Earnings Call: Q1 2021

May 6, 2021

Good afternoon, and welcome to Diodes Incorporated First Quarter 2021 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 followed by the 0 on your touch tone phone. As a reminder, this conference call is being recorded today, Thursday, May 6, 2021. 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' Q1 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, Doctor. 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, Laura Merle. Before I turn the call over to Doctor. Lu, I'd like to remind our listeners that the results announced today are preliminary as they are subject to the As such, these results are unaudited and subject to revision until the company files its Form 10 Q for its Q1 2021 ending March 31, 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 ks and 10 Q. In addition, any projections as to the company's future performance represent management's estimates as of today, May 6, 2021. 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 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 at www.diodes.com. And now, I'll turn the call over to Diodes' Chairman, President and CEO, Doctor. Keh Shew Lu. Doctor. Lu, please go ahead. Thank you, Lian. Welcome everyone and thank you for joining us today. Revenue in the Q1 set a new record both organically and On a consolidated basis, increasing 18% sequentially and exceeding The high end of our guidance range in what has historically mean a Seasonally down quarter for our business. Our growth was driven by record total POS revenue as a result of record in both Asia and Europe, combined with strong growth In North America, we also achieved record in our computing end market, driven by record Pericom product revenue in the automotive market due to strong organic growth In Diodes Automotive Business, combined with our expense management and operating efficiency, We delivered the highest quarter of adjusted earnings per share, which increased 25% Sequentially, the integration of LHC is also progressing well and ahead of schedule. As we have already began to harvest the benefit of manufacturing synergies In fact, rolling at the LHC Fax facility has reached 70% in the quarter versus our original target of 50%, resulting in meaning operationally breakeven at this facility 2 quarters ahead of plan. Overall, our global manufacturing footprint is serving As a key advantage at a time when the broader semiconductor industry is challenged By supply and capacity constraint, we have both internal and external capacity needed to support the increasing demand we are seeing for our products. As a result, We expect to deliver another quarter of sequential growth in the second quarter, coupled with a continued expansion in bottom line profitability. With that, Let me now turn the call over to Brett to discuss our Q1 financial results and our Q2 2021 guidance in more detail. Thanks, Doctor. 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, I would 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 Q1 of 2021 was a record $413,100,000 which included the 1st full quarter of revenue from LSC, an increase of 17.9% from the $350,400,000 in Q4 2020. Gross profit for the Q1 was also a record at $138,600,000 or 33.6 percent of revenue on a consolidated basis and 36.3% for Diodes only. This compares to $122,700,000 or 35 percent of revenue in the Q4 2020. GAAP operating expenses for the Q1 2021 were $91,200,000 or 22.1 percent of revenue And on a non GAAP basis, we're $86,400,000 or 20.9 percent of revenue, which excludes $4,000,000 of amortization of acquisition related intangible asset expenses and $800,000 of restructuring costs. This compares to non GAAP operating expenses in the prior quarter of $75,000,000 or 21.4 percent of revenue. Total other income amounted to approximately $2,600,000 for the quarter, including $6,000,000 of other income and $768,000 of interest income, partially offset by $2,900,000 in interest expense and $1,300,000 in foreign currency loss. Income before taxes And non controlling interest in the Q1 2021 was $50,000,000 compared to $36,100,000 in the previous Turning to income taxes, our effective income tax rate for the Q1 was approximately 18.9%. GAAP net income for the Q1 2021 was $39,500,000 or $0.87 per diluted share compared to GAAP net income of $29,700,000 or $0.59 per diluted share in the Q4 2020. The share count used Compute GAAP diluted EPS for the Q1 2021 was 45,200,000 shares, which reflects a reduction in the weighted average share count due to the repurchase of approximately 7,800,000 Diodes shares from LSC as part of the acquisition. Non GAAP adjusted net income in the Q1 was $42,000,000 or $0.93 per diluted share, which excluded net of tax $3,300,000 of acquisition related intangible asset costs, $1,500,000 of acquisition related costs, dollars 700,000 in restructuring costs And $2,900,000 gain in value of certain LSC investments. Non GAAP adjusted net income in the 4th quarter 2020 was $37,300,000 or $0.74 per diluted share. Included in Q1 2021, GAAP net income and non GAAP adjusted net income was approximately $4,800,000 Net of tax of non cash share based compensation expense, excluding share based compensation expense, Both GAAP earnings per share and non GAAP adjusted EPS would have increased by $0.11 per diluted share for Q1 $2,021.10 for the Q4 2020. EBITDA For the Q1 was $81,700,000 or 19.8 percent of revenue compared to $67,100,000 or 19.1 percent of revenue in the prior quarter. 