Good afternoon, and welcome to Diodes Incorporated fourth quarter and fiscal 2021 financial results conference call. At this time, all participants are on a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference call, please press the star key followed by the zero on your touch-tone phone. As a reminder, this conference call is being recorded today, Wednesday, February 9th, 2022. 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 fiscal 2021 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes Investor Relations firm. Joining us today are Diodes Chairman, President, and CEO, Dr. Keh-Shew Lu, Chief Financial Officer, Brett Whitmire, Senior Vice President of Worldwide Sales and Marketing, Emily Yang, Senior Vice President of Business Groups, Gary Yu, and Director of Investor Relations, Gurmeet Dhaliwal. 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 its 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 its Form 10-K for its 2021 fiscal year ending December 31st, 2021.
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 a 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, February 9th, 2022. 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 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 you 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. Now I'll turn the call over to Diodes Chairman, 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 had a record year in 2021, reflecting sustained execution that consists of five consecutive quarters of record revenue as well as seven consecutive quarters of adjusted earnings growth. In fact, full year revenue grew 47% and the gross profit grew 56%, with GAAP earnings per share expanding 166% and adjusted earnings per share expanding 120%, demonstrating the significant operating leverage in our model. Additionally, gross margin expanded 610 basis points from the first quarter of 2021, the first full quarter after completing the Lite-On Semiconductor acquisition, to the fourth quarter of 2021. This increase was driven by a combination of product mix improvement, manufacturing efficiency, and improved loading.
Also, contributing to our ongoing margin expansion has been the achievement of five consecutive quarters of record power comm revenue, three consecutive quarters of record industrial revenue, as well as six consecutive quarters of record automotive revenue, which grew 59% in 2021 and reached a record 12% of total revenue for the full year. With full year revenue of $1.8 billion and a gross profit of $0.7 billion, 2021 represented a significant step toward our 2025 target of $1 billion in gross profit on $2.5 billion revenue and 40% gross margin.
In addition to the manufacturing synergies provided by LSC acquisition over these past years, we expect to realize expanded synergies across our product portfolio, customers, and end market in the coming year to drive additional revenue growth and the gross margin expansion. With that, let me now turn the call over to Brett to discuss our fourth quarter financial results and our first quarter 2022 guidance in more detail.
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 will refer you to our press release for a more detailed review of our results as well as the year-over-year comparisons. Revenue for the fourth quarter 2021 was a record $480.2 million, an increase of 1.9% from $471.4 million in the third quarter 2021. For the full year 2021, revenue was a record $1.81 billion, an increase of 46.9% from $1.23 billion in the prior year.
Gross profit for the fourth quarter was also a record at $190.7 million or a record 39.7% of revenue, increasing 5.2% or 130 basis points from $181.2 million or 38.4% of revenue in the third quarter 2021. For the full year, gross profit increased 55.5% to a record $670.4 million or 37.1% from $431.1 million or 35.1% in 2020. GAAP operating expenses for the fourth quarter 2021 were $104.7 million or 21.8% of revenue. On a non-GAAP basis were $100.1 million or 20.8% of revenue, which excludes $4.1 million of amortization of acquisition-related intangible asset expenses and $0.6 million of acquisition-related costs. This compares to non-GAAP operating expenses in the prior quarter of $99.6 million or 21.1% of revenue. GAAP operating expenses for the full year were $394.4 million or 21.8% of revenue, compared to $296.8 million or 24.1% of revenue in 2020.
Total other income amounted to approximately $22.8 million for the quarter, consisting of $13.2 million of unrealized gain on investments, $11.2 million of other income, $788,000 of interest income, $1.1 million in foreign currency losses, and $1.2 million in interest expense. Income before taxes and non-controlling interest in the fourth quarter 2021 was $108.8 million compared to $85.6 million in the previous quarter. Turning to income taxes, our effective income tax rate for the fourth quarter was approximately 39.1%, which includes taxes related to non-GAAP items. On a non-GAAP basis, the tax rate for the fourth quarter was approximately 18.4%.
