Diodes Inc (DIOD) 2014 Q2 法說會逐字稿

Presentation

Good afternoon, and welcome to Diodes, Incorporated Second Quarter 2014 Financial Results Conference Call. (Operator instructions) As a reminder, this conference call is being recorded today, Thursday, August 7, 2014. 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' Second Quarter 2014 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, 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 represents management's estimates as of today, August 7, 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 reconciliations of GAAP to non-GAAP items, which provide additional details.

Also, throughout the Company's press release and management statements during this conference call, we will 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. And now, I'll turn the call over to Diodes' President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.

Thank you, Leanne. Welcome everyone, and thank you for joining us today. Diodes has an exceptional second quarter in which the results, were at the upper end of our guidance range. Revenue grew over 6% sequentially, and the gross profit reach a quarterly record, [defending] our continued improvement of product mix and the increased capacity utilization.

In fact, our achievement of 31.5% gross margin was the highest level since the second quarter of 2011.

During the quarter, North America and Europe were stronger than expected, which contributed to further gain in industrial end market. These regions has a solid product mix distribution, due to the end markets and the customers we serve in these geographies.

Overall, Diodes continues to execute on our profitable growth strategy across our business. Our strong second quarter results demonstrate the leverage in our operating model, and we expect to generate and increase the profit and cash as revenue continues to grow.

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

Thanks, Dr. Lu, and good afternoon, everyone. Revenue for the second quarter of 2014 was $223.2 million, an increase of 6.3% from the $210 million in the first quarter of 2014 and an increase of 4.1% from the $214.4 million in the second quarter of 2013.

Revenue increased due to sequential market share gains across the Company's end markets, in particular for products sold in North America, and Europe. Gross profit for the second quarter of 2014 was a record $70.3 million or 31.5% of revenue compared to the first quarter of 2014, of $61.6 million or 29.3% of revenue, and second quarter of 2013 of $61.3 million or 28.6% of revenue.

The increase in gross profit margin was primarily due to continued improvement of product mix and increased capacity utilization. GAAP operating expenses for the second quarter were $47.2 million, or 21.1% of revenue, compared to $47.2 million or 22.5% of revenue in the first quarter of 2014, and $51.1 million, or 23.8% of revenue, in the second quarter of 2013.

Non-GAAP operating expenses excluding non-cash acquisition-related intangible asset amortization costs and the gain on the sale of assets were $46.1 million, or 20.6% of revenue, in the second quarter of 2014. Looking specifically at selling, general and administrative expenses, SG&A was approximately $33.3 million for the second quarter, or 14.9% of revenue, compared to $32.3 million or 15.4% of revenue in the first quarter, and $35.1 million or 16.4% of revenue in the second quarter of 2013.

Investment in research and development for the second quarter was approximately $12.8 million or 5.7% of revenue, compared to $12.9 million, or 6.1% of revenue last quarter, and $12.1 or 5.7% of revenue in the second quarter of 2013.

SG&A plus R&D combined equal 20.6% of revenue, which was down 90 basis points sequentially and 140 basis points from 22% in the second quarter of 2013.

Total other income amounted to $360,000 for the second quarter. We had approximately $1.8 million of gain on securities, approximately $440,000 of interest income, and approximately $1.2 million of interest expense, as well as a $760,000 currency loss.

Income before taxes and non-controlling interest in the second quarter of 2014 amounted to $23.5 million compared to the income of $13 million in the first quarter of 2014 and $10.5 million in the second quarter of 2013.

Turning to income taxes, our effective income tax rate for the second quarter was approximately 24%, which was at the high end of our guidance of between 19% and 25%, due to the higher profits from US and Europe.

GAAP net income for the second quarter of 2014 was $17.4 million, or $0.36 per diluted share, compared to the first quarter of 2014 GAAP net income of $10.2, or $0.21 per diluted share and second quarter of 2013 GAAP net income of $8.6 million or $0.18 per diluted share.

