Earnings Call: Q1 2020

May 11, 2020

Good afternoon. Call. As a reminder, this conference call is being recorded today, Monday, May 11, 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' first Quarter 2020 Financial Results Conference Call. I'm Leanne Sievers, President of Shelton Group Diodes Investor Relations Firm. Joining us today are Diodes' President and CEO, Doctor. K. Xu Lu, Chief Financial Officer, Brett Whitmire, Vice President of Worldwide Sales And Marketing and Lee 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 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 10Q for its first 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 question. 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 SEC, including Form 10 K and 10 Q. In addition, any projections as to the company's future performance represent management's estimates as of today, May 11, 2020 Dowd 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 discussion 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 of Diodes' website at www.diodes.com. And now, I'll turn the call over to Diodes' President and CEO, Doctor. Keshi Lu. Doctor. Lu, please go ahead. Thank you, Leanne. Welcome everyone and thank you for joining us today. I want to start by saying that I hope everyone and their family are staying safe in those unprecedented time for our economy entered war. Our top priority demands our people And Diodes has taken proactive measures to protect the safety, health, and the well means of our global associates. Our employees are successfully working remotely and remain in close contact with our suppliers, customers and partners. Our first quarter results were in line with our original expectation and included the details of our manufacturing productions. Following the extended Chinese New Year holiday. Our result further affected the temporary closure of our UK wafer fabs in the late power of March. In response to the global COVID-nineteen pandemic. Our operation in China has since gradually returned to full production with our UK facility also reaching full production as of today. Comanded North America and Europe revenue, grew more than 12 Asia revenue declined 12% sequentially because of certain expected Customer Manufacturing Manpower recovery due to COVID-nineteen. With revenue mean only slightly without typical seasonality and limited only by customer demands. Our first quarter results serve as further testament to our long tracking record of successfully mentioned through challenging environments. Highlighting the quarter was our continued growth in the automotive end market. In switch, revenue grew sequentially and the year over year to 11% of brand 1,000,000. As a result of our increased content gains across expanded customer base. Including a significant new design win in Asia. Additionally, our Pericom IC products have the 2nd highest revenue quarters since the 2015 acquisition. Due to strong demand in the computing end market for our products using in high end server storage, datacenter, and notebook. Our growth engagement with customers has enables us to benefit from the increasing demand for roads and equipment applications. The diversification and the strength of our business and the longstanding relationship with customers continue to serve us well. As we focus on carefully managing those factors, that are within our control. We currently expect to deliver 2nd quarter revenue and margin slightly better than first quarter at the midpoint, which is notable given the increasing market uncertainty resulting from COVID-nineteen. And the significant softness in the automotive market. Before turning the call over to Brett, I would like to provide a brief update on our proposed acquisition Since our thus earning call, at the end of March, we receive all required regulatory approval. From Taiwan Authority, including Taiwan Fairway Commission and the foreign investment approval from the Investment Commission of the Ministry of Economic Affairs. We also extend the outside date including in the sales op agreement from May 31, 2020 to December 31, 2020. To accommodate the diffuse schedule for the relevant Chinese authorities and associate operation process that would need to be completed. That remains consistent with the previously communicated expected close date of the second half of twenty twenty. With that, let me now turn the call over to Brett to discuss our first quarter financial results and our second 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 our 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 first quarter of 2020 was $280,700,000 as compared to 301 $200,000 in the fourth quarter 2019. Gross profit for the 1st quarter was $95,800,000 or 34.1 percent of revenue compared to the 4th quarter 2019 of $109,400,000 or 36.3 percent of revenue. GAAP operating expenses for the first quarter 2020 were $70,000,000 or 24.9 percent of revenue and on a non GAAP basis were $65,400,000, or 23.3 percent of revenue, which excluded $4,200,000 of amortization of acquisition related intangible asset expenses and $400,000 of acquisition related costs. This compares to non GAAP operating expenses in the prior quarter Total other expense amounted to approximately $896,000 for the quarter. Including $1,200,000 of interest expense, partially offset by $273,000 of interest income and $76,000 of other