GAAP net income for the fourth quarter 2021 was $65.5 million or $1.43 per diluted share, compared to GAAP net income of $68.4 million or $1.50 per diluted share in the third quarter of 2021. Net income per diluted share in the fourth quarter increased 142% year-over-year from $0.59 per diluted share in the fourth quarter 2020. The share count used to compute GAAP diluted EPS for the fourth quarter 2021 was 45.9 million shares.
GAAP net income for the full year 2021 was a record $228.8 million or $5 per diluted share, 166% improvement compared to the $1.88 per diluted share or $98.1 million in 2020. On a non-GAAP, adjusted net income in the fourth quarter was a record $73.3 million or $1.60 per diluted share, which excluded net of tax $3.3 million of acquisition-related intangible asset costs, $0.4 million of acquisition-related costs, $13.5 million of costs related to certain LSC investments, and a $9.4 million dollar gain on the sale of a manufacturing subsidiary.
This represents an 8.8% improvement from the third quarter 2021 of $1.47 per diluted share or $67.3 million, and a 116% improvement from $0.74 per diluted share or $37.3 million in the fourth quarter 2020. On a non-GAAP adjusted net income for the full year 2021 was a record $237.2 million or $5.18 per diluted share, a 120% improvement compared to $2.35 per diluted share or $122.7 million in 2020.
Excluding share-based compensation expense of $6.5 million for the fourth quarter and $26.2 million for the full year 2021, both GAAP earnings per share and non-GAAP adjusted EPS would have increased by $0.14 per diluted share for the fourth quarter and $0.57 for the full year. EBITDA for the fourth quarter was a record $139 million or 28.9% of revenue, compared to $114.5 million or 24.3% of revenue in the prior quarter. On a year-over-year basis, EBITDA increased 107.2% from $67.1 million in the fourth quarter 2020, further highlighting our significant operating improvements over the past year.
EBITDA for the full year 2021 increased 82.1% to a record $434.6 million or 24.1% of revenue from $238.6 million or 19.4% in 2020. We have included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income and GAAP net income to EBITDA, which provides additional details. Cash flow generated from operations was $77.6 million for the fourth quarter 2021, and $338.5 million for the full year.
Free cash flow was $22.5 million for the fourth quarter, which included $55 million for capital expenditures, and $197.3 million for the full year, which included $141.2 million of capital expenditures or 7.8% of revenue. Net cash flow in the fourth quarter was a positive $82 million and a positive $46.3 million for the full year, which included a paydown of approximately $152.6 million of long-term debt during the year. Turning to the balance sheet, at the end of fourth quarter, cash equivalents, restricted cash plus short-term investments totaled approximately $373 million. Working capital was $717 million, and total debt, including long-term and short-term, was $301 million.
In terms of inventory, at the end of the fourth quarter, total inventory days increased to approximately 107 in the quarter as compared to 99 last quarter. Finished goods inventory days were 32 compared to 27 last quarter. Total inventory dollars increased $26.5 million to approximately $348.6 million. Total inventory in the quarter consisted of an $18.5 million increase in finished goods, a $15 million increase in raw materials, and a $6.9 million decrease in work in process. Capital expenditures on a cash basis for the fourth quarter 2021 were $55 million or 11.5% of revenue and 7.8% for the full year, which is within our target model of 5%-9%. Now turning to our outlook.
For the first quarter 2022, we expect revenue to be approximately $480 million ±3%, which at the midpoint is better than typical seasonality of down 5%. We expect GAAP gross margin on a consolidated basis to be 39.7% ±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 ±1%. We expect net interest expense to be approximately $1.4 million. Our income tax rate is expected to be 18.4% ±3%, and shares used to calculate diluted EPS for the first quarter are anticipated to be approximately 46.3 million shares. Please note that purchase accounting adjustments of $3.3 million after tax for previous acquisitions is not included in these non-GAAP estimates. With that said, I will now turn the call over to Emily Yang.