The share count used to compute GAAP diluted EPS for the second quarter of 2014 was 48.4 million shares.

Second quarter non-GAAP adjusted net income was $18.2 million, or $0.38 per diluted share, which excluded net of tax $1.6 million of non-cash, acquisition-related intangible asset amortization costs and a $1 million gain on the sale of assets.

This compares to non-GAAP adjusted net income of $12.4 million or $0.26 per diluted share in the first quarter of 2014 and $15.5 million or $0.33 per diluted share in the second quarter of 2013.

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 the second quarter of 2014 GAAP and non-GAAP adjusted net income was approximately $2.2 million 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 second quarter.

Cash flow generated from operations from the second quarter of 2014 was $33.9 million. Free cash flow for the second quarter of 2014 was $22.1 million which included $11.9 million of capital expenditures, and net cash flow for the second quarter was a positive $23.8 million, which includes the paydown of approximately $2.7 million of our long-term debt.

Turning to the balance sheet, at the end of the second quarter we had approximately $235 million cash and cash equivalents, and $18 million in short-term cash investments. Working capital was approximately $520 million.

At the end of the second quarter, inventory increased by $6 million to approximately $183 million, compared to approximately $177 million at the end of the first quarter of 2014.

Inventory in the quarter reflects a $4 million increase in finished goods, a $3 million increase in work in process which were partially offset by a $1 million decrease in raw materials. Inventory days were 107 in the second quarter, compared to 108 days last quarter.

At the end of the second quarter, accounts receivable was approximately $188 million, up about $12 million from the first quarter. AR days were 74 compared to 79 last quarter. Our long-term debt totaled approximately $163 million, down $2.7 million from the first quarter.

Second quarter capital expenditures were $13.3 million, or 6% of revenue, which was within our reduced CapEx spending target range of 5% to 9% of revenue. Depreciation and amortization expense for the second quarter was $19.2 million.

Now, turning to our outlook, for the third quarter of 2014 we expect revenue to increase to a range of $228 million and $238 million, or up 2.1% to 6.6% sequentially. We expect gross margin to be 31.8% plus or minus 2%. Operating expenses are expected to be approximately 21% of revenue, plus or minus 1%. We expect our income tax rate to be 22% plus or minus 3%, and shares used to calculate diluted EPS for the third quarter are anticipated to be approximately 48.8 million.

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

Thank you Rick, and good afternoon. As Dr. Lu mentioned, our 6% sequential revenue growth was driven by continued sales expansion in North America and Europe as well as OEM sales globally.

OEM sales were up 11% while distributor POS increased 2%. Distributor POP was up 5% and inventory increased 5.6% as distributors built inventory in preparation for third quarter ramps. Global channel inventory is healthy and in line and remains under 3 months.

In terms of our end markets, consumer represented 33% of revenue, communications 22%, industrial 21%, computing 20%, and automotive was 4%. Our strongest market in the quarter was industrial, primarily due to the strength in North America and Europe as well as communication as a result of continued gains in smartphones and smartphone chargers. We also had a strong quarter in automotive and a better-than-expected result in computing.

Turning to global sales, Asia represented 79% of revenue, Europe 11%, and North America 10%. Design wins were solid across all regions, markets and product lines, and we continued to have a strong pipeline of new products. It was a record quarter for our analog line driven by AC-DC, CMOS LDO, LED lighting, and load switches, and we also had a strong quarter in discretes for our bipolar transistors and MOSFET products.

During the quarter, we released 88 new discrete products across 20 product lines. Product launches during the quarter were aimed at applications such as power management, where Diodes' devices help to improve energy and power efficiency in chargers, adapters, and power supplies for smartphones, tablets, LED TVs and set-top boxes. In particular, several products were launched aimed at meeting the needs of wireless charging and quick-charge devices. Diodes also continued to build upon its position in the automotive market with product launches, design wins and sales momentum for MOSFETs, rectifiers, and TVS products.

