Earnings Call: Q3 2019

Nov 4, 2019

Good afternoon, and welcome to Diodes Incorporated Third Quarter 2019 Financial Results Conference Call. At this time all participants are in a listen only mode. At the conclusion of today's conference call, Instructions will be given for the question and answer As a reminder, this conference call is being recorded today. Monday, November 4, 2019. 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 2019 financial results conference call. I'm Liam Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today from Taiwan are Diodes' President and CEO, Doctor. Keh Shew Lu, Chief Financial Officer, Brett Whitmire Vice President of Worldwide Sales And Marketing, Emily Yang and Director of Investor Relations, Laura Murrow. Before I turn the call over to Lulu, I'd like to remind our listeners 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 third quarter 2019. In addition, management's prepared remarks contain forward looking statements, which are subject to risks and uncertainties and management may make additional forward looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore, we refer you to a more detailed discussion of the risks and uncertainties the company's filings with the Securities And Exchange Commission, including Forms 10 K and 10 Q. In addition, any projections as to company's future performance represent management's estimates as of today, November 4, 2019. Diodes assumes no obligation to update these 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 statement during this conference call will include discussions of certain measures in financial information and GAAP and non GAAP terms. Included in the company's press release are definitions and affiliations of GAAP to non GAAP items, which provide additional details. Also, throughout the company's press release and management statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income. For those of you unable to listen to the entire call at this time, A recording will be available via webcast for 90 days in the Investor Relations section of Diodes' website at www.diodes.com. And now, I'll turn the call over to Diodes' President and CEO, Doctor. Pei Shee Lu. Doctor. Lu, please go ahead. Thank you, Diane. Welcome everyone and thank you for joining us today. Diodes achieved another quarter of record financials, resulting increased profitability and cash flow from operation. Our 9 months revenue grew 5.4 percent over the same period last year. While earning increased over 30%. This growth is especially notable at the time during which our served market was down more than 6.5%. EBITDA also set a new quarterly record and represent 2nd consecutive quarter to exceed a $300,000,000 annual run rate as it approached 25% of total revenue. Further, gross margin remained above 37% of revenue. As support mix continues to benefit from record revenue in the automotive end market, which demand at 10% of total revenue as well as our Pericom brand IC product. I would also like to take time to provide an update on our proposed acquisition of NIOON Semiconductors. As recently announced, NIOON Semiconductor shareholders approved the proposed acquisition and a special meeting of shareholders on October 25th. Diodes has also met a necessary regular firing in the U. S, Taiwan and China In China especially, we are waiting feedback from the government. And at this time, I'm not aware of any issues that will delay the closing past the expected date. In April 2020. To conclude, I'm very pleased with our year to date and inventory adjustment that are typical of our industry as we approach year end. Non term, I believe Diodes remain well positioned to continue delivering constant profitability growth with ongoing on content gains in high growth areas such as Connected Car high end servers and storage, 5G as well as IoT. With that, let me now turn the call over to Brett to discuss our third quarter financial results and our fourth quarter 2019 guidance in more detail. Thanks, Doctor. Luke, and good afternoon, everyone. As part of my financial review today, I will focus my comments on the sequential change for each of the line items and would refer you to our press release for a more detailed review of our results as well as the year over year comparisons. Revenue for the third quarter 2019 was a record $323,700,000, compared to $322,000,000 in the second quarter 2019. Gross profit for the third quarter remained a record $122,000,000 or 37.7 percent of revenue compared to the prior quarter, of $122,000,000 or 37.9 percent of revenue. GAAP operating expenses for the third quarter 2019 were $73,300,000 or 22.7 percent of revenue and $68,800,000 or 21.3 percent of revenue on a non GAAP basis, which excluded $4,500,000 of amortization of acquisition related intangible asset expenses. This compares with GAAP operating expenses in the second quarter 2019 of $73,500,000 or 22.8 percent of revenue and $69,000,000 or 21.4 percent of revenue on a non GAAP basis. Total other income amounted to approximately $20,000 $272,000 of interest income, largely offset by $2,000,000 of interest expense and $822,000 of foreign currency losses. Income before taxes and non controlling interest in the third quarter 2019 was a record $48,700,000 compared to $47,900,000 in the previous quarter. Turning to income taxes, our effective income tax rate for the third quarter was approximately 21.8%. GAAP net income for the third quarter 2019 was a record $38,100,000. Or $0.73 per diluted share compared to net income of $36,300,000 or $0.70 per diluted share the second quarter of 