Thank you, Brett, and good afternoon. As Dr. Lu and Brett mentioned, fourth quarter revenue increased 1.9% quarter-over-quarter, which is better than the midpoint of our guidance due to the continued strong demand and record revenue across all the regions. Distributor inventory in the fourth quarter in terms of weeks increased slightly quarter-over-quarter, which is still below our defined normal range of 11 weeks-14 weeks. Looking at global sales in the fourth quarter, Asia represented 78% of revenue, Europe 13%, and North America 9%. In terms of our end market, Computing Represented 29% of revenue, Industrial 24%, Consumer 19%, Communication 16%, and Automotive 12% of revenue. We achieved record revenue in the Automotive, Industrial, Communications, and Consumer segments. Now let me review the end markets in greater detail.
In the automotive market, we continue to extend our strong growth momentum, with revenue increasing 37% year-over-year and 59% for the full year to set new record. Since 2013, when we begin our expansion initiative into the automotive market, we have achieved an eight-year compounded annual growth rate of 30%. One key to our success has been our content expansion initiatives and design win momentum that has continued across all target application areas, particularly in three focus areas of connected driving, comfort, style, and safety, and powertrain. Automotive DC-DC 32-volt and 40-volt buck converters, LED switching drivers and SBRs continue to see strong demand for telematics, front and rear LED lighting, daylight running lights and ADAS applications.
Similarly, linear mode LED driver product was designed into first responders' emergency lighting systems, and high-efficiency charge pump LED drivers has been seeing traction for indicator LED lights in the household EV plug-in charging units. Newly released LDOs, current limit power switches, and Pericom product line of level shifters, crystal oscillators, buffers, and PCI Express clocks are seeing new design wins in ADAS, telematics, autonomous vehicle control units, and infotainment systems. We are also seeing great success from the high-voltage latch, high-voltage regulators, and omnipolar Hall-effect switching in cooling fans, window lifters, motors, water pumps, and door lock applications. Additionally, transient voltage suppressors, MOSFETs, gate driver ICs, and USB charging controller products are being designed into applications including battery management systems, wireless charger converters, and in-vehicle USB charging ports.
Fast recovery rectifiers were also well accepted in electric vehicle heat exchanger applications as well as automotive electric intelligent controllers. MOSFET design wins momentum continued for automotive brushed and brushless electric motor applications, including power steering, fuel, oil and ABS pumps, seats and mirrors. Our low capacitance ESD and surge protection devices are also being designed into applications for protection of in-vehicle network and for the I/O port protection of its far-field cameras for advanced driving assistance. In the industrial market, revenue increased 43% year-over-year, and 46% for the full year to also reach new records. We are continuing to see growth and adoption of DisplayPort HDMI switches and ReDrivers in the commercial display application. Our ultra-fast recovery rectifier product and PCI Express Gen 3 packet switch are gaining traction in the Artificial Intelligence video analytics, 3D sensing camera modules, and civilian and security applications.
We are also seeing strong demand for application-specific multi-chip circuits and standard recovering rectifier products driven by multiple applications such as diagnostic test system, brushless DC motor drivers, energy metering, power supplies, smart lighting, and electro medical applications, including automated blood and body fluid analyzers. We have also been pleased with the strong design win momentum for the Lite-On Semiconductor image sensor product line being used in document scanners, lottery bar scanners, and PCB inspection applications. Additionally, our ultra-fast recovery rectifier products, bipolar transistors, synchronized controllers, and MOSFETs continue to gain momentum in power supplies and inverter applications. Medium voltage DC-DC LED drivers have been gaining design wins in smoke detectors, and SBR products are expanding in GPS tracking applications, which enable real-time location monitoring during the transportation. In the computing market, revenue was up 72% year-over-year and 122% for the full year.
We are seeing strong traction for USB Type-C power switches, TVS, high power density Schottky, low voltage omnipolar Hall sensors, dual output unipolar Hall sensors, DC-DC buck converters, as well as HDMI 2.0 ReDrivers in the new compute platform, including gaming notebooks and workstations. Similarly, we are seeing increasing interest for DisplayPort, USB Type-C, HDMI switches and ReDrivers in the docking station, dongles, active cable and keyboard video mouse applications.