Starting with the power supply and charging space, Diodes successfully demonstrated at Computex in early June its first active rectification controller for USB power delivery and AC adapter solutions. The USB PD standard is important for portable device manufacturers as it features faster charging speeds in a small, space-saving, form factor. Diodes collaborated with Renesas on this exciting development to provide a total solution.

Diodes' secondary side controller is able to provide exceptional power efficiency both under light load and heavy load charging conditions. In addition to power supply, wireless charging is an important emerging trend. Diodes' new lateral DMOS technology is well-suited for this space with its ultra-low gate charge and lower [on resistance] than competing solutions.

Also in the second quarter, Diodes launched two ultra-high-density LDMOS devices in tiny chip-scale packages offering exceptional power efficiency to portable device manufacturers.

Lastly, Diodes launched six additional devices from its recently-introduced, proprietary and ultra-high-efficiency TRENCH SBR rectifier technology aimed at quick-charging applications.

Next, looking at the automotive market, Diodes continues to execute our strategy of expanding our presence and footprint in the automotive space. In Q2, we secured a design-in for a tail light system with a major manufacturer for the 2015 model year. This win was for our miniature package triple-isolated high voltage switching diode product.

We also introduced a family of automotive qualified rectifier devices in a PowerDi package series for applications in lighting and reverse battery protection.

Turning to analog, we had a strong quarter with 95 new analog product releases across 11 product lines. In support of the consumer products market, we released a new 5 amp DC-DC converter with an adaptive constant on-time control that is targeting at the TV and monitor market. We also introduced a low-voltage DC-DC converter for portable products such as GPS receivers, that maximizes battery life.

Also in the consumer products space, we expanded our audio product line with the release of a filterless Class-D audio amplifier for portable wireless speakers.

In addition, we increased our packaging options for our single and dual-gate logic products, offering the industry's widest range of packages for logic devices and portable applications where board space is at a premium. Key design wins in the consumer space include a Hall sensor, an audio amplifier adoption for the rapidly-emerging wearables space, including a win on a very high-profile consumer device. We also saw major wins for our audio products in TVs, monitors, and IP camera applications.

Other large-scale consumer product wins include LDOs, load switches, and logic into TVs, DVRs and set-top boxes.

Key wins in the portable application include an AC-DC converter for mobile charging of a portable projector, as well as a wi-fi dongle for streaming video.

In the communications market, we released a family of low-noise, low-dropout regulators that are specifically designed for high density, noise-sensitive smartphone applications. Design win activity remains strong in the cell phone charger market, with seven major wins for AC-DC converters and voltage reference design.

We also saw adoption of our filterless Class-D audio amplifiers into a key cell phone platform targeting the China market.

Turning to the industrial space, we released a high-performance motor driver that combines PWM and temperature controls as well as a motor pre-driver targeting fans and blowers. We also introduced a family of industrial op amps and comparators that offer very low power consumption and operate across a wide voltage range. These devices are well-suited for process automation and motion-control systems.

Key industrial design moves during the quarter included the adoption of our Hall sensors into several e-meter platforms, as well as a motor control win in the white goods space.

In LED lighting, we have seen strong customer interest for our new TRIAC dimmable LED drivers which use pulse-frequency modulation technology to regulate output current and achieve deep dimming as low as 1%. We also released new constant-current LED drivers targeted at the automotive lighting application.

Significant new lighting design wins during the quarter included more than 10 LED bulb replacement sockets, including both dimmable PAR and MR16 lamps.

In summary, Diodes has once again had a strong quarter in terms of product introductions, as well as design win momentum across portable, consumer, computing, automotive, and industrial applications. We remain focused on expanding our product offerings and customer content across end markets to ensure continued growth in the coming quarters. With that, I'll open the floor to questions. Operator?

(Operator instructions) Our first question comes from the line of Steve Smigie from Raymond James. Your question, please?

Great, thanks a lot. Congratulations on a pretty nice quarter, Dr. Lu.

Yes, thank you, Steve.

