Earnings Call: Q3 2020

Nov 9, 2020

Good afternoon, and welcome to Diodes Incorporated Third Quarter 2020 Financial Results Conference Call. At this time, Instructions will be given for the question and As a reminder, this conference call is being recorded today, Monday, November 9th 2020. 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' 3rd quarter 2020 financial results conference call. I'm Leanne Sievers, President, Ms. Shelton Group, Diodes' Investor Relations firm. Joining us today are Diodes' Chairman, President and CEO, Doctor. Keshi Lu, who is joining us from Taiwan, Chief Financial Officer, Brett Whitmire, Vice President of Worldwide Sales And Marketing Emily Yang and Director of Investor Relations, Laura Murl. 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 company finalizing its closing procedures and customary quarterly review by the company's independent registered public accounting firm. As such, these results are unaudited in subject to revision until the company files its Form 10Q for its third quarter 2020. 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 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 SEC including Forms 10K10Q. In addition, any projections as is the company's future performance represent management's estimates as of today, November 9th, 2020. Doug 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 and 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 www.diodes.com. And now, I'll turn the call over to Diodes' Chairman, President and CEO, Doctor. Keh Shew Lu. Doctor. Lee, please go ahead. Thank you, Diane. Welcome, everyone, and thank you for joining us today. 3rd quarter revenue was better than expected and increased 7.2% sequentially. Driven by strong recovery in Asia, followed by North America, contributing to record revenue in automotive, consumer, and computer end markets. Total worldwide point of sale revenue increased 19% sequentially and reached a record in the quarter. Trading by weaker POS revenue in Asia at 20%. And 16% growth in both Europe and North America. Our record sales in the automotive market grew 18% sequentially and over 5% year over year to 11% of total revenue. Reflecting Diodes continued success in expanding application opportunities. Across new and existing customers, while further increasing dial semiconductor content per vehicle. Additionally, we continued to gain strong momentum with our Pericom ICE product in both the automotive and computing markets. And we increased approximately 30% from In fact, our total revenue first quarter of 2020. At the onset of the pandemic, with net income increasing approximately 35%. Demonstrating both the resiliency our business as well as the solid leverage in our operating model. We expect to further extend our growth momentum as we continue to see broad based improvement across our target end market and geographies. Which at the midpoint of our first quarter guidance, represented the highest quarter revenue in the company's history. This expectation excludes any contribution from our proposed acquisition of nylon semiconductors. That is expected to close until the end of November With that, let me now turn the call over to Brett to discuss our third quarter financial results and our fourth quarter 2020 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 and will refer you to our press release for a more detailed review of our results as well as the was $309,500,000, an increase of 7.2% as compared to $288,700,000 in the second quarter of 2020. Gross profit for the third quarter was $111,100,000, or 35.9 percent of revenue, an increase of 9.5 percent or 70 basis points compared to the second quarter 2020 of $101,500,000 or 35.2 percent of revenue. GAAP operating expenses for the third quarter 2020 were $73,200,000, or 23.7 percent of revenue. And on a non GAAP basis, were $68,900,000 or 22.3 percent of revenue, which excluded $4,000,000 of amortization of acquisition related intangible expense. And $300,000 of acquisition related costs. This compares to non GAAP operating expenses in the prior quarter of 64.5000000 dollars or 22.3 percent of revenue. Total other expense amounted to approximately $4,600,000 for the quarter, including $2,600,000 in foreign currency loss, and $3,700,000 in interest expense, partially offset by $1,600,000 of other income and $138,000 of interest income. Income before taxes and non controlling interest in the third quarter, 2020 was $33,300,000, compared to $26,100,000 for the third quarter was approximately 17.7%. GAAP net income for the third quarter 2020 was $27,200,000 or $0.51 per diluted share compared to GAAP net income of $21,000,000 or $0.40 per diluted share in the second quarter 2020. The share count used to compute GAAP diluted EPS For the third quarter, 2020 was 52,700,000 shares. Non GAAP adjusted net income in the 3rd quarter was $32,800,000 or $0.62 per diluted share. We excluded $3,300,000 and $2,400,000 of acquisition related financing and other costs. This compares to non GAAP adjusted net income of $28,600,000 or $0.54 per diluted share in the previous quarter. EBITDA for the 3rd quarter compared to $55,300,000 or 19.2 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 $39,700,000 for the third quarter 2020. Free cash flow was $21,900,000 for the 3rd quarter, which included $17,800,000 of capital expenditures. Net cash $85,200,000, including an additional $105,000,000 drawdown of debt and the paydown of long term debt by $49,700,000. At the end of the third quarter, cash and cash equivalents plus short term investments totaled approximately $591,000,000. Working capital was $893,000,000 and long term debt including the current portion was $346,000,000. Both our cash and debt balances increased in the quarter as a result of actions we took to prepare for our pending acquisition of light on semiconductor. Which is expected to close and drew down on our since the transaction will be funded the equivalent of $305,000,000, resulting in our debt and cash balances increasing accordingly. In terms of inventory, to approximately 120 compared to 30 in second quarter of 2020. Total inventory dollars increased $4,500,000 to approximately $260,300,000, which reflects a $2,600,000 increase in raw materials and a $2,100,000 increase in work in process and a $200,000 decrease in finished goods. Capital expenditures on a cash basis for the third quarter 2020 were $17,800,000. Or 5.8% of revenue, which remains at the low end of our target model of 5% to 9% Now turning to our outlook. Building on our growth momentum in the third quarter and record POS results, we expect 4th quarter revenue to increase to a record of approximately $324,000,000. Plus or minus 3%, which at the midpoint represents growth of 4.7% sequentially. And 7.6% year over year, which is significantly above typical seasonal results over the past 5 years of down 4%. These revenue expectations exclude any contribution from light on semiconductor acquisition, which is expected to close 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 22% of revenue. Plus or minus 1%. We expect non GAAP net interest expense to be approximately $1,500,000. Our income tax rate is expected for the fourth quarter that purchasing accounting adjustments of $3,300,000 after tax for payer comp and previous acquisitions is not included in these non GAAP financing costs. With that said, I will now turn the call over to Emily Yang Thank you, Brett, and good afternoon. In the 3rd quarter, revenue increased 7.2% sequentially, which was at the high end of our guidance. Due to better than expected demand recovery in Asia, followed by North America. Of particular note, worldwide POS revenue increased 19% sequentially, led by record POS in Asia at 20% and 16% in both Europe and North America. General inventory is the lowest being since the end of 2018. With distributor inventory in terms of weeks decreasing quarter over quarter and within our defined range of 11 to 14 weeks. We expect the sugar inventory to remain within our normal range of 11 to 14 weeks in the near term. Looking at the global sales in the 3rd quarter, Asia represented 79% of revenue, Europe 13% and North America 8%. In terms of our end market, consumer represent 27% revenue, mainly driven by consumer pre Christmas bills, industrial 22 percent, communication, 21 percent, computing 'nineteen, and automotive 11 percent of revenue. We achieved record revenue in automotive, computing and consumer end markets. Now, let me review the end market in greater detail. Beginning with automotive market. As mentioned, Diodes achieved record revenue increasing 5.2% over the prior year period, and 18% sequentially, driven by strong sales growth in Asia, followed by North America and Europe. This growth reflects the success achieved by Diodes Total Solutions sales approach and demand creation efforts in penetrating new and existing automotive customers and applications in addition to the steadily increasing semiconductor content per vehicle. We're also able to secure several new design wins and grow our automotive business for products, including SBR, Zener Diodes, switching diodes, power transistors, and TVS, high demand applications, including battery management system, powertrain, oil pump, 48 volt battery power, automotive lighting and lighting controllers, as well as emerging applications like mini electric vehicles and micro hybrid also drove our growth. Newly released automotive compliance 40 volt and 5.50 DCDC product family and LDO has gained increasing market attention with new opportunities and design ins for infotainment to add ADAS applications. Gate driver ICs and new data line protection products, compressing single, dual and quad channel TZF in small packages has been