Earnings Call: Q2 2019

Aug 5, 2019

Good afternoon, and welcome to Diodes Incorporated Second Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference call is being recorded today, Monday, August 5, 2019. I would like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead. Good afternoon, and welcome to Diodes' 2nd quarter 2019 financial results conference call. I'm Leanne Sievers, President of Shelton Group Dowd's Investor Relations firm. Joining us today are Diodes' President and CEO, Doctor. Keishi Lu, Chief Financial Officer, Brett Whitmire, Vice President of World sales and marketing, Emily Yang, and Director of Investor Relations, Laura Murrill. 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 and subject to revision until the company files its Form 10Q for its second 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 risk and uncertainties in the company's filings with the Securities And Exchange Commission, including Forms 10K10Q. In addition, any projections as company's future performance represent management's estimates as of today, August 5, 2019. Diodes assumes no to update these projections in the future as market conditions may or may not change, except to the extent required by applicable law. Additionally, company's press release and management statement 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 at www.diodes.com. And now, I'll turn the call over to Diodes' President and CEO, Doctor. Keishu Lu. Doctor. Lu, please go ahead. Thank you, Ian. Welcome everyone and thank you for joining us today. Diodes once again set new records across multi functional metrics in the second including revenue, gross profit, EBITDA and net income. Gross margin also further expanded by 260 basis points year over year. And the 70 basis points sequentially. As a result of record revenue in the automotive and natural end markets, as well as from our telecom IC products. Additionally, we continued to successfully drive increased profitability on incremental revenue growth. With the first half twenty nineteen revenue, increasing 8% over the same period Dase and non GAAP net income increasing more than 40% over the same period. Of note, our both market performance was achieved in the current global trade environment as a better result of our test design wins and expanded customer content. Over the past year, we have been strategically focused on demand creation and deploying a total solution scale approach that leverage our broadened product portfolio. Contributing to our consistent share gain. I believe gross profit strategy will continue to sustain Diodes future growth and outperformance of our served market while also driving increasing profitability and cash flow. Additionally, our exceptional financial performance enabled us to aggressively reduce our long term debt by $44,000,000 during the quarter. We now have a $70,000,000 net positive position of cash and short term investments to our total debts, which provide us a increased flexibility and that opportunity to consider strategic acquisitions. With that, let me now turn the call over to Brett to discuss our second quarter financial results and our third quarter 2019 guidance in more detail. Thanks, Doctor. Lew, 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 second quarter of 2019 was a record $322,000,000, a 6.5% increase from $302,300,000 in the first quarter 2019 due to continued strong performance in Europe and North America, as well as the automotive and industrial end markets. Gross profit for 2nd quarter was a record $122,000,000 or 37.9 percent of revenue compared to $112,400,000 or 37.2 percent of revenue in first quarter 2019. The 70 basis point sequential increase was primarily due to record high revenue contribution GAAP operating expenses for the second quarter 2019 were $73,500,000, or 22.8 percent of revenue $69,000,000 or 21.4 percent of revenue on a non GAAP basis. Which excludes $4,500,000 of amortization of acquisition related intangible asset expenses. This compares with GAAP operating expenses or 23.3 percent of revenue and $65,800,000 or 21.8 percent of revenue on a non GAAP basis. Total other expense amounted to approximately $639,000 for the quarter, including $2,000,000 of interest expense $496,000 for foreign currency losses. Partially offset by $1,200,000 of other income $633,000 of interest income. Income before taxes and non controlling interest in the second quarter 2019 amounted to $47,900,000, compared to $42,000,000 in the first quarter 2019. Turning to income taxes Our effective income tax GAAP net income for the second quarter 2019 was a record $36,300,000 or $0.70 per diluted share. Compared to $31,700,000 The share count used to compute GAAP diluted EPS for the second quarter of 2019 was 51,600,000 shares. Second quarter 2019 non GAAP adjusted net income was a record $40,000,000, or $0.77 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 35 point $4,000,000 or $0.69 per diluted share in the first quarter 2019. EBITDA for the second quarter 2019 was a record $77,100,000. Or 23.9 percent of revenue compared with $69,900,000 or 23.1 percent of revenue in first quarter 2019. 