Sure, no problem. I was hoping you could comment a little bit on industrial strength, and how sustainable you see that?

I think that Mark answer this one.

Yes, I think the North American market and European marketplace, which drives a good percentage of our industrial, has been -- continues to be relatively strong going into the third quarter. So, I think it's sustainable, certainly into the third quarter. Percentages might tighten a little bit as things ramp in Asia a little bit, but I think the business base looks okay.

Okay great, and also you guys had some pretty nice gross margin improvement. I was hoping we could get more of an update on where you are on the BCD integration the fab utilizations?

Well, BCD integration went very smoothly so far, okay, but they do as expected. You remember I kept mention about when they start to ramp up their Fab 2, there're going to be -- cost some, the reduction or drag down on our GP percent. Okay, because when you put in a new fab, their cost typically is higher than a mature fab like their Fab 1 and our K Fab or O Fab. But you know, they're going to continue to ramp, and when we have more and more new product design in and ramp up that new product which -- by the way, most our new products now from analog point of view, is all used in BCD Fab 2 for the new product. And, if our new products start to ramp, then their load-in will start to continue, start to get improved, and then of course our Fab 2 will be, go down.

But in general, integration is good.

Okay great, thank you. I was just hoping you could comment just a little bit on a couple of little nits. As we look into the September quarter, any sense of what we might be thinking about interest expense, and what we might be thinking about in terms of options expense?

Yes, so interest expense is going to be approximately what it was in this quarter. We had $1.2 million of interest expense, and we had about $400,000, $450,000 worth of interest income. Option expense has been about $2 million, $2.2 million a quarter. We expect that to be about the same next quarter.

Okay great, thanks, and just the last question is you paid down some debt in the quarter. Just curious about what your thoughts are about cash use today. Obviously paying down the debt's good, but we're also seeing a lot of consolidation in the industry. Any thoughts of cash, or more debt paydown, or holding it back for acquisitions? Thanks.

Okay. We, our plan is, every time we're moving money back, then we'll try to pay off. The goal, the goal is try to pay off $15 million a quarter, and then that will reduce our interest cost. So, that's my plan, but every time we make enough cash and we don't need it for CapEx, then we'd like to bring back to return to pay off some loans.

Great. Thank you very much, congratulations.

Thank you.

Thank you. Our next question comes from the line of Harsh Kumar from Stephens. Your question, please?

Good afternoon, Dr. Lu. I had a couple of questions. Let me start off by asking you about the September guidance. That's typically the quarter where one would think there'd be a lot of build for the Christmas time frame, and I would have expected somewhat of a better growth. I'm curious if there's any one-time events that are going on, Dr. Lu, that you guys are seeing in your business that are affecting maybe growth to some degree?

Well, I don't know this Christmas drive already exist, for currently now, you know. In the last several years, before that typically yes, third quarter is the Christmas drive. But I don't know that Christmas is already exist for the last couple years. You can see you know, last year, and even before last year, probably since 2011, we don't see the Christmas ramp-up any more. It's more on the new, like new phone, new tablet, new stuff, when they announce, they are driving the revenue. Different customer, they'd announce different new product that's driving the uptick of the business.

So, I no longer see a major Christmas season any more. That's why our [cyclical] revenue is out of -- is no longer really that much significant there anymore.

Okay, that's helpful, Dr. Lu. And I'm curious if I can ask maybe Mark and Dr. Lu to look out past the September quarter. Historically, you guys have been slightly down, just slightly down a little bit in the December quarter. Should we still expect that to be the case, or will it be different? Or are you seeing anything different this time?

Okay, number one, we really don't give the guidance in the fourth quarter. One quarter away, but I was thinking right now, we see slightly down but it's not going to be a big down like last year. Last year, you can see the fourth quarter went down quite a bit, but so far, the feeling, the market -- I just came back from Taiwan, from Asia Monday this week. Just two or three days ago. And the general feeling over there, don't see a major drop in fourth quarter. But we don't give any guidance, you know, yet.