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 $68,200,000 for the Q1 2021. Free cash flow was $51,000,000 for the Q1, which included $17,200,000 for capital expenditures. Net cash flow in the Q1 was a positive $10,600,000 which included a pay down of $37,400,000 of long Term debt. Turning to the balance sheet. At the end of Q1, cash, cash equivalents, restricted cash plus short term investments Totaled approximately $339,000,000 Working capital was $618,000,000 And total debt, including long term and short term was $415,000,000 In terms of inventory, At the end of Q1, total inventory days decreased to approximately 98 in the quarter on a consolidated basis as compared to 115 last quarter. Finished goods inventory days also decreased to 27 from 31 in the Q4 2020. Total inventory dollars decreased $17,100,000 to approximately $290,000,000 total inventory in the quarter consisted of $18,200,000 decrease in raw materials, A $3,500,000 decrease in finished goods and a $4,600,000 increase in work in process. Capital expenditures on a cash basis for the Q1 2021 were $17,200,000 For 4.2% of revenue, we expect to remain within our target model of 5% to 9% for the full year. Now turning to our outlook. For the Q2 of 2021, we expect revenue to increase to approximately $434,000,000 plus or minus 3%, which represents a record on both an organic and a consolidated basis for a combined increase of 5% sequentially at the midpoint. We expect GAAP gross margin On a consolidated basis, to be 35.6 percent, 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 20.5 percent of revenue, plus or minus 1%. We expect net interest expense to be approximately $1,600,000 Our income tax rate is expected to be 19% plus or minus 3% and shares used to calculate diluted EPS for the Q2 are anticipated to be approximately $45,700,000 Please note that purchasing accounting adjustments A $3,300,000 after tax for Pericom and 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. The 17.9% sequential increase in the 1st quarter revenue was better than the high end of our guidance, Driven by the record direct revenue increase more than 30% and record POS revenue up more than 10%, Li Bai POS records in Asia and Europe combined with strong growth in North America. Distributor inventory in terms of weeks decreased quarter over quarter and below our defined normal range of 11 weeks to 14 weeks. Looking at the global sales in the Q1, Asia represented 81% of the revenue, Europe 12% and North America 7%. In terms of our end markets, Computing represented 30% of the revenue industrial 22% consumer 19% communication 17% and automotive 12% of revenue. We achieved record revenue in automotive end market, which was strong across all regions and the computing market driven by record Pericom revenue. Now let me review the end market in greater details. Starting with our automotive market, our record revenue achieved in the quarter reflects an 18% sequential increase and 61% year over year increased to 12% of total revenue. This growth was driven by Strong organic growth for Diodes Automotive Products with minimal contribution from LSC since this product have low exposure to this market. We also continue to gain contact with our expanded automotive portfolio of Pericom products as we secure several new design ins for our interface and frequency control product in the automotive applications ranging from ADAS, infotainment, telematics and dashboard systems. During the quarter, we introduced several new automotive grade products, including USB switches, IO expanders and 14 new frequency control products for the in vehicle infotainment system, connected driving, lighting and body control applications. We also introduced a 2 wire automotive latch Hall sensors and over 20 DC to DC products with design ins and design wins and multiple customers in the infotainment power supplies, Lighting, instrument clusters, telematics and ADAS applications. We also secured additional design wins for gate drivers, LED drivers and voltage regulators with major car manufacturers in applications like wireless charging, lighting and DCDC for electric vehicles. Also during the quarter, we saw very strong demand for our protection devices in automotive pistol links, HDMI, LVDS and data line protection. Higher voltage battery system drove up the demand for our MOSFET product. Also released 2 new MOSFETs in the tall package To help address the power efficiency demand, we also released 3 channel linear LED drivers, 7 new SVR products and 5 Automotive product during the quarter. SBR SKY product will be signed in by a number of customers in the EV battery management system, Car Headlights, Displays, Onboard Computer and Portable Power Bank Applications. In our industrial market, we also achieved Very healthy revenue growth of 13% sequentially and 25% over the prior year. Similar to the automotive market, revenue contribution from LSC is very minimal, which highlight the strong growth and momentum Diodes has continued to achieve in the industrial market. During the quarter, we saw increasing demand of our wide wing LDO product family for applications such as power tools, e meters, IoT and other industrial applications. We have also seen an increasing number of design wins for linear voltage regulators in DC fans to