successfully designed into various end applications, including infotainment system, wireless chargers, USB chargers and user interface systems. Also during the quarter, we continued to gain market share in brushless DC motor controllers wireless charging, reverse battery and protected low switching applications. We are seeing strong momentum on design wins for our bipolar junction transistors and LED drivers in LED based automotive retrofit lens to replace halogen lamps. We are also seeing BJT design wins in both in aerial and exterior vehicle lighting with applications ranging from highlight to the taillight and mood light modules. In the industrial market, revenue increased over 7% sequentially as customer factories began to reopen throughout the quarter in both North America and Europe, but yet still remain below full production output compared to a year ago. One area of focus for Diodes in the industrial market is providing innovative solutions to support customers in reducing their carpet footprint. Additionally, our switching diode products continue to be used in personal protective equipment by the first crystal oscillators has been adopted in a number of medical applications ranging from testing equipment to ventilators especially those to fight by COVID-nineteen. Our switching diodes are also being used in many additional industrial applications including smart power, high efficiency HVAC, security and controls, smart energy metering, factory automation, elevators and moving sidewalk control system. In addition, we've seen strong growth for our LTO product family, as we continue to see new design wins in industrial LED lighting, e meter, and power tool application. We also secured several new design wins for our linear LED drivers in applications such as defibrator ATN UV lights, factory automation and LED stripe lighting. Our SBR and gate driver products also saw a high level of design activities in embedded systems and in high performance fans using telecom power systems, medical equipment and industrial control system. In the consumer market, we achieved record revenue in the quarter as a result of strong recovery in Asia, We saw strong demand for our boost LED drivers for applications such as earphones, skin beauty, mask, UV sanitizer boxes, and handheld devices. We also saw tremendous growth for our ACDC products, mainly driven by 25 volt phone chargers small appliances and power adapters as well as new design wins for LDOs, rectifiers and BJTs in charging, TV and set top box applications. We also achieved significant revenue growth for our haptic controllers and affluent amplifiers products in portable gaming and consumer spark speaker applications, we also continue to see strong demand for our TES and switching Diodes in the consumer segment where growth was driven by the white goods, including high efficiency washing machines, dishwashers, dryers, vacuum cleaners, and stoves. Turning to communication market. 5G infrastructure continued to be a key focus area, and we are continuing to see expanding opportunities for our products due to 5G's high frequency and limited distance Small cell has become increasingly common to improve the coverage and capacity of the network. Our low jitter high performance crystal oscillators are needed in certain modules for precision timing needs. In the CPE space, our PCI Express package switches and crossovers are finding wide acceptance in many 5G boxes. We also saw strong momentum for PMOS in remote radio units and MROS for 1 KE or large boost power in 5G base stations to save power consumption. Low voltage hall sensors, TBS and LDOs also saw increasing design wins and design wins in smartphone and 5g router applications. Lastly, in the computing market, revenue increased over 7% sequentially and also 14% year over year to record levels as work from home and shopping in place continue to drive momentum in notebooks, motherboard, surfers, and storage applications. In particular for our Pericom product families. This quarter, we released 20 output PCI Express Gen 4 and Gen 5 club offers. Building up our previous release family of call buffers and clock generators and enabling us to now offer the most comprehensive clock solutions for server and data center applications. This clock solutions and our frequency control products position us well for the next major server platform with PCI Express Genworth Deployment. Momentum for our Pericom product continues in the quarter, and revenue remained at the 2nd highest quarterly level since the acquisition. This product continued to dominate incenal integrity space with PCI Express Gen Four ReDrivers, Pest and Moxins USB 3.0 gen 2 interface in PC and motherboard vacation. We're also seeing traction for our fully integrated active mods for PCI X-ray Gen 4 and USB 3.02 Gen 2 by 2 lead driver solution for USB Type C applications. We