2019. The share count used to compute GAAP diluted EPS for the third quarter 2019 was 51,900,000 shares. Non GAAP adjusted net income in the 3rd quarter was a record $41,900,000 or $0.81 per diluted share, which excluded net of tax, $3,700,000 of non cash acquisition related intangible asset amortization costs. This compares to non GAAP adjusted net income of $40,000,000 or $0.77 per diluted share in the second quarter of 2019. EBITDA for the third quarter was or 24.2 percent of revenue compared to $77,100,000 or 23.9 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 to EBITDA, which provides additional details. Cash flow generated from operations was $67,200,000, for the third quarter 2019. Free cash flow was $41,800,000, which included $25,400,000 for capital expenditures and net cash flow in the 3rd quarter was a negative $17,100,000, which includes a paydown Turning to the balance sheet, at the end of third quarter, cash and cash equivalents plus short term investments totaled approximately $226,000,000. Working capital was $465,000,000 and long term debt, including the current portion was $119,000,000. In terms of inventory, at the end of 3rd quarter, total inventory days increased to 104 in the quarter. Compared to 100 last quarter. Total inventory dollars amounted to approximately $230,800,000, which reflects a $5,000,000 increase and $100,000 increase in work in process. Finished Good inventory days was 27 in the quarter, compared to 26 in second quarter 2019. Capital expenditures on a cash basis for the third quarter 2019 were $25,400,000 or 7.9 percent of revenue and within our target model of 5% to 9% of revenue. Now turning to our outlook. For the fourth quarter, we expect revenue to be approximately $300,000,000 plus or -2 percent. Which at the midpoint represents an annual growth of 2.8% even in the overall weak market environment and continued outperformance of our served market. We expect GAAP gross margin to be 36.5%. Plus or minus 1%. Non GAAP operating expenses, which are GAAP operating expenses, adjusted for amortization of acquisition related intangible able assets are expected to be approximately 22 percent of revenue, plus or minus 1%. We expect net interest expense to to be approximately $2,000,000. And shares used to calculate diluted EPS for the 4th quarter are anticipated to be approximately 52,500,000 Please note that purchase accounting adjustments of $3,700,000 after tax for Pericom and previous acquisitions are not included in these non GAAP estimates. With that said, I will now Looking more closely at 3rd quarter revenue, POS revenue was up driven by strong demand in Asia. Distributor inventory in terms of weeks was down in the quarter and within our normal range of 11 to 14 weeks, which is where we expected. To remain near term. Global sales for the 3rd quarter, Asia represented 74% of revenue euro 17% and North America 9%. In terms of our end markets, industrial was once again our largest representative end market at 28% of revenue, Consumer, 24%, communication, 22%, computing, 16 and automotive 10% of revenue. Now let me review the end markets in greater details. Starting with our automotive market, Revenue reach out a record as we continue to gain increasing traction and content in this key focus area for Diodes. We also expanded our product portfolio by introducing exciting new products from multiple product lines including MOSFETs, Krystos, LED drivers, TVS, Xener Diodes, protection products, bipolar junction transistors, SBR and sensors. Diodes also recently released our XRQ family of Cristal qualified to AECQ200 Grade 1 requirements targeting auto applications that demand frequency accuracy under harsh environments. Additionally, Diodes leading PCIX press 4.0 solution and USB Type C solutions for Cinelluxing and Cinell integrity continue to see growth in emerging automotive applications like instrument cluster, infotainment, and assisted driving information. In fact, PCXpress has become the interface of choice for the backbone transmission of engine control units ADAS navigation, telematic and infotainment systems. Diodes is well positioned to address this need with a variety of products designed to support the PCI Express protocol. Diodes is the only supplier to offer PCI Express 4.0 clock generators and clock buffers with AECQ grade 2105c ambient temperature support. Also in the automotive market, we continue to see success with our proprietary SBR technology as well as MOSFET design ins. This products are suitable for a wide range of applications in connected driving ADAS, telematic, and infotainment powertrain, covering conventional hybrid and electric vehicles and battery management system. In addition, we saw new design wins for our gauge driver ICs for in car charging system for portable equipment such as phones and tablets. We also saw growth in our TVS product in cameras and ADAS system. And for our multi chip array products, using engine diagnostic test systems. Diodes also had multiple design wins and revenue growth from our newly introduced LED driver in rear lights and air filter applications. In our largest representative end market of industrial, our momentum continued with new design win activities across many such as metering, DC fans, power tools and power supply, as well as home appliances, including Eloc applications. Our glass preservation process Retifier and Bridge Retifier products experienced strong growth in applications including pumps, mixers, aeration system and measurement system. In the third quarter, revenue increased for our Linear mode discrete LED