That's helpful, Dr. Lu. And can I ask you, it's the last question and I'll get back in line, you talked about Fab 2 in the previous answer to the previous caller, that the gross margin is coming down as you're ramping Fab 2. In terms of when would you expect that effect to go away, and Fab 2 maybe not have a negative impact? How long do you think that might take?

Number one, when I say the third quarter might be some effect to compare with second quarter, but that is just really due to the loading up and down. And now if you are asking for long-term when Fab 2 will not be a drag for our GPM percent, I will expect probably one more year to two more years. And it's just because the new product ramp, it takes time. Second, to get to the level of very cost-effectively, it take a while.

First, today, the only equipment capacity but then we need to expand some of the equipment to make it fully utilize the space. And when you fully-utilize the clean room, the output is high enough compared with S Fab 1, that BCD Fab 1. Then you can be very cost-effective.

Today, other than the loading at the same time, the capacity is not as big as the Fab 1, and so the cost will be higher.

I got you. Very helpful, Dr. Lu. I'll get back in line. Thank you.

Okay, thank you, Harsh.

Thank you. Our next question comes from the line of Gary Mobley from Benchmark, your question please?

Hi guys, thanks for taking my question. First, I want to extend my congratulations on a solid quarter, but I wanted to nitpick a little bit on the gross margin line. If I'm not mistaken, didn't you have a currency headwind in the quarter? And how much did that impact the June quarter gross margin?

Oh, I don't know about the gross margin. We had a $760,000 currency loss, but that was in other income and expense. We think just from a margin standpoint that we have a lot of local costs, and the Pound versus the dollar, we pay salaries, we have expenses. So, we have a natural hedge against those kinds of things impacting us significantly in the GPM line.

Okay, and focusing a bit on the third quarter gross margin guide, the midpoint of that guide is up only about 30 basis points sequentially on an expected 4.5% revenue increase on a sequential basis. Given your depreciation, what, 8%, 9% of revenue, I would've expected just more of a gross margin expansion. Could you talk a little bit about some of the factors that are sort of built into your gross margin guidance with respect to mix and various other factors?

Well, like I just mentioned, probably is because in S Fab 2, you know, BCD Fab 2, because we tried to -- we had too much wafer inventory because we are looking at in second quarter, we are looking at second quarter growth. Third quarter growth. We built in, in the loading S Fab 2, and you get too much inventory.

And when you go to the third quarter, you started looking at fourth quarter, and 1Q next year. Then we tried to adjust our wafer fab loading to match with the revenue assumption on 4Q and 1Q next year.

And therefore, we have some headwind, we intentionally under-load the Fab 2, and that give us some GPM percent problem.

Okay. Mark, I appreciate the comments about inventory. I think you mentioned that inventory held by distributors is still under 3 months, but do you know specifically how much your inventory at your distributors increased on a sequential basis during the June quarter?

Yes, I think I said 5.6%.

Okay, 5.6%.

It's pretty natural for this period in the quarter.

Because it's tied to the revenue growth.

Right, so we advanced, that advances a little bit. But again, our inventory is as clean as it's ever been.

Okay, no concerns that the days of chip inventory held by end customers and distributors is inching up, and then maybe once we hit a seasonally soft patch of the year, maybe in the fourth quarter, you might see some ratcheting down of days of inventory held?

I mean, if distributors, if the market takes a sudden shift, distributor enthusiasm shifts. And you're always subject to that, but the products that we, that they're buying and I think we feel really good about the way they're positioning their inventory and the way we're working with them to get it in there. So, it's all supportive of POS and so forth. So, I think we feel pretty good unless there's obviously a sudden change in attitude.

Okay, all right, thank you guys.

Thank you. Our next question comes from the line of Shawn Harrison from Longbow Research. Your question please?

Hi. I guess a bit in that vein, are there any end markets as you look in either the third quarter or the back half of the year where maybe demand trends are a little bit more uneven or a little bit dodgy?