income. Income before taxes and non controlling interest in the first quarter 2020 was $25,000,000 compared our effective income tax GAAP net income for the first quarter of 2020 was $20,200,000 or $0.38 per diluted share. Compared to GAAP net income of $47,200,000 or $0.90 per diluted share in the fourth quarter of 2019. The share count used to compute GAAP diluted EPS for the first quarter of 2020 was 52,400,000 shares. Non GAAP adjusted net income in per diluted share, which excluded net of tax $3,500,000 of non cash acquisition related and tangible asset amortization costs and approximately $300,000 of acquisition related costs. This compares to non GAAP adjusted net income of $33,800,000 in the fourth quarter 2019. EBITDA for the first quarter was $52,900,000, or 18.9 percent of revenue compared to $88,300,000 or 29.3 percent of revenue in the prior quarter. We have included in our adjusted net income and GAAP net income to EBITDA, which provides additional details. Cash flow generated from operations was $53,700,000 for the first quarter 2020. Free cash flow for capital expenditures. Net cash flow in the first quarter was a positive $11,400,000, which includes a pay down of $16,600,000 of long term debt in the first quarter. At the end of the first quarter, cash and cash equivalents plus short term investments totaled approximately $272,000,000, Working capital was $525,000,000 and long term debt including the current portion was $80,700,000. In terms of inventory, at the end of the first quarter total inventory dollars decreased $4,300,000 to approximately $232,200,000, which reflects a $9,200,000 decrease in finished goods and a $6,400,000 decrease in work in process and an $11,300,000 increase in raw materials. Finished goods inventory days was flat at 29 compared to fourth quarter 2019. Total inventory days increased slightly to 115 in the quarter compared to 112 last quarter. Capital expenditures on a cash basis for the first quarter of 2020 were $14,200,000 or 5.1 percent of revenue. Which is at the low end of our target model of 5% to 9%. For the full year 2020, we expect to remain at the low end of our target model. Now turning to our outlook. For the second quarter of 2020, we expect revenue to be approximately $283,000,000, plus or minus 3%. We expect GAAP gross margin to be 35% plus or minus 1%. Non GAAP operating expenses, which were GAAP operating expenses adjusted for amortization, of acquisition related intangible assets are expected to be approximately 23 percent of revenue, plus or -1 percent. We expect net interest expense to be approximately $1,500,000. Our income tax plus or minus 3% and shares used to calculate diluted EPS for the second quarter are anticipated to be approximately 52,800,000 Please note that purchasing accounting adjustments of $3,200,000 after tax for Pericom and previous acquisitions are not included in these non GAAP estimates. With that said, I now turn the call over to Emily Yang. Thank you, Greg, and good afternoon. In the first quarter, revenue decreased 6.8 percent sequentially. POS revenue in Asia was down due to the impact of coronavirus in January February. Followed by a strong recovery in March. POS in both North American euro was up in the quarter. Distributor inventory in terms of weeks was slightly above our targeted range of 11 to 14 weeks. Both Europe and North America inventory days decreased in 1st quarter and Asia inventory days increased due to the slower than expected end customer manufacturing capacity recovery. Looking at the global sales in the first quarter, Asia declined 12% sequentially to 75% of the total revenue, and Europe and North America combined increased 12% over the prior quarter to represent 17% 8% of the rest newly effectively. In terms of our end market, the industrial end market represented 26 percent of revenue Communications 23 consumer also 23, computing, 17, and automotive, 11% of revenue. Now let me review the end market in greater detail. Starting with Automotive, BIO continued to gain market share in this end market, growing both sequentially and year over year to 11% of the total revenues. This accomplishment is even more noteworthy in the current backdrop of the market TAM decrease related to the COVID-nineteen pandemic. Our consistent growth in this market is a direct result of our content expansion focus and new design win design win effort over the last few years, which most recently resulted in a significant new design win in Asia during the quarter. We also secured design in across a number of new products, including various MOSFET SASP, automotive rate, TVS, in motor controlled lighting, powertrain and connected driving, including ADAS, infotainment, and telematic applications. With a record increase of electronic in today's highly connected cars, robust ESD protection becoming increasingly more important. Our growing family of protection products offers high reliability and high performance ESE protection for connected driving applications. Our portfolio includes Canvas, Line Bus, Ethernet, Ethernet, and high speed data line protectors that covers the full spectrum of connected driving. Similar to last quarter, Diodes once again saw continuous success with our proprietary SDR technology suitable for a wide range of applications including e bikes. We also continue to build momentum over the last