We also continue to see strong demand for SSD mux, crystal and oscillator products in the enterprise SSD storage modules and data center server applications. We have several design wins for the universal level shifter product family in various applications including SSD storage, gaming, server, laptops and mobile devices. Additionally, Lite-On Semiconductor image sensor products continue to gain momentum with new design wins in the scanner and copy machines. In the consumer market, revenue increased 18% year-over-year and 12% for the full year to also set new record for the quarter and the year.
Diodes continues to see strong revenue growth of standard recovery rectifier products and SBR in the consumer applications, including digital light projection, LED backlight modules, and high-efficiency vacuum cleaners. We also have new design wins for USB mux and bipolar transistors in LED TV and display panels, as well as increasing demand for low-power Class D audio amplifiers, SBRs, and LED drivers utilized in monitor, Bluetooth speakers, LED lighting, and smart doorbell applications. We also continue to see strong momentum for CSP and small DFN MOSFET for IoT and wearable devices, as well as high power density products securing new design wins in the home exercise equipment. Mobile phone adapter generated strong demand for Diodes fast recovery rectifiers, and AC-DC products continue to see growth from quick charging applications.
Lastly, in the communication market, revenue was also a record and grew 10% year-over-year and 13% for the full year. Design win momentum for the Pericom product line continues in this market for our USB mux and ultra-high voltage protections with 5G CPE application. There has also been growing demand for USB ReDrivers, primarily driven by the USB Type-C application. Additionally, our small size low saturation transistors continue with design wins across multiple applications, from base stations, routers, network cameras to doorbells. We saw strong demand for our SBR chip-scale package and design wins for high PSRR LDO product family in smartphone applications. In summary, 2021 was an exceptional year for Diodes, both operationally and financially.
We achieved strong revenue growth and margin expansion for our total solution sales approach and content expansion initiatives, especially in the automotive, industrial, end markets, as well as the Pericom product family. We also successfully integrated LITE-ON Semiconductor acquisitions and benefited from the manufacturing synergies, with additional opportunities for the growth and expansion through the products, customers, and end market synergies that we expect to realize over the coming quarters and years. With that, we now open the floor to questions. Operator?
Thank you. As a reminder, to ask a question, you will need to press the star one on your touchtone telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Matt Ramsay from Cowen. Please go ahead.
Thank you very much. Good afternoon, everyone.
Yeah, Matt.
Congrats on the great results, Dr. Lu. I wonder if you might provide some commentary. Over the last, I don't know, year and a half or so, the industry has been very supply constrained, and your company was fortunate enough to acquire the capacity from Lite-On and did an amazing job in executing and filling that capacity. It's led to some pretty remarkable growth. I wonder as you think about the next year or two in Diodes growth plans, where do you have the opportunity to add more capacity, and how much of the growth are you thinking coming from pricing versus units versus additional capacity? Thanks.
Okay. I just answered several of your question. Okay. First, you are talking about, you know, how much of the growth coming from price increase and how much is coming from revenue growth, okay? Or the capacity expansions. We do not really separate that number very clearly, but we only increase the price based on our wafer or our cost material increase. We reflect the material increase to our customer only. But we take this opportunity by, you know, better support customer to asking them to give us more design opportunity. You know, some of the area our customer would not allow us to touch in the past. Now, with this, you know, great support to our customer, we can demand or ask them to open up the design in opportunity for us.
That is, you know, what we are doing today and using the capacity constraint to our advantage to open up more business opportunity. Now, you are talking about the future growth then, you know, we have like our SFAB 2, 8-inch. We just from very low ramp it up to fully loading by December last year. If you listen to what we have been talking about, last year, the whole year, we ramp up the SFAB 2. This year that will be fully loaded. Okay. Then another is our GFAB. If you remember, we bought that GFAB back to 2019.