support applications such as mining machines, communications, MCUs and IT systems. Additionally, We saw more design ins for SDR and TrendShotKey in applications like industrial router, lighting and heavy machinery. Diodes MOSFET product continued to gain market share in brushless DC inverter application and our success with LED driver chip that continue with new design ins for commercial lighting projects. We also released an 848 Link PCI Express 3.0 packet switch, which is designed to meet the need of industrial PC market to improve signal reliability and increase bandwidth performance. In the consumer market, we saw strong demand for our pistol sound driver due to tracker market growth. We also continue to expand our business for USB powered delivery decoder in OEMODM quick charger application. TV and monitor design wins also continue to represent a large opportunity for our BGP product and we have very good design win activities for very smart transistors into robotic vacuum cleaners and doorbells. In addition, we continue to build traction for our products in IoT, Smart Home and Entertainment Applications. For the communication market, we saw traction From Cephro, Shawky and SBR product in the satellite radio, 5 gs routers, access point routers and power over Ethernet switches, Demand for our Pericom product remains strong as high speed data processing drove the ramping of 200, 400, 800 Gig Connection. Peraton Frequency Control Products Ultra Low Jitter, small size crystal oscillator family Have several design ins into optical modules. We also released more than 11 new devices in frequency control product family for communication applications. Also during the quarter, our high PSRR LDO product family and omni polar HAW sensors Continue to achieve design wins and design ins in smartphones, our low saturated high voltage transistors were designed into routers, IP cams and Optical Network Applications. Lastly, in the computing market, revenue increased 54% quarter over quarter and 160% year over year to a quarterly record, primarily driven by record Pericom revenue Combined with initial revenue contribution from LSC products, new design in activity continues in the PC7 Along with increased demand of our existing Pericom products, driven by the growth across all the platforms, including consumer, education and commercial PCs, In the quarter, we released 3 1.8 volt redrivers, surfacing USB Type C and Display TAR for PCs and 2 additional HDMI drift drivers for high speed media applications. Continuous demand for high resolution display Propelled our HDMI DP ReDriver product to other unit volume peak. New USB PowerSwitch product for USB A And USB C port achieved solid revenue growth, driven by strong market demand for notebooks. Our design in momentum continues for Due unipolar hot sensor, ESD total solutions for USB Type C, flash LED driver and the Schottky product in the notebook, Tablets and Storage Applications. Also during the quarter in computing market, we released close to 100 new power TVS, HiSurge data line protection and PowerStage products for PowerLine and U Bus protection for mobile phones, Panels and Charger Applications. In summary, we are very pleased with our strong start to the New Year, led by above seasonal growth resulting in record 1st quarter revenue. Additionally, record POS as well as low channel Internal inventory indicate a strong second quarter with continued increasing in growth and profitability. We have already began to realize the initial benefit of the manufacturing synergy from the LSC acquisition with significant opportunities for upside by capitalizing the additional synergies across products, customers and end markets. With that, we now open the floor to questions. Operator? Our first question comes from the line of Matt Ramsay from Cowen. Your question please. Thank you very much. Good afternoon, everybody. Impressive results for sure. On the operations side with LSC, you, I think, mentioned in your brief prepared comments that you're now at 70% utilization in those facilities. It's certainly a good environment to have, extra capacity, given the tightness in the industry. So you could give us a little bit of an update there and how you see that utilization rate of those facilities trending in the next couple of quarters? Thanks. Yes. Let me let me get Gary, he is in charge for the LLC integration To answer your question. Yes. Hi, everybody. This is Gary. I'm new to this conference call, okay? And to answer your question, yes, we do see the improvement by the facility usage increase a lot in the second quarter. And we will continue loading our factory in the next couple of quarters and we will see more utilization in the 3rd and the 4th quarter. Got it. Thanks. Welcome to the call and thank you for the detail. As my Follow-up question, I guess, for the whole team. It's been some very impressive growth, both consolidated inorganically, but no secret that there's a lot of Different points of capacity tightness across the industry. Diodes happens to be in a position to have some extra foundry capacity, which But maybe you could calibrate us a little bit on how other things in the market may be affecting the upside that you can continue to deliver. I'm thinking about things like testing capacity, packaging, wafers, substrates and even limitations of supply of Some of your peer companies that may