if you see our guidance of midpoint minus 1% against a traditionally 1Q is down 0% to 5%. That is what I think every time when I talk to you guys, I always say 1Q is down 0% to 5% or sometime even more. But with that, you can see I feel very good.

And so right now, I think the feel back I get from the Chinese, post Chinese New Year is quite positive. And that is what we guidance that. So I think that is my answer.

Okay. Great to hear. Thank you.

And next question is come from Harsh Kumar with Stephens.

Congratulations. Very good quarter, very good guidance. I had a couple -- first of all let me ask the easy one. Mark, could you repeat the breakdown of revenues by the end markets?

Yes it was I've got it right here -- 34% consumer, 23% communication, computing 22%, and industrial 18% and automotive 3%.

Thanks so much. Dr. Lu, I had a pretty simple question. In your press release you mentioned that BCD was negative for you for the whole year.

Are you willing to talk about maybe exiting the fourth quarter, or maybe currently, if that starting to turn for you if it's positive. How much positive impact, any kind of color you want to give us.

I don't think it's positive yet, in 1Q, okay? But it's getting close to helping us, and the reason I think is, fab 2 is ramping, and fab 1 because that fab 1 is underloaded.

We have gradually filled fab 1, but when we are able to get fab 1 back to the original loading and fab 2 is there, then I think we will be positive. Today, it is still negative impact us.

It's negative on the margin. On the gross profit percent, not on the dollars.

Yes.

So their gross profit margins are less than Diodes'.

Understood. Totally understood. Thanks for clarifying that.

Dr. Lu, another question for you. You brought Anachip a while back, six or seven years ago. You bought BCD recently. If I was to ask you of your total business, how much of your total business is analog today, would you have a ballpark number for us?

Well I probably -- we don't talk about, I can give you maybe 60/40. Because as we grow and probably somewhere about 60/40, right?

So 60% discrete and 40% analog?

Somewhere around there. I don't have the number, what I give you a ballpark. So don't take me --

Understood. And then analog typically has better margin structure, correct?

Typically my understanding is analog for you is 30% to 40% or 45%. Is that accurate?

I would say that it's too much to generalize that. We have some really strong discrete products that run as good or better margins.

We might have some products in the discrete side that might be more draining in margin, that we will eventually mix out of. But I wouldn't say analog is always better.

Okay. And then one more for you, Dr. Lu. You talked about solid pipeline, both in your commentary and the press release.

Particularly design wins. I'm curious what other areas maybe you are the most excited about for the next 12 months out of your end markets?

Well, I think we have several areas. For example LED driver, AC to DC, and when we talk about AC to DC we are working on the first charger.

We are working on the wireless charger. Those are the analog portion.

But then when you are talking about digital portion, most fabs are still going quite well. SBR is still going quite well. And those, again from a discrete point of view, they are growing quite well.

So remember I just mentioned buy Anachip, buy BCD, those are analog product. But today we still have 60/40. It may be somewhere 30/70.

Around that range. 70/30, 60/40, somewhere in that range. So you can see discrete organically is still growing very fast.

Got it. And then my last question for you was, why the decision to pay down debt? Just to bolster the balance sheet or was there any particular reason?

Well, the main reason is that interest expense impacts our earnings per share, and we like to have the best earnings per share we can have.

So when you want money, and money put in the bank doesn't generate interest and the money we borrow generates interest costs. So it's better just pay it off.

That's fair, thanks. I'll jump back in the queue. Congratulations again.

Our next question is from Vijay Rakesh with Sterne, Agee.

Good job on the gross margin. I had a question going back on one of the previous questions. Do you have an idea of what, particularly the last six months, what percent of revenues came from new products, and as you end of 2014 what percent of revenues come from new products, and design wins?

So a longer-term perspective on that. And also, you talked about handset design wins in your prepared remarks, if you could give more color on that?

What was the last thing? More color on the what?

On the handset design wins, that you were talking about in your prepared remarks.

Okay. From a smart phone and tablet perspective, I think we just continue to make progress at multiple players around the world, in a broad mix of devices.

Not too much more to say about that. So I didn't get your first question, either.

I was wondering, if you look at the new product ramps, if you look at -- I'm wondering how much revenues came from new product ramps in the last six months, and how much do you think this new product ramps, let's say second half of 2014?