We, you know, committed to the original owner who will support them, you know, for five years. That every year they would reduce their loading to us 10%. We gradually qualify our production or our technology, our product into the GFAB. We actually have additional capacity by, you know, original owner requirement reduce. We are able to take the opportunity to give us more capacity for the growth. This will continue because they're going to be, you know, their demand going to go down, and we continue ramp it up.
At the same time, if we still need more than that, they still have enough capacity, we can, you know, bring that capacity or bring that loading even higher. Because the time when we bought that, we said they are fully loaded. In the wafer fab definition, when we say fully loaded, it's 80%. If you look at some of our wafer fab is already load up to 100% or 95%.
Right.
We still have more room in the chip fab to give us additional growth. We have our supplier, other external fab. With our relationship, we still can continue asking for a little bit more every quarter or, you know, here, there to get a little bit more. We still believe we have enough capacity to support our growth in this year or next year. You know, then when the demand start to loosen up, we can take that opportunity to continue our growth pace.
Right. On top of that, Matt, we also will continue to drive the product mix improvement. We want to focus to better utilize the available capacity to support better business as well.
Got it. Thank you both for the commentary there. As my follow-up question, I guess I'd be remiss to not mention that you're bumping right up against your long-term 40% gross margin target. I think your run rate of revenue is slightly under $2 billion, and you were planning to hit 40% at $2.5 billion in revenue. If you could just kind of walk me through the puts and takes on gross margin as we go forward. Is this kind of a new floor of margin and sustainable? And what are the incremental margin drivers as you add that additional $500 million in revenue towards the target model? Thank you.
Well, you know, really what we're looking for is $1 billion gross profit. Okay? When I said that, it's really the goal, $1 billion gross profit, because that follows through to the EPS. That is really the goal. Now, when I say $1 billion gross profit, we say, how do we make it? We say $2.5 billion revenue, 40% GP to make up that $1 billion. If our gross margin can be better than 40%, we are not going to reduce it. We just continue improve our gross margin, and we get there without $2.5 billion. We'll achieve that goal earlier. After that, we'll start to get to our next target. I'm not ready to announce that next target yet. We are quite close to the target of $1 billion gross profit.
Got it. Thank you. I'll get back in the queue, but congratulations on the progress.
Thank you.
Thank you. I show our next question comes from the line of William Stein from Truist Securities. Please go ahead.
Great. Thanks for taking my question. I'll add my congratulations, especially to the outlook, but both the results and outlook are great. I have a question about the guidance, by end market. Normally, Q1 is down a little bit, and I think the end markets that tend to do that are the, I think what you call the three Cs, right? Consumer comms and communications. I think those are typically down sequentially, while industrial and automotive are typically up a little bit. If we think about the delta or the difference in this Q1, you know, is it more spread across all end markets that they're all gonna do a little better than typically? Is it more that you're gonna see sequential growth a little bit in each of the end markets or is there some different explanation?
Okay. William, hi, this is Emily. I think overall what we're seeing is actually strength across all the end markets. I think all in all, we have really strong demand. If we look down to the specific segments, so for example, automotive, we actually have a full year growth of 59%. We see that momentum continues. For the industrial, we're also seeing a lot of growth, like 46% for the full year. Again, a lot of design in pipeline continue to grow. On the computer side, where we talk about the low-end PC, there's definitely a little bit softness, but we're also seeing strength on the cloud computing and servers. It's kind of balanced itself. On the consumer side, you are right, absolutely.
Q1 usually is not a super strong quarter, and we definitely see a little bit softness, I would say more from the China consumer side. Again, we have a lot of overall other demands, whether it's home care or some other consumer applications that we continue to see the strength, right? On the communication side, I think there's a lot of, you know, news about the smartphone softness a little bit in China. Since we are very well diversified into all the tier one smartphone manufacturer, that we're actually seeing, you know, not that much of the impact to the overall Diodes. I would say all in all, 5G continue to drive a lot of momentum, not just on the base station, but 5G related applications. Yeah, I would say all in all, still very, very strong.
