Diodes Incorporated
Q2 2018 Earnings Call Transcript

Published: 6 Aug 2019

[Operator:]

Good afternoon and welcome to Diodes Incorporated Second Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded today, Monday, August 5, 2019.I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead.

[Leanne Sievers:]

Good afternoon and welcome to Diodes' second quarter 2019 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today are Diodes' President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Brett Whitmire; Vice President of Worldwide Sales and Marketing, Emily Yang; and Director of Investor Relations, Laura Mehrl.Before I turn the call over to Dr. Lu, I'd like to remind our listeners that the results announced today are preliminary, as they are subject to the company finalizing it's closing procedures and customary quarterly review by the company's independent registered public accounting firm. As such, these results are unaudited and subject to revision until the company files it's Form 10-Q for the it's second quarter 2019. In addition, 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 more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission, including Forms 10-K and 10-Q.In addition, any projections as to the company's future performance, represent management's estimates as of today, August 5, 2019. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change, except to the extent required by applicable law. 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 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 90 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.

[Keh-Shew Lu:]

Thank you, Leanne. Welcome, everyone, and thank you for joining us today. Diodes once again set new records across multi-functional metrics in the second quarter including revenue, gross profit, EBITDA and net income. Gross margin also further expanded by 260 basis points year-over-year and 70 basis point sequentially. As a result of record revenue in the automotive end-markets, as well as from our Pericom IC products. Additionally, we continued to successfully try to increase profitability on incremental revenue growth. With the first half 2019 revenue increasing 8% over the same period last year. And non-GAAP net income increasing more than 40% over the same period.Of note, our both market performance was achieved in the current global trade environment as a direct result of our cash resembling and expanded customer content. Over the past year we have been strategically focused on demand creation and [indiscernible] a total solution approach that which had broadened product portfolio contributing to our consistent share gain. IVDs gross volume strategies will continue to substantile [ph] future growth and outperforms our sales market while also driving increasing profitability and cash flow. Additionally, our exceptional financial performance enabled us to aggressively reduce our long-term tax by $44 million during the quarter. We now have a $70 million net positive position of cash and short term investments to our total debts, which provide us increased flexibility and that opportunity to consider strategic acquisitions.With that, let me now turn the call over to Brett to discuss our second quarter financial result and our third quarter 2019 guidance in more detail.

[Brett Whitmire:]