also continue to increase market shares for switching Diodes and TBS products using desktop and notebook applications as notebook, PC, and crumpled business continued to be strong, primarily driven by work from home, remote education and e learning demands due to COVID-nineteen. Our USB power switch product line achieved record high quarterly revenue and we are seeing more USB Type C adoption with many design wins using our popular crossbar switches product. We have also seen growth momentum for FBR, MOSFET and SKY product in applications like USB Type C and power delivery and ATX power charging and adapters. In summary, we're very pleased with other quarter of strong results and continued growth despite the current environment. Our record results in the automotive, consumer and computing market combined with record worldwide POS are setting the stage for Diodes to potentially set a new quarterly revenue record next quarter. In what is typically a seasonality down quarter. We look forward to reporting our continuous progress and closing our light on semiconductor acquisition at the end of November to further enhance our future opportunities. You. Our first question comes from the line of Gary Mobley of Wells Fargo Securities. Your question please. Hey, everyone. Hope all is well. I want to start out asking for clarification from you Emily. You mentioned that point of sale was up 19% versus revenue being up only 7%, but you think you mentioned that distributor channel inventory was up sequentially. I'm just trying to reconcile that difference. Right. Gary, good morning. Are definitely POS increased globally 19% and Asia has actually increased 20 and North America and Europe increased 16%. Our channel inventory is actually decreased to our lowest ever since the end of 2018. So it's really at the lower end that we define as a normal range. Okay. Let's turn that. All right. And as it relates to your gross margin outlook for the 4th quarter, roughly 36% and that's on a record quarterly revenue level. And so you've been at 30 7% or 38% gross margin in the past at a lower revenue level. So I'm wondering what the difference is there? Is it lower utilization? A lower mix of industrial? Gary, let me address this question, right? So if you really look at the region shift from the racial point of view changed a little bit compared to I would say 2019, Q3, Q2 range, Asia is definitely contributing a lot more and usually this is the region also have a little bit lower gross margin percentage. And you know, there's also also directly impacted pretty much the automotive industrial because automotive industrial usually has maybe more dishes allocated to Europe and also North America. So, yes, as the COVID-nineteen continue to improve, North American and Europe recover more. We believe that will help us. That's helpful. Thank you. I'll hop in the queue. Thanks everyone. Thank you. Our next question comes from the line of Sean Harrison of Loop Capital. Hi. Good morning and good evening everybody. My first question has to deal with distribution. I'm just wondering if you're getting any signs from distributors, let's say in Asia first and then in the Western world next, if they'd like to add additional inventory given that you're seeing strong demand. I don't know what your lead times are doing. Maybe you could discuss that. And channel inventory is the lowest level in 2 years. So it seems like there's the potential for restocking to occur at some point in time in the near future. Hi, Sean. Nice to talk to you. So definitely if you look at our channel inventory, it's really more on the lower end. As you can see, based on our Q4 guidance, we actually definitely look closely to our booking trend to our backlog situation as well as channel inventory and the POS trend, right? So that's the reason we actually guided Q4, you know, what you seeing right now. So definitely we'll look closely to all those things combined and take the strategy from there. Emily, do you think distributors will continue to work down your inventory in the fourth quarter or will they try to at least hold it steady? Our strategy is keeping within the normal range 11 to 14 weeks And you know, definitely if the inventory at channels too low, it's not beneficial to diodes. So we're definitely not planning to lower more of the distribution inventory. So again, we try to maintain within the 11 to 14 weeks range that we defined as a normal range. Great. And then as a follow-up, Brett, if my math is right, I think you said you've borrowed $305,000,000 so far. So is there another don't know, $125,000,000, $150,000,000 that you still have to borrow or transfer over the deal to close and that's what we should base kind of the go forward interest expense off of? Yes, Sean, that's right. Yes, you got it exactly right. $100,000,000 or $150,000,000, sorry. $150,000,000, yes. It's $150,000,000 is what we expect to borrow in 4th quarter. Thank you. Our next question comes from Matt Ramsay of Cowen. Your line is open. Thank you very much. Good morning and good evening, everybody. I don't know, for Doctor. Lu or for Emily. Maybe you could walk us through a little bit, in more detail by end market segment, the strength of your fourth quarter guidance. It's up I think pretty materially versus where the consensus had modeled it. Obviously, the POS revenue is strong. And you called that out, but maybe you could walk us through a little bit by division, particularly talking a little bit about automotive, where we've seen a market acceleration as that industry has recovered. Thank you. Sure. Hi, Matt. Yeah, let me start with automotive, right, Segment. We definitely see a very strong momentum in Asia and we definitely see momentum will continue into our fourth quarter. We also start seeing North America and Europe regions, you know, started with a good momentum of recovering and we do expect that momentum continues, right? At the same time, we've been working on the contact expansion and that will continue to see our strategy to expand our dollar content. And then I would go into the industrial I think overall factory closure in North America and Europe, we start seeing a lot of improvement. We also see it start seeing the production output getting close to 100%. And we also, I mean, from all this data with regional improvement from North American euro, we're also pretty upbeat about the industrial for the fourth quarter. And then for communication, like I explained before, our smartphone is actually in the communication and with a smartphone, especially 5 T smartphone market, the cycle shifted a little bit So we're actually seeing continued strong momentum into this segment together with 5G infrastructure. We continue to see a really strong design in and also design win momentum in this area. And then for the computing, this is the area, a lot of shelter place. We've seen a lot of good resale in the fourth quarter 3rd quarter and second quarter already and we do expect some of the momentum will continue to carry through And for the consumer, right, usually 4th quarter is not a strong quarter, but we also noticed, you know, the shelter in place continue to drive some of the gaming consoles I talked about last quarter and also anything related to fitness and health I think the IoT related, I would say applications that we're still seeing good, you know, growth momentum in this area. So across the board, we're seeing almost every single end market segments showing some momentum to grow and also across all the regions. Thank you for the detail there. That's really helpful. I guess the next follow on question to that is, as we go into maybe the first half of next year and we wouldn't you guys aren't going to guide that yet, obviously. But if you can maybe remind us what would normal seasonality look like in the First And Second quarters for your business? And if there's any particular thing? No, it's very difficult. Predict the seasonality. We now we still go ahead, assume the severity that could be for, which is a 1Q go down, probably say 3% to 5% then 2Q going back up 5% to 10% 3Q. So we'll probably 5% then 4Q going down. We just go ahead, assume that normal seasonality. Now it may be very strange, but like 4Q this year, instead of go down average 4%, 5%, we actually going up 4%, 5%. So if you go to DUKA, it's very difficult due to this virus issues. And another thing is that Europe and U. S, the virus is not really settled on yet. And but the Asia looked like it's more stable now. Okay. So at this moment, we're just thinking the seasonality will be the same. But since the dire majority of our business is in Asia, And therefore, we even automotive industrial, we still have allowed the business in Asia. Therefore, our thinking will benefit more than our competitors. Thank you, Doctor. Lu for that one more quick one from me and then I'll jump back in the queue. I noticed that the folks that light on have reported their revenue for the September quarter. And I think it's up 3% year over year, maybe 4% sequentially versus the June quarter. For the pieces of the business that you plan on acquiring by the end of the month, Doctor. Lu, anything unusual or different to call out in their business conditions I know it's a volatile time for everyone. So I just if there was anything unusual there that was worth calling out, we'd appreciate it. Thank you. I think, when we acquire, LSC, we have certain assumption and, you know, then when we see it now, we read and see that much of a difference. Okay. The one we're looking for more is a long term. I think we from the from the synergy point of view, we have much long term view, which is like, market synergy, product synergy, customer synergy, and manufacturing synergies. And