My follow-up, if I can. I think I saw an announcement recently about Diodes dipping its toe into silicon carbide development. Can you maybe clarify what you envision? Well, first, what capabilities you're developing and what market or opportunity you believe you'll be able to address? Thank you.
Okay. This is Gary and William, and nice to talk to you. Actually, you know, the silicon carbide development, we've been starting for this kind of project probably a year ago, and we see that's a very strong trend from the market. We have our design team in-house, and we do our wafer design, and we use our design using outside fabrication through the wafer. Particularly the silicon carbide we are using is for the automotive-related, you know, part like OBC onboard charger, like micro EV and the inverter. Especially if you see the news we have for the Diodes. That's a joint venture activity that we have with your silicon carbide MOS, with the technology that we have put into module go to the inverter, and those inverters are going to the electric vehicles motors. That's the area we're gonna focus on.
Any revenue to discuss in that area yet, or is it all-
No, not yet.
Oh.
Not yet. Our engineering sample should be delivered by end of this year, and then we are looking forward because automotive related, probably one year or a little bit longer, and with looking for probably the first revenue gonna come in probably the middle of next year.
Great. Thank you. Congrats again.
No problem.
Thank you. Our next question comes from the line of Gary Mobley from Wells Fargo Securities. Please go ahead.
Good afternoon, everybody. Thanks for taking my question. Congrats to the strong 2021 and a good start to the current calendar year. I wanted to ask about your manufacturing footprint in China. I realize the majority of your employees are based in China. Have you seen any impact on your production facilities, past or present or maybe in the future from China's COVID zero policy?
Well, let me answer this one. You know, actually, our wafer fab, majority of wafer fab internally is not in China. Okay? You know, we have external, but internal, we're in the, you know, GFAB and OFAB in Europe, and the LSC has, you know, the wafer fab in Taiwan. Today, in China, we only have SFAB 2. Okay? We don't have majority now there. Now, for assembly, yes. Virtually, the two major sites are in Shanghai, which don't have that big problem with COVID-19, and Chengdu, again, in that sense, the Chinese government is very, very careful too. We don't see the problem due to COVID-19. Okay?
Actually, it's helping us because, for example, you know, typically, every year during the Chinese New Year, we're going to have shut down and because a lot of worker going to go home for the Chinese New Year. During the Chinese New Year, that month, our productivity or our production is actually slowed down. That's why one of the reason we have this seasonality in Q1, we cannot get enough output. But this year, like last year, you know, the Chinese government actually encouraged, quote unquote, encourage the people don't go home, stay in the dorm or and either take off or continue working. Okay, so because of that, this year, our output affected by Chinese New Year is not that great or that critical. Therefore, we are able to support our demand.
Still not enough, but we are able to support it. Therefore, we have guided our Q1 revenue, you know, flat from Q4 because our output is not really going to slow down that much. At the same time, we did build some inventory in Q4 to support Q1. Overall, we are not really affected manufacturing-wise by COVID-19, you know, effects in China. Actually we are better than in the past. It's due to the workers do not really go home.
Got it. I appreciate the color there, Dr. Lu. I have a couple follow-ups for Emily, perhaps. You know, normally Q1 is down 5%, but I presume that you're gonna have a better than seasonal Q1 because perhaps you're getting an opportunity to replenish distributor inventory. Related to that, would you expect to be back up in the normal 11- 13 week range? Is there any way to, excuse me, quantify the impact of your competitors, one in particular that is exiting few hundred million dollars last year and the next year in some product categories that you directly compete in? Thank you.
Right. I think, Gary, we, you know, with the, like Dr. Lu mentioned, better than maybe little bit better than expected output in Q1. That's the reason we provided a slight guidance, which you are absolutely right. This is usually about 5% down quarter, right? What we do, we still aggressively working with all the customers closely and review all the opportunities in front of us, right? If this is the right fit for the overall Diodes growth and fit into our overall strategy, we aggressively pursue.
Like I mentioned earlier, any time there's a strategic change from my peers or a merchant acquisition always create a more opportunity for Diodes to pursue after, right? Again, we are not just blindly going after every business. We really more focused on strategic good business that will continue to drive our product mix improvement as well as the total solution sales, strategy that we initiated few years ago, right?