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 $40,600,000 for the second quarter 2019. Free cash flow was $8,500,000, which included $32,100,000 and net cash of $44,100,000 of long term debt, as well as cash used to acquire Texas Instruments Greenrock Scotland fab in early April. And the final payment for our Cash and cash equivalents plus short term investments totaled approximately $242,000,000. Working capital was $481,200,000 and long term debt, including the current portion, was 171,900,000 In terms of inventory at the end of second quarter, total inventory days decreased to 100 in the quarter compared to 102 last quarter. Total inventory dollars amounted to approximately $223,000,000, which reflects a $3,100,000 increase in work in process, a $1,800,000 increase in raw materials and a $1,500,000 increase in finished goods. After four consecutive quarters of finished goods decreases, These good inventory days was 26, down from 27 in first quarter of 2019. Capital expenditures on a cash basis for the second quarter 2019 were $32,100,000, which includes an 18.1 Building on our strong first during a time in which our served market was down more than 6% further highlights our ability to deliver growth in a down market. For the third quarter, we expect revenue to be approximately $324,000,000 plus or -2 percent which at the midpoint represents another quarter record and continued growth year over year as well as further outperformance of our served markets. We expect GAAP gross margin to be Non GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition related intangible assets, are expected to be approximately 20 will be approximately $2,000,000. Our income tax rate is expected to be 23.3 percent, plus or -3 percent, and shares used to calculate diluted EPS for the third quarter are anticipated to be approximately $52,000,000. Please note that purchase accounting adjustments and previous acquisitions are not included in these non GAAP estimates. With that said, I now Thank you, Brett, and good afternoon. As Doctor. Lu and Brett highlighted, 2nd quarter revenue grew 6.5% quarter over quarter and 5.9% year over year as we continue to reach new records across our business and gain increasing market shares. Looking more closely at 2nd quarter revenue, point of sales revenue was up, driven by the strong demand recovery in Asia, Distributor inventory in terms of weeks was flat in the 2nd quarter and remains within our normal range of 11 to 14 weeks. Looking at the global sales in the 2nd quarter, Asia represented 74% of revenue, Europe 14% and North America In terms of our end markets, industrial was once again our largest representative end market, 29% of revenue, communications 23%, consumer 22%, computing 16, and automotive 10% of revenue. During the same period in 2018, industrial was 27%. Communications was 23%, consumer was 25%, computing was 16% and automotive was 9%. Now let me review we achieved other quarter of record revenue as we continue to benefit from past design win activity and expanded customer content. As I have discussed in the past, Diodes has been focused on strategically deploying a total solution sales approach that leverage our bottom product portfolio, which has been a key contributor to our consistent share gain and growth in this market. From a product perspective, we had solid revenue growth in our switching diodes, Xener diodes, hall sensor, MOSFETs, LDOs, and proprietary SBR product family. This products are targeted at a variety of applications, including battery managed system, advanced driving assistance system or ADAS, acoustic domain controllers, airbag control, lighting, body control, infotainment display, and gear shift level indicators. During the quarter, we released a number of new automotive grade products, including real time clock, interface larger level shifters and hall sensors. We saw design ins in brushless DC motor, water pump, power window, electric horns and infotainment. Wireless charges for portable equipment like mobile phones are becoming a popular feature of vehicles. Side is designed into several automotive modules. We also continue to see adoption of in the automotive LED lighting especially in front side, rear side and interior lighting, where we are winning designs for our LED drivers with a number of automotive customers. With the record increase of electronics in today's highly connected cars, Robust ESD protection is becoming increasingly more important. We are seeing excellent design win momentum in the connected driving applications for our protection products in applications such as ADAS, telematics, and infotainment. We also continue to set new record revenue in industrial end market as well, growing 13.7 year over year. Together with Automotive, this 2 end market represented 39% of total revenue. We are gaining increasing momentum in connected lighting and commercial spot lighting application for our SGP MOS technology and LED drivers. Drones and laser scanner are also driving growth in the industrial end market for our Zener diodes and also continue to secure more design wins with DCFAN applications for regular transistors, gate drivers and bipolar transistors. With a wrapper adoption of high speed interface across multiple end applications in the IoT marketplace. ESD protection is getting more important for data links as well. We are seeing multiple design wins for our data line platform, which offer best in