Thanks, Dr. Lu. And good afternoon, everyone. As part of my financial review today, I will focus my comments on the sequential change for each of the line items and would refer you to our press release for a more detailed review of our results as well as the year-over-year comparisons. Revenues for second quarter 2019 was a record $322 million, a 6.5% increase from $302.3 million in the first quarter 2019 due to continued strong performance in Europe and North America, as well as the automotive and industrial in markets. Those profits for second quarter was a record $122 million or 37.9% of revenue, compared to $112.4 million or 37.2% of revenue in first quarter 2019. The 70 basis points sequential increase was primarily due to record high revenue contribution from the automotive industrial markets, as well as pair con products.GAAP operating expenses for the second quarter 2019 we're $73.5 million or 22.8% of revenue and $69 million or 21.4% of revenue on a non-GAAP basis, which excludes $4.5 million of amortization of acquisition-related intangible asset expenses. This compares with GAAP operating expenses in the first quarter 2019 of $70.3 million or 23.3% of revenue and $65.8 million or 21.8% of revenue on a non-GAAP basis. Total other expense amounted to approximately $639,000 for the quarter, including $2 million of interest expense and $496,000 for foreign currency losses, partially offset by $1.2 million of other income and $633,000 of interest income. Income before taxes and non-controlling interest in the second quarter 2019 amounted to $47.9 million, compared to $42 million in the first quarter 2019.Turning to income taxes, our effective income tax rates for the second quarter was approximately 23.3%. GAAP net income for the second quarter 2019 was a record $36.3 million or $0.70 per diluted share, compared to $31.7 million or $0.62 per diluted share last quarter. The share count used to compute GAAP diluted EPS for the second quarter 2019 was 51.6 million shares. Second quarter 2019 non-GAAP adjusted net income was a record $40 million or $0.77 per diluted share, which excluded net of tax $3.7 million of non-cash acquisition-related intangible asset and amortization costs. This compares to non-GAAP adjusted net income of $35.4 million or $0.69 per diluted share in the first quarter 2019.EBITDA for the second quarter 2019 was a record $77.1 million or 23.9% of revenue, compared with $69.9 million or 23.1% of revenue in the first quarter 2019. We've included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net come and GAAP net income to EBITDA which provides additional details. Cash flow generated from operations was $40.6 million for the second quarter 2019. Free cash flow was $8.5 million, which included $32.1 million for capital expenditures. And net cash flow for the second quarter was negative $65.5 million, which includes the pay down of $44.1 million of long term debt, as well as cash used to acquire Texas Instruments Greenock, Scotland Fab in early April and the final payment for building for our subsidiary.Turning to the balance sheet. At the end of second quarter cash and cash equivalents was short term investments totaled approximately $242 million. Working capital was $481.2 million and long term debt, including the current portion was $171.9 million. In terms of inventory, at the end of second quarter, total inventory days decreased to 100 in the quarter, compared to 102 last quarter. Total inventory dollars amounted to approximately $223 million, which reflects a $3.1 million increase in work in process, a $1.8 million increase in raw materials and a $1.5 million increase in finished goods. After 4 consecutive quarters, the finished good decreases. Finished goods inventory days was 26 down from 27 in the first quarter of 2019.Capital expenditures on a cash basis for the second quarter 2019 were $32.1 million, which includes an $18.1 million final payment for a building for our subsidiary. Now turning to our outlook. Building on our strong first half revenue growth of 8% over first half 2018 during a time in which our third market was down more than 6% further highlights our ability to deliver growth in a down market. For the third quarter, we expect revenue to be approximately $324 million, plus or minus 2%, which at the midpoint represents another quarter record and continued growth year over year as well as further out performance of our third markets. We expect gap gross margin to be 37.8% plus or minus 1%.Non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition-related intangible assets are expected to be approximately 21% of revenue plus or minus 1%. We expect net interest expense to be approximately $2 million. Our income tax rate is expected to be 23.3% plus or minus 3%. And shares used to calculate diluted EPS for the third quarter are anticipated to be approximately $52 million. Please note that purchase accounting adjustments of $3.8 million after tax for Pericom and previous acquisitions are not included in these non-GAAP estimates.With that said, I now turn the call over to Emily Yang.

[Emily Yang:]