There's a lot of data out there, there's a lot of overly -- I really don't think I can make any comment on that. I mean, we watched the continual flow of computer, that's kind of relatively [inconsistent], we're hoping for a reasonably solid communications for the balance of the year. Our consumer's relatively strong after a softer second quarter. North America and Europe appear to be running strong, at least through the third quarter, so industrial should be good. Automotive looks pretty strong, although it's still a small portion of our overall sales.

Okay, and then I can't remember if you touched on this, but pricing dynamics this past couple quarters have been pretty benign. Has there been any change in that outlook?

I think if anything, things are pretty stable.

Okay.

At this point.

And then finally, just in case I missed it Rick, what's the CapEx forecast for the third quarter on a dollar basis, and maybe the rest of the year?

Well, we're shooting for 5% to 9% of revenue, so for the year it'd be 5% to 9% of whatever you have for the forecast for the revenue.

Okay, what would push it up toward the upper end of the range for the year?

No, I don't think we push -- if you look at it, 7% is the midpoint, and if you look at this second quarter --

This quarter was 6%.

6%.

So, if we're going to hit the midpoint of 7% then we might spend a little bit more in the third quarter or fourth quarter to move that up to the midpoint, but it's just equipment availability -- when the manufacturing guys need the equipment, those kinds of things. And CAT, CapEx too. Chengdu [assembly test].

We already start to kick off the CAT, the Chengdu assembly, and are currently is a building, the power -- okay, the government going to bring the power to the [red point] and then we will spend the money to bring the power inside. And then we will start to put some MERFEI, get ready to bring the CAT up to running. So, we spend some money on the CAT.

Okay, very helpful. Thanks so much and congratulations on the results.

Thank you.

Our next question comes from the line of Suji De Silva from Topeka, your question please?

Hi guys, nice job on the quarter. I don't know if you've provided this in the past, but can you provide the third quarter guidance color around end markets?

We don't, we can't do that.

We don't. We just give the guidance on the revenue plan and GP plan, gross profit plan.

Okay. I wasn't sure if we did it in the past, I can't remember. And then, the smartphone and the tablet program wins, and the one you already have, can you talk about whether your mix of exposure there is the premium market versus the emerging sort of China mid-range market and whether there's a gross margin differential if one does well versus the other?

I think we'd probably be more on the premium side with sites of some strong growth in the mid-level, as we go forward. And I don't want to comment on the margins of those differences.

Okay. And then lastly, you mentioned somewhat I think were new opportunities end-market-wise, with the wireless charging and wearables. Can you just talk about whether there's a sizeable opportunity and if those kind of come in at higher margins, since they're newer opportunities? Thanks.

I think that most of those are premium products, so obviously they would lend themselves towards our -- towards higher margins. And I would say it's a growing market, whether it's sizeable, but it's important.

Typically, our new product is target at higher margin, and this charger obviously is a new product.

Great. Thanks, guys.

Thank you. Our next question comes from the line of Christopher Longiaru from Sidoti & Company. Your question please?

Hey guys, congratulations on the quarter.

Okay, thank you, Chris.

So my first question, kind of piggybacking off Suji's question. Even though you can't give kind of specific idea of where your guidance is coming from, can you comment on some areas where there's relative strength that you're seeing, that gave you the confidence in your guide for September?

Yes, I think we see improvements in all of our segments. I thought we had a relatively soft second quarter in the consumer market. I think we'll see some improvements there. I think we're progressing forward in the communications market. We have stable or -- I mean, as a percentage maybe not as stable on the industrial side, because we have some faster-growing markets probably in this quarter in Asia, and I thought automotive was relatively strong. So, I think really across the board, the only one that I don't really have a clear picture of exactly of whether it's going to be flat or how up it's going to be, is the computer market.

Okay, and just to clarify, so computer was -- computing was pretty stable in 2Q?

Right.