drivers in various commercial and industrial lighting applications. Bipolar transistors also continue to be in demand for industrial applications where they are often used for voltage regulation and driving the gates of power devices such as MOSFET and IGBT. Additionally, we continue to expand our market in industrial PC by expanding design in activities with our low power PCI Express 2.0 package switch. Our product's low power performance gives Diodes a leading position in the small income port expansion applications. We are also seeing USB Type C adoption into medical equipment with our HDMI over the Type C crossbar switch designed in for transporting video image to monitor over a USB Type C interface. Diodes also introduced during the quarter, our universal high speed crossbar switch that supports the latest protocol costs such as PCI Express 1.0, Thunderbo3, Super Speed USB 20 gigabits per second, and 10 g base KR It provides an almost universal solution to routing high speed signals up to 20 gig per second. Further with the rapid adoption of high speed interfaces across multiple end applications in the IoT industry. ESC protection is becoming more and more important for such data links. Multiple design wins in 3rd quarter confirmed Diodes leading position in ESC Protection devices. Turning to Consumer. This market continues to be strong area for Diodes SBR, Shawke, and GPP Ratify growing both sequentially and year over year. We saw increased momentum for new applications like smart speakers, wireless chargers, gaming PC power, white goods, protection circuit modules for reverse, polarity protection, and IP phone mark Load leakage CSP products are increasingly used in the battery pack for portable devices to boost battery life. Also in the quarter, Diodes protection product continued to gain traction in various panel applications such as mobile panels, TV panels, monitor panels and mobile panels. In the communication market, as reported last quarter. We continue to see design win expansion of our products in the 5G applications like CPE, small cell, base station baseband units and remote radio units for higher speed, increased bandwidth and improved power density. We also saw additional design wins in 5G applications for discrete power management, clock and connectivity products, including USB redrivers and switches. Power density is one of the key concern for 5G Smartphones and Diodes has been actively engaging this market with a comprehensive small footprint, DFN and CSP MOSFET portfolio. Also in the communication market, we continue to see revenue growth from mobile handset applications our products like kite tolerant, Zener diodes, high voltage fast switching diodes, low leakage to no diodes and fast recurfering GPP Ratifier. In addition, our protection products continue to be our key growth in mobile phone applications. Lastly, in the computing market revenue grew in mobile PC applications for our TBS products, high current LDOs, tight, tolerant, zener diodes, rectifier and small signal fast switching diodes. Our Cinno Integrity solutions continue to maintain a leadership position as they are well recognized by CPU partners. With the adoption of USB Type C in notebook and PC applications, we are seeing this area as the next big growth engine protection and connectivity product from our Pericom product line. Speaking of our Pericom IC product line, As Doctor. Lu mentioned in his comments, we once again achieved another quarter of record revenue from this product. Which is a testament to Diodes' ability to leverage our global sales channel and cross selling opportunities we have been able to achieve across our customer base. We also achieved strong revenue growth for low switches in PC and mobile applications combined with increasing design wins for our high breakdown voltage product for our applications such as power over Ethernet, surfer power and data center. In summary, our achievements of record results in the 3rd quarter is a further testament to Diodes consistent execution and increasing benefit from our total solution sales approach and content expansion at key customers. Further, as indicated by our fourth quarter guidance, we expect full year revenue to grow 2.8 percent over 2018, which is further evidence of our continuous outperformance of our served markets. We look forward to the additional opportunities afforded by the proposed acquisition of Lyon Semiconductor in terms of broadened product offering as well as wafer and packaging capacity to further support our future growth. With that, we are now Thank you. Our first question comes from Gary Mobley with Wells Fargo Securities. Your line is now open. Hey, everyone. Thanks for taking my question. I wanted to start asking about the gross margin assumption for the 4th quarter with gross margin expected to decrease about 120 basis points quarter over quarter. I'm curious to know how much of that is underutilization of manufacturing versus pricing on a like for like basis for products? Well, Gary, majority actually is coming from under the evaluations. We right now our motto is 95% for AT and we probably go down another 5% for utilization or for AT and probably 5% to 10% for for wafer fab, okay. Our ASP actually is quite stable. You'll remember we're using the model as 1.5% down to 2% quarter. That's our models. And we are looking at probably about same part of the rate. And but so basically the reason for ASP point of view can be within the model is really for for commodity is down more. But if I look at the automotive and Pericom IC in third quarter, they