Thank you, Brett. And good afternoon. As Dr. Lu and Brett highlighted second quarter revenue grew 6.5% quarter-over-quarter and 5.9% year-over-year as we continue to reach new records across our business and gain increasing market shares. Looking more closely at second quarter revenue, point of sales revenue was up driven by the strong demand recovery in Asia. Distributor inventory in terms of weeks was flat in the second quarter and remains within our normal range of 11 to 14 weeks.Looking at the global sales in the second quarter, Asia represented 74% of revenue, Europe 14% and North America 12%. In terms of our end markets, industrial was once again our largest representative end market at 29% of revenue, communications 23%, consumer 22%, computing 16% and automotive 10% of revenue. During the same period in 2018, industrial was 27%, communications was 23%, consumer was 25%, computing was 16% and automotive was 9%.Now, let me review the end markets in greater detail. Starting with automotive market, we achieve -- had a quarter of record revenue as we continue to benefit from past design win activity and expanded customer content. As I have discussed in the past, Diodes has been focused on strategic redeploying a total solution sales approach that leverage our bottom product portfolio, which has been a key contributor to our consistent shirking and growth in this market. From a product perspective, we have solid revenue growth in our switching diodes, Zener diodes, hall sensor, mouse set, audios and proprietary SBR product family. These products are targeted at a variety of applications including battery managed system, events driving assistance to some RHS, acoustic domain controllers, airbag control, lighting, body control, infotainment display and gearshift Level indicators.During the quarter, we released a number brand new automotive great products including real-time clock, interface logic level shifters, and Hall sensors. We saw the signings in brushless DC motor, water pump, power window, electric horse and infotainment. Wireless charges for portable equipment like mobile phones are becoming a popular feature of vehicles. Our logo [indiscernible] driver fully AECQ qualified is designed into several automotive modules. We also continue to see adoption of in the automotive LED lighting sermons, especially in front side, rear side and interior lighting, where we are winning design for our LED drivers with a number of automotive customers.With the rapid increase of electronics in today's highly connected cars, robust ESD protection is becoming increasingly more important. We are seeing excellent designing momentum in the connected driving applications for protection products in applications such as ADAS, telematics and infotainment. Similar to automotive market, we also continue to set new record revenue in industrial end market as well growing 13.7% year-over-year. Together with automotive this to end market represented 39% of total revenue. We are gaining increasing momentum in smart connected lighting and commercial spotlighting applications for our SGT mass technology and LED drivers.Drones and laser scanner are also driving growth in the industrial end market for our Zener diodes and also continue to secure more designs with DC sent applications for regular transistors, gate drivers and bipolar transistors. With a rapid adoption of high speed interface across multiple end applications in the IoT market space, ESD protection is getting more important for data links as well. We are seeing multiple designs for our data line platform which offer best in class ESD cleansing voltage performance while minimizing capacitance loading on the data line. Also during the quarter we added new products in smaller package with DC to DC converter that are suitable for home applications, power tools and other industrial applications.Our newly released why in IDO are gaining strong momentum in this market especially for e-meters and detector applications as well as DC to DC power converters and solar inverter applications and high voltage Hall sensor in power tools. Turning to consumer market Diode's protection product continue to gain traction in all types of panel applications. Our new miniature super high search performance protector product has been designed into earphones, wearable, portable devices, TVs and smart speakers. We also saw significant revenue growth for BJT product driven by TV and monitor design win. We also secure increasing these sign wins for our standard recovery rectifier, logo sensors and TV S products in large panel TV, cloud-based cameras, robotic vacuum and lawnmower.While switching diode has solid growth in white goods home appliances our Zener diode will also design into smart thermostat as well as powered phone system. Diode also continue to gain strong momentum in quick charger and direct charger application with our USB power delivery solutions which helped reduce the charging time of batteries. We also continue to gain increasing traction in virtual reality applications where are newly released and first in the market integrate the high-speed marks for USB 3.1 and USB 2.0 are seeing new design win. In the communication market, attraction from 3G to 4G and then 4G to 5G has become the major trend to meet the requirement of significant speed upgrades and large amount of bandwidth.Our products are well aligned to this trend. With our clock buffer solutions currently being designed into a 5G base station. These products are used as critical sampling cloth with a base bandth unit and remote radio unit. Diode's diverse club portfolio and separate jitter performance are the key technical factor for this application. In addition, we see traction in 5G applications for the screen, power management and connectivity products including USB drivers and switches and are also gaining traction in other communication applications such as new voice over IP phone, telecom power product as well as beta network and gateways.Also in the communication market, mobile phone and portfolio applications continue to grow growth for our protection and power switch products. Our key driver has been successfully designed into a latest wireless charging transmitter module. While our SBR and Schoky [ph] product continue to gain increasing penetration in IoT mobile and smartphone market by offering product with a senior profile and compact dimensions. Design wins are also being achieved with high variety battery product for applications such as POE, surfer power and data center.Lastly in the computer market revenue increased 13.5% sequentially as a result of increasing traction for our Pericom product family. Power density and efficiency are few in the development of the hardware evolution. And Diodes is actively engaged in this market with NLD mas in DC-DC power conversion and ultra-low ROM PMAS for low switch for battery management in computing application. During the quarter we saw strong revenue growth for our standard recovery rectifier and synchronize rectifier functional array products in surfer power and send applications. Along with this trend we also saw growth for our power switch, WELDOE notebooks and the high current LDOs in surfer applications. Additionally, our protection products along with timing, signal integrity USB type C switches, read drivers, charging and power management product have seen significant activity in notebooks, tablets and PC applications. Further, our focus on momentum into core computing continues as our new products with timing, signal integrity and switching are being designed into server and datacenter application.In summary, our achievement of record results in the second quarter underscores Diode's solid positioning across our global customer base, as well as the benefits from a path design win activities and new product initiatives. Additionally, we continue to gain increasing content and customers with our expanded product portfolio, including our Pericom product family, our consistent performance team used to set diodes apart, especially during the current market environment. We look forward to providing our continued progress next quarter.With that, we now open the floor to questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question is from Tristan Gerra with Baird.