sell into the same cars or end market devices, if there's any way you could calibrate how the environment is out there Versus the strength that your company is seeing that would be much appreciated. Thank you. Okay. The Most of the constraint of the capacity is the wafer fab. And fortunately, Half of our wafer fab requirement, our wafer requirement is coming from our internal We have a fab support. And another advantage or another fortunately is because In 2019, we acquired the fab from Texas Instruments, We call it GFAB and that GFAB provide us a very big additional internal capacity. And then the other one is we are ramping up the we call S fab 2, which is in Shanghai when we acquired BCD and that is the fab we get it and now We are ramping up for 8 inches section of the S fab tool. So those 2 fab is helping us a lot for the wafer requirement. Then in addition, when we purchased LHC and LHC fab is under loaded, You remember, we're just talking about that. When we acquire, it's a 50% loaded. So we now Like Gary, we're talking about is in 1Q is already up to 70%, then we'll continue Increase the capacity or the utilization for that So overall, we really have a good room to grow Our revenue by ramp up or utilize more our internal fab. Then, yes, since we are able to get more support from our external So overall, we see some constraint, but it's not very severe To us and you can see our revenue growth, continue revenue growth in 1Q and continue To 2Q and we are able to continue to support us in the future the rest of the year. That's correct. Okay. And then the rest of it since assembly, again, majority It's our own factory, so we do continue expand our Assembly capacities, so we don't really see a major limitation For our expansion for the revenues and the rest of it is really a minor Constraints, therefore the iSiP Diodes performed Much better than our competitor due to we have a lot of our internal manufacturing capability. Thank you, Doctor. Lu, for that. The results speak for themselves. I'll jump back in the queue. Appreciate it. Thank you. Thank you. Our next question comes from the line of William Stein from Truist Securities. Your question please. Great. Thanks for taking my question. Part of it was answered a moment ago, but I'm maybe looking for Maybe the word is a more forceful view. Everyone else is all the other companies are talking very clearly about It sounds like they're not as problematic for you because of your internal capacity. Are you seeing lead Times in aggregate stretch either because the company is having trouble delivering on some parts Or because customers are willing to place orders at longer lead time, are you seeing that dynamic in your business? And If so, maybe how far out in the future are we stretching today? Hi, William, this is Emily. Let me answer the question. So We definitely seen the overall market constraint, right? We have very, very strong book to bill ratio. We have extremely strong backlog Across all the regions and just like I reported, we have very, very strong POS result as well. So definitely, we've seen a little bit of the imbalance of Client demand in the market, I want to make sure we've seen that as well. What we've been doing is actually we are overcoming different bottlenecks By working very closely with the customers to understand their true demand, right. So definitely, we are Longer, I would say, bookings, right? People the lead time is stretching a little bit longer, but I've been emphasizing it's not really about the lead time. It's really To demand that understanding from the customer by working closely with them. So we definitely see longer visibility for the backlog Our point of view, so yes. One other, if I can. An idea that's Been sort of discussed in the semi industry for some years is competition from local China based manufacturers and there's I think a new JV announced in the last couple of days between Yajiu And Foxconn to produce small ICs, Not necessarily about that potential future competitor specifically, but if you can characterize the competitive Threats generally and specifically about sort of local new entrants in the market in China? Thank you. Right. So definitely, we I mean, new competitors coming from China is nothing We haven't seen that, I would say, situation for a while already. Like I mentioned before, what we usually see this kind of competitors We continue to improve our technology and continue to drive the product mix to the higher end side, right? So I would say even having more competition in the low end area doesn't really have A big impact for the overall guidance business actually fitted better with our new strategy because that has been our direction For the last few years. Yes. I'd like to point in one more word is, we What we another strategy we did is convert our sales From the commodity or individual sales to the content or total solution sales with the very Big or very strong, very wide product portfolio and through all the stable of Our history of M and A, we are now our product portfolio is very And very wide range and therefore it give us advantage when we go to the customer, When we approach to the total solution and the new startup company or China company, Typically, they are not able to have very wide range of the completed strength of the wide range product portfolio. I think this just give the credit for our past history