two quarters in our sensor business for broad applications, including backlight open control, side door control proximity and position detection. We also have success with sensors and switches for hands free calling interface and powertrain control system. Additionally, new designing was secured for VIVO LDO in ADAS cameras CMOS image sensing applications. And for our newly released linear LED drivers used for automotive tail lighting application. In the industrial end market, we continue to gain traction for mass product with key applications like brushless, DC motor, and LED lighting using Diodes SGT MOS technology for low power loss and normal density trench loss technology for better safe operating area. Sales of our switching diodes also grew in the quarter, supporting numerous applications, including light dimers system, industrial printers and security systems. Similarly, our rectifier being used in broad range of application systems, assemblies to ensure strong luminous intensity of halogen lighting system to drive demanding mechanical automation system and heat pump. With a rapid adoption of high speed interface across multiple industrial IOTM applications, ESC protections also becoming more important for this type of data links. Diodes data line platform features ultralow capacitance with the industrial leading surge handling and ESD protection characteristics. This platform offers best in class ESD climbing voltage performance while minimizing capacity and loading on the data lines. Also in the industrial market, design win activity our newly released linear LED driver aimed at the straight likely market was strong. Additionally, we saw increasing demand for our newly introduced AC offline dimmable product in LED box for industrial and commercial applications. In the consumer market, we've seen growth for our DCDC product, high current 1M LEO family, protection products, an LED driver in the display OLED TV, LED monitors and TV backlight applications. Our protection products continue to expand our footprint with small size innovative super high search performance protection platform in applications like earphones, wearable, portable devices, TV, and smart speakers. Also during the quarter, we continued to maintain our leadership position for USB Type C solutions that are widely deployed in consumer applications, including tablets and gaming consoles. Our low switch is also gaining traction in mobile devices, notebooks and tablet applications. In addition, we have seen design in cost sensors in medical applications by cost oximeter as well as demand for Zener Diodes and rectify in home devices like consumer smoke and fire alarms, home irrigation and garage door openers. In communications, are seeing new design wins for voltage reference products in power modules for telecommunications applications, including top tier brands for 5g Mobile Communications. 5G continued to drive demand for PMOS and MOS product to protect 5G RF amplifier and large boost power in 5G base power station in order to save power consumption. We also continue to launch new mass product leveraging our high density process combined with miniature DFN and CST packaging to meet the challenging space and power density requirements for this market. Similarly, our SBR and Shopee product continued to increase penetration of mobile and smartphone market by offering a thinner profile and compact I mentioned to enable significant space saving. Mobile phone functions such as conference calls, audio, rebas, feedback and wireless charging continue to be growth area for protection products. For SASP, within the mobile handset market, we saw the strong customer demand for our variety products, including our tiny DFM 1006 package switching diodes, and our ultra low leakage diodes. We also supported numerous applications for fast and ultrafast recovery higher, including those in the SOD 123F package as well as our power diver to 3 rectifiers. Lastly, in the computing market, we continue to gain increasing traction across our broad product portfolio, including for our Pericom IC products, which as Doctor. Lu mentioned achieved its 2nd highest revenue quarter as a result of strong demand for our products in high end server storage data center and notebooks. Specifically, we have seen increasing demand for our USB Type C general switching protection products, and signal integrity solutions for high end tablets, laptops, and commercial docking stations. Our newly released family of call generators and cloud offers that meet TCI Express 5.0 specifications are designed in major Server and data center OEM worldwide. Additionally, our SBR rectifier Shopee product continue to be in high demand for DC fencing surfers and sulfur power, where Biodes offer cost performance in high temperature operating environment. Our Shopee retrofit technology also continue to win new design wins in applications such as adapters, USB power delivery, and ATX power. Design wins are also being secured for higher breakdown voltage products for applications such as power over Ethernet Server Power data center and power applications. In summary, our first quarter results and second quarter guidance served as a further testament to DIA's ability to manage through challenging environments. This quarter also further highlighted the success of our path design win momentum