Yes, okay. And then, just in terms of comms, is the strength you're seeing in comms off the weakness you kind of saw in 2Q, is that kind of relatively normal strength that you'd see for 3Q? Is it abnormal? Can you just comment on how it compares to last year?

We had a reasonably good second quarter in comm, so we were actually up. And we see continued improvements in Q3, although not everybody's running on full steam. So, it's a little bit more muted than we would have liked it to be, but it still looks pretty solid.

Okay, and then just lastly, this one's for Rick. You talked about a pretty slight increase in your OpEx actually being down as to percentage of sales. Can you just kind of break that -- is that kind of an equal move up or is more of it in R&D? Can you just give us an idea of where the numbers lie between the two?

Yes. So, if you take the GAAP number, it was 21.1% of revenue in the second quarter, and we said 21% in the third quarter. Now, you have to remember that the second quarter included a gain on the sale of assets, and so you would take out of that 21.1% a gain of 1.2%, and then so it really looks like from a GAAP perspective it's going from 21.5% down to 21%.

Okay.

Did that answer your question?

Yes, it does. And just lastly, in terms of the Fab 2 progression, you said -- I think Dr. Lu said it was going to take somewhere between a year and two years before it's not a drag on gross margins. Is that kind of a step-up function as you go forward, or do you see that being kind of relative improvements over the course of that time period, and can you give us a little bit of an idea how that progresses?

Well, I think as I mentioned, we now most our analog product is design use in the process provided by Fab 2. We move everything we want to move from Fab 1 to Fab 2, that's already completed and now what we do is all the new products, or majority of new products, for analog which can be loaded in Fab 2 will be used in Fab 2, [kept to] technology or process technology. But the new product take a while to ramp it up. And then, after they ramp it up and then using in all the equipment capacity, then we're adding some more capacity to make sure the capacity can fully utilize the clean room space, and make sure that output will be big enough or the capacity big enough to bring the costs down.

So, when you asking, when you're looking at when that clean room can be fully utilized, and loading can be fully utilized, it take a while. And that's why I mention probably you know, up to 2016 because it takes time to ramp it up.

I think the specific answer to your question is that it's not going to be a step function. It's going to be an improvement over time, as we ramp up and more wafers get loaded.

Great guys, thanks, it's helpful. I'll jump out.

Yeah, and the question, last year I think we said BCD, I think in the last 2013 we said BCD affect our overall margin 1.5%.

Right, that's right.

So you can see, you can assume okay, improve some but Diodes improved, too. So, that overall effect, we don't know yet because we are not in the whole year. But 2013 we do announce BCD give us about 1.5% GPM percent effect.

Got it, that's very helpful. Thank you, guys.

Thank you. Our next question comes from the line of Tristan Gerra, from Baird. Your question, please?

Hi, good afternoon. Hopefully you can hear me okay. Could you say whether there was any slight constraint, notably (technical difficulty) --

You cut out.

- utilization rates where in Q2 and what do you expect in Q3?

So you asked about supply constraints in Q2 and the impact of that on Q3?

Well, to know whether there was any supply constraints in Q2 and also your utilization rates in both Q2 and Q3?

Yes, so basically there were no significant supply constraints in the second quarter, and Dr. Lu already talked about us dialing back the Fab 2, S Fab 2 capacity utilization because of the inventory situation on S Fab 2 wafers in the third quarter.

Okay, and what about the utilization rates total for the company?

For the company?

Yeah, the utilization rate as a percentage. Is that a number that you're willing to provide?

No, not for the Company, no.

Okay. And then, also in terms of your Q3 outlook, are you embedding PC trends relatively in line with seasonal? Do you expect the above-expectation PC trends in Q2 to continue into the second half?

We don't really trend it. We really view specific customers, so you know, we might buck the trend a little bit based on the customer base that we service, but we expected slight improvements in Q3 off of better-than-expected Q2.

Okay, that helps a lot. Thank you very much.

Thank you. Our next question comes from the line of Vernon Essi from Needham & Company. Your question, please?