I really don't have this information -- clearly some of our discrete new product ramps ramped faster than our analog new product ramps. But the figures started to become distorted, and ramp times, and times for products to actually develop from a revenue perspective, so we just stopped looking at that as a whole, a while back.

We do look at it individually as a percentage, on certain product lines. But we don't really look at it as a whole.

Discrete, especially in discrete area, it's kind of a customer say I need you put this function, this style, or this SBR, or this MOSFET in this package. When a customer tells you that you put the old die in the old package, but it's different die, different package, then you consider it's a new product and you ramp that right away.

For the analog, it's very difficult, because analog, you don't do that. So you design the device and the die and then you put in the packaging you wanted and get it out as a center product. Than the ramp is very slow.

And so for us, tracking new product revenue or new product ramps is very difficult, especially discrete. Every discrete -- most of the discrete products are easier to be considered as a new product. What you say is different.

Okay. On the OpEx line, Rick you mentioned a $900,000 increase due to retention. If you look at the core OpEx, ex those retention bonuses, do you see that flat in dollars for 2014? And on the retention side do you think this rolls off in 3Q this year, or annual, or how does that OpEx land?

Let me give you the basis, then he can give you the number. The basis is due to BCD. BCD retention start with much last year, and 18 months, so it is somewhere around 3Q this year.

But some of the people, especially high-level people the retention bonus is for two years. Then you will be until 1Q next year. Then you can explain this.

Go ahead and tell me -- ask the number question again?

If you ex the retention bonus, the core OpEx, do you think that stays flat in dollars for 2014?

No, I don't think so. Because what's going to happen is that the revenue is going to increase. We're going to try and grow faster than the market.

So yes is flat in the first quarter, but as the revenue goes up, we will spend more on R&D. We'll probably spend more on freight and SG&A. So, it won't stay flat in dollar terms.

If you look at our business -- this is the model, always. When revenue grow, our R&D will grow as a percent, similar to the revenue growth.

Our SG&A we will only to allow grow half of the revenue. So that's our rule of thumb, and we're going to insist on that, but the key thing is we want to get our R&D and SG&A as a percent of revenue go down to 20%. So it will quickly get into 20% but then we will go to our basic model.

Got it, thanks. One last question, here, and I'll get off the line.

When you look at the tax rate, it obviously jumped up. What are the -- versus 2013, it came up a little bit, obviously you had guided to that, but what are the puts and takes to it?

What makes it go up, and what will bring it down, as you look at this year and next year? Thanks.

We're not saying it's going to go down. It's going to go up, probably. It's just basically the split of profit in the various corporate entities.

And so, and you say, okay, well the Taiwanese and the Hong Kong people have lower tax rates, but there's also income over there called sub-part F income, which is taxed at the US rate. So all of that comes into play in the effective tax rate for the year.

So if you take out all the adjustments we had, the tax audit adjustment in the first quarter, and goodwill, and the reason you have to goodwill out is that goodwill is a non-tax-deductible expense in the US. So I think our tax rate was, for the year was 20.6%. So it was right where we said it was going to be, in the 18% to 24% for the year and next year we said it's going to go 19% to 25% so it's only up 1%.

Okay, great. Thanks.

Our next question is from Liwen Zhang with Blaylock Robert Van.

Congratulations on your overall quarterly results. I have a little bit concern about your computing business.

Given large Japanese players exiting in the market, and some of your peers, and they're showing share gains, and your revenue seems down 10% quarter over quarter. Would you please explain to me some of the dynamics within your computing businesses?

What is 10%?

She is measuring our revenue. We think we are tracking relative to everyone else.

We have some strategies long-term for our computing segment, that will completely change our mix within that segment. So we feel we are on track to improve our position in that marketplace, but we don't feel that we are suffering more than the marketplace over time.

I think we know the market pretty well. We're not as PC-based as we are notebook-based but we manage the units, and our share in that units. It may be possible we lost some share on the really low-end products in the second half of the year by choice, rather than by this, but we think we are tracking in our major areas.

Thank you. That's all I had.

At this time I'm showing no additional questions in the phone queue. I'd like to turn the program back over to Dr. Lu for any additional or closing remarks.

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

Thank you, sir. Thank you ladies and gentlemen again, this does conclude today's call. Thank you for your participation and have a wonderful day. Attendees you may now all disconnect.