and new product initiative over the past several years in the automotive market, specifically as well as our total solution sales of approach with operator. Our first question comes from the line of Gary Mobley from Wells Fargo. Your question please. Good afternoon, everybody. Thanks for taking my question. Hope everybody is staying safe. I want to start off by asking about the linearity of bookings during the quarter and as well through the first half here of the second quarter. I appreciate the fact there's been a lot of moving parts and a lot of things you've had to navigate over the last 4 months. But have you seen any sort of recovery in your end markets here in the early part of the second quarter or are we waiting for some North American or European manufacturing facilities to open more fully. Any color you can give there would be helpful. Okay. Hi, Gary. This is Emily. So let me address your question. So, in the beginning of April, we definitely see strong backlog across all regions, including Europe and North America and Asia. I would say the 2nd week of April, we definitely started seeing a change from the backlog situation and the booking situation for Europe and North America. We're still seeing Asia pretty strong carry through the momentum, but definitely there's a slowdown for North America and Europe, I would say second half of April. And also may. And this is exactly like what you mentioned. This is really due to some of the factory shut down in North American Europe that we see. There are some schedule for the factory to resume whether it's going to be, what is the percentage and by when that's still we have to wait and see But overall, Asia, we're seeing the strength, but, Europe and North America definitely are weaker than we expected. Okay. And Brad, I'm curious to know, how much of an impact to gross margin underutilization and in COVID-nineteen related inefficiencies, how much that influenced gross margin in the first quarter and as well, how much of that is influencing your guidance for the 2nd quarter? Well, the biggest thing that impacted us first quarter was you had, basically the time off for Chinese New Year, which is usually a week ended up being more like 2 weeks. And so that was the biggest impact we had in first quarter. And I think we'll see that, recover consistent with our demand and as we move into 2nd quarter. Well, the first quarter, not just the Chinese New Year today, and actually is another problem is that the people return to work slower than the the previous several years. In our previous several years, when the Chinese New Year people returned to work, the 1st week we probably get 50% of people come back then probably 60, 70, In about 1 month, you almost get back to normal productions. But this year, due to the content of the people, So when they started in February 10 other than people from Shanghai, If they return to work, they cannot really report work. They need to content for 14 days before they can report work. So when people take a longer as long as possible, after February 10, they cannot report work. And then all the workers we have from the Wuhan or Hupe province they cannot even return to work. Therefore, when we start in February 10, in 1st week, only like 30% instead of 50% of the worker come back. It took almost until end of March to get all the people we supposed to be have to fully report work. So this is much worse than the previous several years of the first quarters. And therefore, our capacity utilization or as you said, our negative PV due to unload loading is much worse than before. That's why we are, our GP is lower than before. Okay. In Doctor. Lu, I didn't quite catch everything you said about the Penny Lino acquisition correct me if I'm wrong, but we're just waiting for final approval from China. And so did you comment that you expect the acquisition to close at the very end of calendar year 2020 or within your previously disclosed window of the second half of the this calendar year? What we expect is during the second half of 2020 to close on the light on acquisition, Gary? Yes. They have a 2 date. 1 called the the outside day. Outside day. And typically outside that means if you bypass that, no deals. Okay. So, we said it outside originally is in we now said it to end up December, but that's not what we expect to the closing date. The closing date we believe now is somewhere in that, that's 2 or 4Q or, you know, we said it now is, you know, 4Q. Okay. So that's different. 1 is crossing day, 1 is outside day. Okay. All right. Thank you guys. I'll proceed the floor. Thank you. Thank you. Our next question comes from the line of Tristan Gerra from Baird. Your question please. Hi, good afternoon. What is your expected Hi, can you hear me? Yes. Okay, great. What is your expectations for point of sale in Q2, and how do you see inventory levels changing at this, do you expect distributors reduce inventory levels and as such, the POS will be actually above the POP for which you just guided and what also will be the implications for Q3 if there is some inventory deleveraging in Q2? Well, I'd like Emily to answer you the POS questions. Right. So, Tristan, I think overall, we still expect Asia would have a good momentum for Q2 because we actually see the streamfold from the backlog in booking as well as the POS point of view. The big