all have the record of from automotive and from telecom ICs and also the high GP products. So from we expect that kind of product area will continue and therefore commodity or dip commodity is go down, but the higher GP product going up. Therefore, we are ASPs within the motor. Okay. It's a follow-up question. I wanted to ask about seasonality for the first quarter. Typically in the 1st calendar of any calendar in fiscal year, you see of the neighborhood of a 3% sequential revenue decline, just given what you know today about timing of Chinese New Year and maybe demand trends or whatnot, how would you call the seasonal trends in the first quarter relative to revenue And then with respect to OpEx, one would think that you would show an increase in OpEx sequentially in the first quarter because of payroll taxes and whatnot, but in recent years, you've basically trended flat in the first quarter on a sequential basis. So how would you call the OpEx change as we look into Q1, Brett? Okay. Gary, again, and our from seasonality point of view, our 1Q typically is 5%. Okay. And so we expect this year similar to that kind of drop, but we are not sure yet But from the market point of view, what we can see, probably similar to that kind of drop is about 5%, okay. From the the operational course point of view actually is going to become more coming from under loading cost, okay. Not from the that's the GP, okay. And from the very operational cost, you know, salary, yes, we have 2 2 cost up point. 1 is in July, which is more the for the direct up more for the in direct employee like like our engineer and our managers that typically is in the July 1st July. Then for the operator or operation point of view, manufacturing, then it's in 1, January or right? Within the Chinese New Year. So they would be 1Q. So yes, that one operation will be down, operation costs will be up slightly. All right. Thank you for that. Our next question comes from Sean Harrison with Longbow Research. Yes. Thank you, Sean. If you look at the guidance in terms of the sequential change for the December quarter. Are there any end market verticals that you would anticipate to perform better or worse than the implied sequential decline Well, I still believe our Pericom, IC and our automotive still going to be performed, quite strong, okay. We target 10% this year and so far we continue and in 10% and we even have the record. So in third quarters. So I still expect will continue very strong. I don't see a reason or a trend to go in weaker in automotive and the Pericom IC. Right. So let me just add a little bit more, right? So overall, automotive market is definitely not growing and it's actually quite slow. So majority of the growth coming from Diodes is really coming from the content expansion that we've been really focusing on So, again, overall market is definitely not growing. It's definitely not that positive, but overall our resell has been pretty positive really driven by the focus we've been focusing on for the last few years. And so I guess the takeaway would be the underperforming areas would be within consumer electronics, communications and PCs, just seasonality plus maybe a little weaker market trends, not trying to put words in your mouth, but Okay. Sorry, I assume you're talking about the Q4 revenue guidance. Correct. Correct. I was wondering if it's maybe the weaker end markets. Right. So I think overall lower revenue guidance is mainly driven by more than usual our year end inventory adjustment, especially in Europe and North America. But if you look at our overall business in 3Q, our POS is actually up. Our channel inventory is down. We actually performed better than our served the market, right? So even with our Q4 guidance, our whole year estimate would still grow about 2.8%, which is still much stronger than our peers, right? So I think overall, if you look at the business, we're very confident that we're actually in good shape. Gotcha. Very helpful. And then Brett as a follow-up, tax rate has continued to decline here, which is nice to see. As we look out over the next 12 to 18 months, how much further can that decline? Well, I would expect to continue to see some improvement there. It's hard to say exactly what that is, but, we're guiding into 4th quarter to continue that momentum down and I would expect to continue to see momentum, as we go into 2020. We've been working toward a model and we haven't gotten full entitlement of that yet. Okay. And then last, if I may. Just is China big regulatory approval here that is the one that you need to see, get cleared to get the deal closed in April? Or is there something else I'm missing? As China antitrust is the key item for us to, to be able to consolidate LSC, okay. We don't see they're going to turn it down. It might just the timing, because We will believe they will approve it that just may not be the time we expect. So that is the key. Yes, that's what we understand from our attorneys that are handling this for us. We basically addressed everything that's been asked. We provide all the information. It's just a matter of timing, working through their process. And we're just trying everybody updated on that. Thank you very much. And we are pride. We are pride per the requirement. So just order we do take all the action apply per order government requirement. That's right. Okay. Thank you. Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Doctor. Keisholu for any further remarks. Thank you for your participation Operator, you may now disconnect. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.