Got it. The impact from one of your competitors exiting the market?
I think it's really hard to really say how big or how small the impact. I also think, you know, one of my peers publish a lot of statements, but there's also others maybe weren't really so vocal, but also making changes. Again, we monitor all this very closely. You know, as long as fit into our long-term plan, as long as that's gonna help us to achieve the $1 billion gross profit Dr. Lu mentioned earlier, we're definitely aggressively going after it.
Thanks, Emily.
Thank you. Our next question comes from the line of Tristan Gerra from Baird. Please go ahead.
Hi, guys. Quick question on the gross margin trajectory for the next few quarters for this year. What's going to be the mix component versus further fixed cost absorption? It sounds like you have room to further expand utilization rates. So how should we put that in the mix, you know, in terms of margin expanding this year?
Well, I think maybe let me make a comment, and Dr. Lu and some others maybe can add some more. I think the margin improvement really consists of few things, and they're all very important, right? One of the biggest one is product mix improvement, and we've been talking about this for a while, so we will continue to drive. This is really more from the total solution sales, replacing some of the legacy stuff with some of the newer product with better margin, better ASP as well. We believe this is actually just the beginning of this whole initiative, and this is actually something we established probably about two, three years ago and will continue to drive for improvement. I think manufacturing efficiency improvement has always been the strength for Diodes.
You know, like Dr. Lu mentioned, we continue to add additional capacities. You know, this can be, you know, even adding more equipment within existing lines or, replacing some of the old equipment with a new one, expanding to, you know, 4-inch to 6-inch or stuff like that. That will continue to drive some of the capacity improvement. In result, that will continue to drive our manufacturing efficiency and, continue to improve our cost, right? Then we also have Lite-On Semiconductor synergies that I talk about.
We start seeing the benefit of the manufacturing synergy, but there's still customer synergy and market synergy and, you know, end product, end market synergy and product synergy that we can actually, continue to see benefit over the next few years. I would say all in all, you know, these few areas will continue to help us to drive the margin. Just like Dr. Lu mentioned, we're definitely not gonna stop at 39.7% or 40%, and this is continued, the direction. You know, we definitely want to continue to deliver the results to you guys as well.
Okay, great. For my follow-up, it's going to be about inventories in the channel. You've mentioned the well-advertised slowdown in China's smartphone, but that you're also very diversified. Are you seeing any pockets of inventories in the supply chain outside of this space that you could point out despite that diversification? Are you seeing inventory rebalancing because of the high level of work in process inventories? Are you seeing some customers basically choosing and picking what they're going to order because they can't close the book, so they're kind of waiting for that last component?
Yeah. I think, Tristan, overall, we're still seeing the channel inventory very lean. So even we see a very slightly increase in our channel inventory end of Q4, that's actually driven by some of, you know, support for the Chinese New Year customers and also the timing of the shipments. But all in all, still extremely lean. I think, you know, Gary asked a question, I probably didn't address it, is actually do we expect, you know, back to the 11 to the 13 weeks or 14 weeks that we define as the normal range. We don't really expect return to that normal range in a short period of time.
We believe that with all the visibility that we have, with all the customers that we actually have a direct communication with, so far, you know, no one have a opportunity to build up a lot of inventory on the shelf at this moment. I believe that, you know, that will continue for a few quarters to come and we'll continue monitor very closely. That's pretty much apply to all the tier one, tier twos that we have a direct contact. With the tier three, tier four customers, we actually monitor very closely with each of our distributors partners, and they also monitor very closely and, you know, so we definitely don't see that as an issue at this moment.
Great. Thank you very much.