class ESD clamping voltage performance while minimizing capacitance loading on the data line. Also during the quarter, we added new products in smaller package for DC to DC converter that are suitable for home applications power tools and other industrial applications. Our newly released YN LDOs are gaining strong momentum in this market. Especially for e meters and detector applications as well as DC to DC bug converters in solar in her applications and high voltage hall sensor in power tools. Turning to consumer market, Diodes protection product continued to gain track in all type of panel applications. Our new miniature super high surge performance detector product has been designed into earphones wearables, portable devices, TVs, and smart speakers. We also saw significant revenue growth for BJT product driven by TV and monitor design wins. We also secured increasing design wins for our standard recovery rectifier. Low voltage haul sensors and TVS products in large panel TVs, cloud based cameras, robotic vacuum, and lawn mower While switching diode has solid growth in white goods home appliances, our Zener diode will also design into smart thermostat as well as powered sound system. Diodes also continued to gain strong momentum in quick charger, and direct charger application with our USB power delivery solutions, which help reduce the charging time of batteries. We also continue integrated high speed marks for USB 3.1 and USB 2.0 are seeing new design wins. In the communication market, the traction from 3g to 4g and then 4g to 5g has become the major trend to meet the requirement of significant speed upgrades and large amount of bandwidth. Our products are well aligned to this trend with our cloud buffer solutions currently being designed into 5g base station. This product are used as Christmas critical sampling class for the baseband unit and remote radio units. Diodes' diverse cloud portfolio and super jitter performance are the key technical factor for these applications. In addition, we see tractions in 5G applications for discrete tower management and connectivity products, including USB redricers and switches and are also gaining traction in other communication applications such as new voice over IP phone, telecom power product as well as data network and gateways. Also in the communication market, mobile phone and portfolio application continued to grow growth for our protection and power switch product. Our gate drivers have been successfully designed into latest wireless charging transmitter module, wireless and ShawKey product continued to gain increasing penetration in IoT, mobile and smartphone market by offering product with a similar profile and compact dimensions. Design Wins are also being achieved with high variety bitrate products for applications such as POE, surfer power and data center. Lastly, in the computer market revenue increased 13.5% sequentially as a result of increasing traction for our Pericom product family. Power density and efficiency are fueling the development of the hardware evolution and Diodes is actively engaged in this market with NLDMOS in DCDC power conversion and ultra low ROM PMOS for low switch for battery management in computing application. During the quarter, we saw strong revenue growth our standard recovery rectifier and synchronize rectifier functional array products in surfer power and fan app locations. Along with this trend, we also saw growth for our power switch and YVLDO in notebook and the high current LDOs in server applications. Additionally, our protection products along with timing cynal integrity, USB Type C switches, redrivers, charging and power management products are seeing significant activity in notebooks, tablets and PC applications. Further, our focus and momentum in the cloud computing segment continues as our new product for timing funeral integrity and switching are being designed into server and data center applications. In summary, Our achievement of record results in the 2nd quarter underscore Diodes solid positioning across global customer base as well as the benefits from our past design win activities and new product initiatives. Additionally, we continue to gain increasing contact at customers with our expanded product portfolio, including our Pericom product family. Our consistent performance continues to set diodes apart, especially during the current market environment. We look forward to providing Thank And our first question is from Tristan Gerra with Baird. Hi, good afternoon. Could you talk about your progress on the 8 inches capacity ramp and is that helping gross margin? You will talk about the, is it cheaper? Correct. Yes, either it actually step 2 in Shanghai. Okay. That's our expert. Okay, our excess 8 inches is going to be rented up. And so in the second quarter, we are fully ended up. And of course, it is 2018 a gross profit for us And due to the cost, it's cheaper and due to the the equipment and the capability is new in our area and we are able to roll it while in the past, we have a capacity constraint on the MOSFET. So it helped on the gross margin improvement. Great. And then given the macro, which you've obviously outpaced very nicely with share gains. How should we look at your gross margin trajectory medium term? Do you feel that