[Tristan Gerra:]

Hi, good afternoon. Could you talk about your progress on the eight-inch capacity want and is that helping gross margin?

[Keh-Shew Lu:]

You talk about the key differential [ph].

[Tristan Gerra:]

Correct, actually sub 2 in Shanghai.

[Keh-Shew Lu:]

Okay, that's our F5. Okay, our eight-inch is going to be rented out. And so in the second quarter, we are fully rented out and of course, if 18 a gross profit for us due to the cost, it's cheaper and due to the coolant and the capability, is new to our area and we are able to load it while in the past. We have a capacity constraint on the most part. So it help on the gross margin improvement.

[Tristan Gerra:]

Great. And then given the macro, which you've obviously outpaced very nicely with share gains, how should we look at your gross margin trajectory medium term? Do you feel that you can sustain gross margin at current level? Any commentary that you could provide medium term?

[Keh-Shew Lu:]

Well, the economic situation is actually slowing down. We all know that. But Diode continue to increase the market share. We continue gaining the growth -- gaining the reign. If you compare, even at the midpoint of our third quarter, you get nine months of this year versus nine months of last year. We actually are going to grow 5.4%. And on top of 2018 both 2017, we go set a 15%. So year-over-year last year 15%, this year, 9 months versus 9 months was on the grow 5.4%. Therefore, even the market is assault, which everybody knows. The 10 actually going down, but over the next few days, so we -- our capacity is still quite well and that's why our TP we still continue somewhere around 37.5% to 37.8% in that range. We continue to improve. So I still feel good about our gross margin. And I believe we still can continue in that kind of range without -- well, we do have seasonality or typically price erosion of which I'll need to, particularly euros are priced too much to gain the capacity of the [indiscernible] to the capacity.

[Tristan Gerra:]

Okay, that's great. And then just the last very quick one. Any color you can provide on your Form 10 utilization rate?

[Brett Whitmire:]

So utilization rate for our back ends is running our mid-90s, which is well and good in terms and that's what we see. So we're able to modulate some of the things we outsource. So the internal utilization has been pretty good.

[Keh-Shew Lu:]

The way we set our model, 80% for 50% and 95% for AP. Consider as full because you cannot really full all the capability or all the packages, therefore, we typically use a 95% assessment, that means majority of our capacity is full of maybe here there has some unused capacity due to special packages. So based on that, we still our fab and our AP still quite full. And that's why we are able to maintain our growth margin and we've seen since our rain did not go down. Our building situation is going to be the same. So we don't see a huge issue from that point of view.

[Tristan Gerra:]

Great, thank you very much.

[Operator:]

Thank you. Our next question comes from Sean Harrison with Longbow Research.

[Sean Harrison:]

Hi, good afternoon and my congratulations everybody.

[Keh-Shew Lu:]

Thank you, Harrison.

[Sean Harrison:]

If we look into the September quarter or even the back half of the year, either Dr. Lu or Emily what markets are you seeing continued strength either on a sequential or a year-over-year basis versus kind of further contraction or incremental weakness?