question is really North America and Europe, we're definitely seeing some slowdown it really depends on how soon the end customer factory recovery will happen. And so I think, you know, we definitely included everything that we know already into our guidance. And so our guidance is actually better than, I think most of our peers, as you can see. So that's really based on the knowledge that we have. For inventory days, that we definitely continue to monitor closely and our ideal range is 11 to 14 weeks and that is still continue to be our goal. You know, a lot of times, the last few days of the quarter kind of dynamic change the situation, but that still remains the goal. I think it really depends on the recovery of the the market and a little bit higher inventory definitely can help us with faster lead time and short delivery quick turns as well. So we've seen benefit of that. I think for Q3, it's it's kind of difficult to estimate at this moment and we are not in a position to provide the guidance. But in general, we definitely hope the market will start seeing some recovery in Q3. Okay, great. And then given the continued market share gains that you've experienced in automotive, Would you say that the automotive end market in China, which I think may be around percent of your total automated exposure. Has that stabilized quarter on quarter or is it still declining sequentially? From a unit standpoint, so not your own, not your dollar content, but actual automotive units in China? Right. I think overall automotive unit definitely declined, not only in China, right? That's overall the market. So we've definitely seen that as well. So our automotive game market share, like I mentioned, is really focusing on contact expansion and also past few years on the demand design in design win effort. And we started seeing some results. So, Mark is one thing our content is the other thing. So, that has been the philosophy and focus for Diodes is really continue to expand on the demand creation, continue to expand the sockets, right? So Yes, you're right. We overall seeing the demand decrease from the unit point of view, not related to diodes and that's really how we've been focusing on is really, like I said, content expansion. And also releasing quite a number of new products targeting in this area continue to drive the technology improvement as well. So even in automotive market, slowdown a weak quite a lot, but we still year over year and quarter over quarter. Our revenue still grow. That's really in our very good compared with our peers because we are able to accomplish that due to the past design win, past customer engagement. Great. Thank you. Our next question comes from the line of Tianjin Gohner from Sidoti. Your question please. Yes. Thank you for taking my questions. So first one, just on the curve a little bit of color on OpEx. So it looks like R and D and SG and A also came a little bit higher as percentage of revenue compared to the most recent quarters. So I'm wondering how much of those increase was driven by the just the coronavirus. What else drove the increase and how should we think in the near future? I think our R and D and SG and A actually in the in fourth quarter last year compared with third quarter last year, actually 12, 5% or 6%, right? So 5% or 6%. And that's because 4Q is the holiday in U. S. And Europe the Christmas holidays. And then you go to 1Q we are almost flat between 4Q and 1Q and now 4Q in 1Q is in Chinese New Year, so Asia expenditure for R&D SG And A is slow down, but U. S. Europe is up. So they are about totally 4Q to 1Q is above that. And therefore, we don't really expect that 4 to 4Q, we think we're slightly going down because all the traveling nutrition, normal, and most of the people working from, well, in U. S. And euro most of the the people working from home, but, but Asia they can travel, but they we don't encourage them to travel in, okay? So, we believe that traveling expense go down some, but we don't expect a major reduction on operational expense. I mean SG and A. Okay. Thank you. And probably next one with just some color on the in-depth you know, Emily, if you can help me to understand, it looks like industrial really I know the general market is weak, but how can we just talk about how should I think about for 2020 and just some color, would it be very appreciated? Okay. So, I think overall just like you said, right, industrial overall segment is actually a down segment. So, it's similar to our automotive segment. Overall market it's down, but we have been continuing to focus on demand creation, driving the compact expansion, design in, design win effort is actually in the past few years helping us to continue to increase the revenue in this market. So I think there's definitely different segments within feel, I think that he is really continuing to focus on the expansion of the content. If we have more parts selling to the same customer on the same application and that's really where we actually gain the revenue improvement. This does conclude the question and answer session of today's program. I'd like to hand the back to Doctor. Keisholu for any further remarks. Thank you for your participation on today's call. Operator, you may now disconnect. Your participation in today's conference. This does conclude the program. Everyone, have a great day.