you can sustain gross margin at the current level? Any commentary that you could provide your medium term? Well, the economic situation is actually slow down. We all know that But the Diodes continue to increase the market share. We continue gaining the growth, gaining the revenue. If you compare even at the midpoint of our third quarter, you've discussed that 9 months of this year versus 9 months of last year, we actually going to grow 5.4%. And on top of 2018, both 2017, we grew 16%. So year over year last year, 15% this year 9 months versus 9 months, we're going to grow 5.4%. Therefore, even the market is soft, which everybody know the TAM actually going down, but our demand still there. So we our capacity is still utilized quite well. And that's what our CP we still continue somewhere around 37.5to37.8 in that range. We continue to improve. So, I still feel good about our gross margin and at this believe we still can continue in that kind of range. We saw well, we do a seasonality or typically, price erosion, but we don't need to particularly erodes our price too much to gain the capacity or to analyze the capacity. Okay. That's great. And then just a last very quick one. Any color you can provide on your Fontaine utilization rates? Oh, installation? Oh, yes. So the utilization rate for our back ends is running in the mid kind of mid 90s, which running good. In terms of it. And that's what we see. So we're able to modulate some of the things we outsource. So the internal utilization has been pretty good. Yeah, you know, the way we set our model, 80% for wafer fab and 95% for AP consider as a full because you cannot really fool all the capability or all the packaging Therefore, we typically use 95% as I said, that means majority of our capacity is full, but maybe here layer has some unused capacity due to special packages. So based on that, we still are vocal fab and our 18 still quite good. And that's why we are able to maintain our gross margin And we've seen since our revenues go down, our building situation is going to be the same. So we don't see a huge issue from that point of view. Thank you. Our next question comes from Sean Harrison with Longbow Research. Hi and good afternoon and my congratulations everybody. Thank you. Hi, Tom. If we look into the September quarter or even the back half of the year, either Doctor. Louis or Emily, what end markets are you seeing continued strength either on a sequential or a year over year basis versus kind of further contraction or incremental weakness? Well, that's separate into 2 things. 1 is the chemo market. Okay, we predict similar market this year is weaker compared with last year. And that's why everybody started guidance year over year growth is either negative offer it. And so that is a terminal market, okay. And but if you look at the titles, we fighting very hard during the slowdown market am able to continue keep us on the growth path. And I know it's getting harder but we still committed to continue, you know, growth year over year. Okay. And so, automotive actually, you see, we see the slowdown in automotive and fortunately, Tayo can grow our automotive revenue by increased the content. In natural, I think that first swiss have for us is very good we have been setting the breaker for the industrial and we see this is some slowdown in U. S. And Europe, okay? But that's where our major one is, but we don't have very strong in natural in Asia. But for the multi, we do have very strong in Asia and we still continue increase our revenue in Asia or in China in particularly. So Although the market do slow down, Tayo, we're hoping we can continue our year over year growth. Especially our first half, we already grow 7% or 8%. Okay? And then even including the third quarter, the 9 months of year over year, we we are going to grow 5.4%. So we still continue to push our revenue growth. Okay, great. As a follow-up, Emily, or Doctor. Lou, the point of sale versus point of acquisition number for distribution, was there a big variance this quarter? Did you see any of your notable destocking at distribution? No. So as I reported, right, our channel inventories within our normal range, 11 to 14 weeks if I compare quarter to quarter, it's pretty flat. So we manage it very closely for the channel inventory. So that's really what we've been doing. Okay. And then The point of sale, yes, so for the point of sale, we do actually see good recovery from as I reported in my script. So, I think that that's really encouraged to see. So, you know, definitely that's that's a good momentum that we want to continue. Great. And then last for me. I wanted to just get some I guess an answer on the rising intercompany sales. I know there's been some questions about that and how that's changed over the past 12 months. And I don't know if that's a factor of moving fabs around, other issues at work, but if you could just speak to kind of the rise of intercompany sales that we've seen over the past 12 months? The biggest change in intercompany sales is, operating in a more of a global supply company way in terms of how we move our product and interact with our internal and external manufacturers. You also see some optimization occurring with our customers regarding how they want to take product, where they want to