[Keh-Shew Lu:]

Well, that's separated into two things. One is the Q1 market. We predict similar market is weaker compared to last year and that's why everybody started guidance on year-over-year growth, is either negative or flat, and [indiscernible] if you look at the finals, we are fighting very hard during the slowed down market and able to continue keep up on the growth path. I know it's getting harder but we stay convenient to continue growth year-over-year. Automobile factory you see -- we see the slowdown in automobile, and fortunately tire can grow automobile revenue by increased accounting. Naturally, that first half for us is very good, we have been setting the breaker for the industrial and we see this is a slowdown in U.S. and Europe. But that's where our major one is, we don't have very strong industrial in Asia. The automotive we build in Asia, it can continue increased our revenue in Asia or in China, in particular. So, the market slowdown -- we're hoping we can continue our year-over-year growth, especially our first half we grew 8%, and then [inaudible, 32

[Sean Harrison:]

Okay, great. As a follow-up, Emily, point of sale versus point of acquisition number for distribution, was there big variances in the quarter, did you see any notable destocking at distribution?

[Emily Yang:]

No, it's all as I reported. Our channel inventories within our normal range 11 to 14 weeks. If I compare quarter to quarter, it's pretty flat, so we managed there closely for the channel inventory. That's really what we are doing. For the point of sale, we do actually see the recovery from Asia, as I reported in my script. That's really encouraging to see, that's definitely a good momentum that we want to continue.

[Sean Harrison:]

Great, and then last from me. Why don't we get an answer on a rise in company sales? I know there have been some questions about how that's changed over the past 12 months. I don't know if that's a factor of moving tabs around or issues at work, but if you could just speak on the rise in our company sales that we see over the past 12 months.

[Brett Whitmire:]

The biggest change in the company sales is operating in a more of a global supply company way, in terms of how we move our product and interact with our internal and external manufacturers. You also see some optimization occurring with our customers, regarding how they want to take product, where they want to receive that product and how it will serve them. That's the biggest changes that you see in that.

[Sean Harrison:]

Great, thanks Brett.

[Operator:]

Thank you. [Operator Instructions] Our next question is from Gary Mobley with Wells Fargo Securities.

[Gary Mobley:]

Hi, everyone. Let me extend my congratulations again on a solid first half of the year. I realize that there's not a lot of turf, headwind to your product that you've specifically selling, but you do sell heavily in the tyreesodium supply chain. Much of that part is consumer-oriented and we have various turf implementation dates, the most recent of which is coming up here the first day of September. Have you been seeing any demand for tyreesodium customers as they're trying to get ahead these turf implementation dates?

[Keh-Shew Lu:]

Okay, number one is already talking for itself, we do have customer on the move, they're assembly [inaudible] outside of China. All in all, we do see that and some of them actually always taking the action move to South Asia or Taiwan, some of the CM do actually take actions. Now, for our product, we ship to the CM so if they move we can ship according to where they want to pursue. We don't really see that much effect. Now, our new announcement announced several days ago saw I don't have any reaction to the market or any market reaction wide away. They've been talking any particular reaction other than the announcement, I just got back from Taiwan last night but unfortunately before the weekends, I don't really see any reaction.

[Gary Mobley:]

Okay, now you have obviously taken a lot of market share in the first half of the year, probably the most notable share gain period that you've had in the company's history. I was wondering if you could talk about the types of competitors that you're taking share from, is it the old world Japanese IDMs, is it some of the former U.S. competitors that have been acquired by other U.S. companies that left some market share for you to gain? I know your products are great products and you probably won the design in the technical merits of the product, but is it just an easy environment to take share, given that other people perhaps de-emphasized the products you're promoting.

[Keh-Shew Lu:]

Gary, I think I already talked about this for several times and, number one, I really don't like to point out our competitors, the names, because it's not really alright to get the shield out of them. Basically, our growth is coming from campaign increase [inaudible, 38

[Gary Mobley:]

Okay, well, thanks for the details, Dr. Lu.

[Operator:]

Thank you. This concludes our Q&A session for today. I would like to turn the call back to Dr. Lu for his final remarks.

[Keh-Shew Lu:]

Thank you for your participation on today's call. Operator, you may now disconnect.

[Operator:]

Thank you, everyone, for joining our call today. You may now disconnect. Have a wonderful day.