from the first three synergy, it takes a long time, a much longer time to be able to, mature or to get it, okay, because you're talking about design in and all those activity, it takes 1 to 2 years, especially to automotive it could be get 2 to 3 years before we can get that synergy. So the one short term one we can get the synergy is that building manufacturing synergy If you, you know, currently their manufacturing is way under loaded probably 40% to 50% loaded. And we are quickly trying to qualify our diodes product, to be able to, manufacture and we're thinking that ramping will be start from 2nd quarternextyear and probably up to about 70%, 70% loaded by the end of next years, okay? So this is a much quicker we can bring the synergy in. But one thing, we know their product GP due to the dolling issue, their product their GP is about 13%, 14% So it really pulled down our total GP next year. But we will try to bring it up. And one thing is it's accretive immediately. This is the key thing, even the GP is not as good as Diodes GP. And the wafer fab, the manufacturing is under loaded but we're still hoping or we still can see there will be breakeven next year at the end or the total year will be breakeven with the improvement of the manufacturing loading. And the total we believe the from the the share purchase back and the interest payment, those 2, at the end, we should be able to accretive, probably improve our EPS about $0.30, 2021. Thank you, Doctor. Lu, really appreciate the help. You're welcome. Our next question comes from the line of Tristan Gerra of Baird. Your line is open. Quick question on your manufacturing overall. What do you expect your utilization rates to be in Q4 And are you looking at acquiring more capacity given the trends that we see low inventories, some buckets of price increases? Yes. So the question is, what do you expect your utilization rates to be, this coming quarter? And also, given the backdrop of very lean distributor inventories and we're also seeing some pockets of price increases for products like MOSFET, which all point to strong demand. So are you looking at acquiring potentially more capacity ahead given those trends? Okay. So Brad, you like to go ahead, Doctor. Luz. Well, that is the it's really the growth for next year, we're going to focus on is thyogrow, okay? And the reason is LSE gross margin is very low. Okay. So next year, We'll focus on design in is for both IO and Automotive and the LSC product. But for the revenue, we're thinking most of them will be coming from the growth of Diodes product. We don't think the AOC product will be grow. That much, okay? And therefore, the utilization for title manufacturing would be improved because if we see the growth and we see that then Tayos Manufacturing utilization will be improved. For the AOC Manufacturing, what we want to do will be qualified some product, from, capable produced by AOC, qualified Diodes product capable produced by LSC and majority of the utilization improvement will be coming from non tire manufacturers. We still have a doubt of wafer and some AT outside of the diodes. And therefore, that is the portion, that would be the product we're going to focus on is bringing those doors from outside Diodes operation. Into LC operations to improve their utilization. Right. So Tristan, let me add a little bit on top of Doctor. Lu's comment, right? So remember, we actually acquired GFAP in Scotland and we're also renting up additional capacity on SFAP 8 inches in house as well. And addition to what Doctor. Lu just mentioned, LSC, both in the fabrication capacity and also assembly capacity, we believe with all this combined plan that we have in place should be really good to support our 2021 target growth year. So that's pretty much our internal capacity strategy for a longer term. So it fits it really well with our past few and position really well for our growth. Okay, great. And then a quick follow-up, you mentioned Pericom ramping in automotive. Are we at the early inning of that trap and what's the content and market share implications because Pericom has had over the past, I would say, 18, 24 months are very successful ramping server. So is automotive incremental at this point Oh, yeah. I think like I mentioned before, all these applications are really at a very early stage of adoption and a lot of new, you know, application I talked to before related to Pericom product family are more in the, you know, Nick generation of ADAS infotainment system and stuff like that. So yes, to answer your question is at the beginning of this whole cycle. Great. Thank you. Turn the call over to Diodes management for any closing remarks. Thank you for your participation on today's call. Operator, you may now disconnect. Thank you. Ladies and gentlemen, this concludes the conference call. You may disconnect your lines at this time.