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Hey, good afternoon, and thanks for letting me ask the question. I apologize, I jumped on a little bit late, but Dr. Lu, I wanted to ask you've been through a lot of these cycles, and we've talked about it in the past. Just kind of curious how you're seeing the landscape today. How do you think maybe it seems like the channel inventory still remain extremely lean, but it always tends to be that we've got excesses through the supply chain. Do you feel pretty comfortable today that there really isn't maybe some excesses that are kind of building up within that channel that just maybe aren't being seen or aren't as visible? Do you think there's even an opportunity for that to have happened, I guess, kind of given the demand and where that, the level that it's been?
Well, yes, you are right. I have been in semiconductor business for a long time, and I go through 1970, 1980, 1990, up and down cycles, you know. I'm familiar with that. If I'm gonna say this year, this cycle is really different from the previous, you know, cycles. Okay? In previous, always, demand continue and expansion for the capacity behind. Then all of a sudden you get a shortage. Then people, the people wait until they cannot stand, then they go to exit the capacity. Then the problem is the lead time of the equipment take a long time. So the time they get capacity there, they, everybody get it at the same time, then all of a sudden you get over capacity. Then everything go down. Then go to the down cycle.
If you look at, it's a timing issue of the capacity improvement. That's why, if you remember several years ago, our strategy is putting capacity ahead of the demand. During the downtime, you actually exit the capacity because the lead time is equipment lead time issue. Now, this time, that's what I'm able to grow this year or 2021 much better than 2020, is because we ramp up SFAB 2 at that time. We get AOC ahead of time, and then we get GFAB even one or two years before the shortage. We prepare for all this, you know, and all this shortage, and that's why we are able to take the advantage of this. If you're talking about move forward, I think the move forward still have shown.
Because you don't see that many people adding capacity that's crazy, okay? Everybody very careful about adding the capacity. You know, I think this shortage will continue at least this year. Now, you're going to start to ramp it up, but electronics demand actually continues to increase, you know, ahead of more than in the past. I would see that demand going to continue very strong, and then the capacity increase will gradually catch up with the demand.
Okay. Good. Definitely great insight. I certainly appreciate it. Maybe one other one here for Emily, but you’ve had some really nice growth in the automotive side, and that’s been a fairly diversified, I guess, application area across the different areas of the vehicle. But when you think about your maybe ICE or traditional vehicle versus the EV, how do you think that split looks like maybe this year and or even in 2021? Are you seeing much adoption within the EV space now, or is that primarily still driven by the traditional? How do you think that mix kinda shakes out as we go into maybe the next you know 12-18 months? Do you see the demand in EV and kind of that pull-through? Does this happen fairly quickly for you all in terms of seeing that reflected within your revenue base?
Right. I think, you know, the EV volume increase is definitely real, right? I think, you know, there's a lot of data in public companies that we can refer to their output unit increase and expectations for 2020 growth, 2022 growth, as well as 2023. You know, there's also a lot of new startups or any of the tier one traditional manufacturers are all working on some sort of EV application. We think that's real. There's a lot of opportunity for Diodes continuing to expand and continue to grow in this area. This is actually volume increase as well as customer expansion increase for us. On the traditional side, what we really focus on, you know, there's also, you know, a lot of comfort, style, and safety. We're talking about, you know, the number of lights, the number of cameras.
I talk about brushless DC motors and all this additional contact expansion for us to go after. We're really growing, I would say, both from traditional vehicles as well as the EV vehicles, right? If you remember, the three areas we focus on is electrification. That covers the EV, the hybrids, right? Or the battery management system. Then we also talk about the comfort, safety, and style, as well as connectivity. This is actually for the ADAS, the telematics and infotainment system. I would say all in all applies to both. The good news for Diodes is we continue to have a lot of momentum and continue to have a lot of opportunity in front of us.
With our new product introduction, we are very confident that we'll continue to drive a very strong momentum in the automotive growth, which should be, and we have demonstrated, stronger than the overall market, right? If we look at the track record from 2013 till 2021, we actually have a compounded annual growth rate of 30%, and that will continue to be the focus for DIOD. We're definitely ready.
Great. Thanks so much. Certainly appreciate the help.
Thank you. I'm showing no further questions in the queue. At this time, I'd like to turn the call back over to Dr. Lu for any closing remarks.
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