Thank you very much. I was wondering, Dr. Lu, if you could clarify -- and I may have misheard something here earlier in the call -- you were responding to a question, you were talking about demand expectations in the fourth quarter over in China dropping? I was wondering if you could just expand upon that, or maybe I misheard that?

No, I didn't say China going to be, I just said typically 4Q for semiconductor is weaker than 3Q quarter. I didn't particularly mention China. What I really relative to is in the past, several years ago, you have a Christmas build in 3Q, and I said no longer for me to see a big upside for the Christmas build. And then, if that happen, then typically 3Q very up and then 4Q down quite a bit because Christmas will be over.

But right now, we don't really tie to that much for the Christmas build. We're more tied to is our customer announce their new gauge or new product, then all build, they ramp it up, we ramp it up, they ramp down, we ramp down. But I didn't say anything about China fourth quarter would be soft.

Okay, thanks for clarifying that. And then the second question, Mark, this is kind of a long one so bear with me. But you mentioned a lot of products in the LED lighting area, and I admit I tend to ignore these products that most analog companies discuss. It just seems like a tough market, it's hard to get critical mass, it's very fragmented. So, I guess two questions along that line First off, is this market large enough to move the needle for you? I mean, is this something that could approach 3% to 5% of your revenue maybe in three to five years? And also, is there a dynamic out there where the bulb manufacturers are moving towards companies of your profile, more general purpose, analog and discretes, as opposed to guys that are producing more advanced solutions for the market due to cost reasons?

I would say that in the last statement, I would say yes. I mean, I think that the bulb people and the lighting people are looking for cost-effective solutions, so some of the more traditional suppliers are -- or higher-end analog suppliers -- it'll become a more difficult market for. Regarding the 3% to 5%, at the growth rate we planned probably not, but it's still an important market and it's an important piece, and it really connects very, very well with our whole AC-DC strategy on charger and so forth.

So, I think we segment it, but it's really part of an overall product line and an overall product mix that's important from our BCD acquisition. So, we consider it important. We think it drives reasonable margins, and we think it's an important part of building our whole analog pie.

Okay, thank you.

And then we move, in addition of the general market or general lighting, actually we believe you know, in the smart lighting is an area you can get a better profitability for the smart lighting. So, we -- even currently we don't have that much revenue coming from smart lighting, but smart lighting is one of the areas I'd like to focus on. Which is not necessarily going to be a commodity type of product.

Okay, thank you.

Thank you. Our next question comes from the line of Liwen Zhang from Blaylock, your question please?

Thank you for taking my questions, and congratulations, and only one from me. So, you guys narrowed the guidance in early June, and now the results is still also a little bit lower than the high end of guidance. So, what prevented Diodes from reaching the high end of the guidance in terms of revenue? Thank you.

In terms of revenue, in terms of GP?

Revenue.

Okay. We update guidance you are talking about, is we raise is the GP, not the revenue. We hold in the revenue the same for our update guidance.

Yes, I don't have it with me right here.

Yes, so do we -- what's our guidance? Do we, Rick, do we do much better than our revenue guidance?

We're right at the midpoint.

I know we do better on our GP guidance.

Right.

And then we raise the guidance, and then we still hitting the high end. Okay.

Yes, so why don't you let us look that up and we'll give you a better answer?

Okay, thank you.

Thank you. Our next question is a follow-up question from the line of Harsh Kumar from Stephens. Your question please?

Dr. Lu, I was curious if Mark or Dr. Lu can talk about your relative position in the China handset market. It seems like the local Chinese handset vendors are growing really fast, and I'm curious how you would characterize your positioning there?

I would say we're growing our position there. I think in the past we've focused on different customers, but I think that we have a position and we have a growing position. Although the content isn't quite as significant in the China handset markets.

That's fair, thank you so much. Appreciate it.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Dr. Lu for any further remarks.

Okay well, if no more question, thank you for your participation today. Operator, you may now disconnect.

Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.