Thank you and congratulations on the excellent results. Thank you. Thank you. Our next question comes from the line of Tristan Gerra from Baird. Your question please. Hi. Thanks for letting me ask the question. I think I heard that about 50% of your production is outsourced currently and I That's mostly on the analog side following the years ago Kansas City shutdown. Are you expecting to meaningfully change over the next few years and increased percentage of your manufacturing that's going to be In source, notably as you now have more capacity in house between SFAB to GFAB And G fab required from TI, we got a 6 inches and 8 inches wafer fab in Scotland. And also just recently, we merged with LION Semi, then we have a 6 inches wafer fab and a 4 inches wafer fab in the Qinchu and the Qilon in Taiwan. So we are still looking for The good candidate with a good capacity to increase internally in the future, so that's probably In very soon, we will have newer capacity maybe, okay. But definitely, this is our direction to increase our internal Okay. And then Given the relative supply advantage you have versus peers and given some Larger than other companies are deemphasizing certain products being supply constrained. Do you basically see Market share gains as you're basically taking on products that some of your peers Either de emphasizing on purpose or not able to serve the market with. Yes, definitely. When the capacity is very high and demand is very strong, and whoever the company Right. So let me just add a little bit on top of That I think Tristan is not it's all about balancing, right? So keep in mind, our strategy doesn't really change. What we've been focusing is contract extension, Right. So we want to continue to expand the product into the customer and continue to expand our customer base, right. So right now, it's an interesting dynamic of the market, but does not take away our long term focus as a company. So what our focus is continue With our total solution sales continue to improve our product mix, right? So that is actually the reason Because we do have a very clear goal by 2025 that we want to achieve $2,500,000,000 right? So I would say, yes, there are short term, I would say variations for the demand and supply imbalance, but that does not take So we are long term strategy of the product mix improvement as well as content expansion. Okay. Very useful, Carter. Thank you. Thank you. Our next question comes from the line of David Williams from Loop Capital. Your question please. Hey, good afternoon and thanks for the question and Congrats on the solid progress. I guess, I wanted to see maybe if you could To help size up maybe your backlog or maybe any color around that, the velocity of the orders through the quarter, just kind of how you've seen orders tracking And how you think about that as we move through this quarter or maybe into the Q3? Okay. Hi, David. Let me answer your question. So we do actually continue to see strong book to bill ratio, much higher than 1. And we like I reported in the Q1 result, right, we've seen very strong QS result And the record POS from Asia as well as for Europe, even for North America, we actually seen very, very Strong momentum growth more than 20%. If I look at the direct POP business point of view, the OEM business, I also mentioned we actually Well, more than 30%, right? So based on all of this data and based on the strong backlog that we currently have on the book, So overall, I would say the market is very, very strong across all the regions and also across all the segments. So within the segment, we're definitely seeing continued extra strong strength from the automotive and we're also Seeing very good momentum in the industrial continue to recover and the computing will continue to be strong. I think even consumer communication, we are also seeing very strong backlog as well. Well, in addition, If you look at our the inventory from our disty is very low, okay. We Typically looking for 11 to 14 week of the listed inventory and we are now Even below the 11 week, so in addition to the POS, strong POS, the Inventory reviews or although inventory actually going to be it became A very strong commitment in the future. Okay. All right. Thanks. And then maybe just from your customers, do you get a sense that they are being fairly rational In terms of their orders, obviously, double bookings are a thing and may not mean much, but do you get a sense that maybe they're becoming a little more rational in Ordering and understanding the lead times and placing orders that are in line with what the real dynamics are? Yes. So I think, like I mentioned before, we work very closely with the Tier 1, Tier 2 customers to understand their true demand. What we've seen is very rational, but going through the distribution side, the Tier 3, Tier 4 is not something we have the And we have to work with each individual customer to understand it. So how we measure it is actually we look at the POS result, we look at the channel inventory. So with all this data, I would say overall, the business seems really solid and strong overall. Great. Thanks so much. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to management for any further remarks. Thank you for your participation on today's call. Operator, You may now disconnect. Thank you. And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program.