receive that product, and how we'll serve them. So, that's the biggest changes that you see in that. And our next question is from Gary Mobley with Wells Fargo Securities. Yes. Hi, Gary. Let me extend my congratulations again on a solid first half of the year. I realize that there's not a whole lot of tariff headwind to your products that you're specifically selling, but you do sell heavily into the Taiwanese ODM supply chain, much of that product is consumer oriented. And we have various tariff, implementation dates that most recent of which is coming up here the 1st day of September. And so have you been seeing any pull forward of demand from your Taiwanese ODM customers as they're trying to get ahead of these tariff implementation dates? Okay. Number 1, This switching to tariffs on this 300,000,000,000 is already talking for certain point or foreigner. So we do have customer want to move their assembly or they CN outside of China, well, did they talk on and off here, there, we do see that. And some of them actually always taking the action move to South Asia or Taiwan. They already, some of the CN do actually take actions. Now for all product, And our product, we ship through the Centimeters. So if they move, we just ship according to where they want to pursue. So we don't really see not much effect to you today. Now the new announcement just announced several days ago. And so I don't have any reaction to the market or any market reaction right away. Yes, okay. So talking has been talking for a while. Any particular reaction after the new announcement I just came back from Taiwan last night, but unfortunately, this is done. But before the weekends, so I don't really see any reaction Okay. Now you guys have obviously taken a lot of market share in the first half of the year. Probably the most notable share gain period that you've had in the company's history. And so I was wondering if you could talk about the types of competitors that you're taking share from? Is it the old world Japanese IDMs? Is it some of the former U. S. Competitors have been acquired by other U. S. Companies that have left some market share for you to gain. And I know your products are great products and you probably won the design wins on the own technical merits of the products, but is it just an easy environment to take share given that other people perhaps have deemphasized products that you're promoting. Well, Gary, I think I already talked about this for several times And number 1, I really don't like to point out our compared to the names because it's not really provide to kill them. We get the shield out of them, okay? So I don't want to them, the company's name, but basically, our growth coming from content increase, solution sales, okay, content increase you know, take automotive compared with 5 years ago, the electronics content on automotive do increase significantly Celinae country. And therefore, since our exam, our growth in automotive area is not the vehicle growth. It is really due to the content growth. The vehicle might grow some even like recently it actually go down, but our content increased overcome that significantly. If you took out automotive growth, CAGR, the last 5 years, is 35%. And even this year, it's going to slow down. We're still looking at 20 something percent, the the automotive revenue increase. So, I quit the market slowdown. We gain it now I don't want to say we take the share from company A or B. I don't want to say that. I want to say due to the content increase, We take advantage of that and we grow our revenue. Industrial, the same thing. We are solution sales through all the acquisition in the past, including Pericom, including VCD, even including a G test, where acquisition give us very complete product portfolio. So, Enry is able to convert our component sales into solution sales So now we bring the whole solution to our customer and to the same application different customer. To show them what is our product portfolio to get into that solution. So when we say we are no longer component sales. We are now a solution sales. That's the second one. The third one is really due to the past several major acquisition in the semiconductor fields. We automatically to provide a second source opportunity to our customer. So by the industry's industry consolidation, We Diodes is virtually has a good quality, good product and good solution will automatically to be the 2nd resource of our customer. And number 4, with all those acquisition, we now can have another synergy and cross sales to each other a product line. And so if you add in those 4 things, you know, content increase, solution sale, a strategic, industry consolidation and our M and A, it gives us the opportunity and the chance to grow better than our competitor. So it's not only one thing of take away from one customer. This is the way we can continue growth and gain the market share in the past. And will continue in the futures too. Okay. Well, thanks for the detail, Doctor. Luh. And this concludes our Q And A session for today. I would like to turn the call back to to Lou for his final remarks. Thank you for your participation on today's call. Operator, you may now disconnect. Thank you, everyone, for joining our call today. You may now disconnect. Have a wonderful day.