Earnings Call: Q1 2019

May 7, 2019

Good afternoon, and welcome to Diodes Incorporated First Quarter 2019 Financial Results Conference Call. Questions and As a reminder, this conference call is being recorded today, to save May 7, 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 First Quarter 2019 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. Keh Shew Lu, 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 the closing procedures and and customary, quarterly reviewed 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 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 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'll refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities And Exchange Commission, including Forms 10 K and 10 Q. In addition, any projections as to the company's future performance represent management estimates as of today, May 7, 2019. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change. Except to the extent required by applicable law. Additionally, the company's press release and management statements during this conference call will include this questions of certain measures and financial information in GAAP and non GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP to non GAAP items which provide additional details. Also throughout the company's press release and management statements during this conference call, we refer to net income attributable to common stockholders as GAAP Net com. 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 Dial's website at www.diodes.com. And now, I'll turn the call over to Dow's President and CEO, Doctor Keshi Lutz. Doctor Lutz, please go ahead. Thank you, Diane. Welcome everyone, and thank you for joining us today. Diodes once again had an exceptionally quarter of solid financial results. Achieving regular income and earning per share on both a GAAP and non GAAP basis Revenue for the quarter grew 10% over the prior year period on continued market share gains. And was down 3.9% sequentially, which was better than typical seasonality. Notable, gross margin increased 90 basis points from the fourth quarter 2018. Is hitting the upper end of our guidance range and the reaching the highest level since the fourth quarter of 2010. And we expect a further increase in the 2nd quarter. Contributing to this margin expansion was the achievement of the record revenue in Europe. Combined with record revenue in the automotive and industrial end markets. In the automotive market, revenue grew 7% sequentially and 23% year over year as we continue to benefit This 2 end market represented 39 percent of total revenue, which place us well on track to achieving our long term target escoring frequency control products, reaching record revenue level in the 1st quarter and contributed to our strong margin performance. We announced the closing of the transition to acquire Tesla Instruments wafer fab facility. And operation located in Greenup, Skyline GFAB. The ownership transfer has gone very smooth with no interruption to production. We are in the process of aggressively installing Diodes process to fully utilize the additional 8 inches capacity and capability of the fab, which will support our growth expansion initiatives and further cost reduction. As part of a 5 year wafer supply agreement. Diodes is also providing foundry service to TI, which is not material to dial overall revenue. As we look to the 2nd quarter, we expect to extend our growth momentum and market share gains. While further increasing gross margin and the rolling operating expense as a percent of the revenue. Together, These factors will contribute to driving higher profitability and the cash flow for Dial and our shareholders. One final comment, as announced in February 22, required to retire a CFO as of March 1st. And Brent Wittma, who has been with the company over 8 years, has assumed the CFO role. I would like to take this time to thank Rick for his many years of service to Dial and our financial organization. While also welcoming Brad into this new position. Rick will remain with Diodes part time and serve as corporate sectors as well as an advisor to the company. With that, let me now turn the call over to Brett to discuss our first quarter financial results, and our second quarter 2019 guidance in more detail. Thanks, Doctor. Lew, and good afternoon, everyone. I look forward to meeting and speaking to each of you in the coming quarters. As part of my financial review today, I'll 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 first quarter 2019 was $302,300,000, a 3.9% decrease from the $314,400,000 in fourth quarter 2018, which is better than normal seasonality. Gross profit for the first quarter was $112,400,000 or 37.2 percent of revenue, compared to $114,200,000 or 36.3 percent of revenue in the fourth quarter of 2018. The sequential increase in gross margin was primarily due to the record GAAP operating expenses for the first quarter 2019 were $70,300,000 or 23.3 percent of revenue and $65,800,000 or 21.8 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 in the fourth quarter 2018 of $70,300,000 or 22.4 percent of revenue and $65,800,000 or 20.9 percent of revenue on a non GAAP basis. Total other expense amounted to approximately $89,000 for the quarter, including $2,100,000 of interest expense, and $64,000 of foreign currency loss, largely offset by $1,200,000 of other income and $900,000 of interest income. Income from taxes and non controlling interest in the first quarter 2019 amounted to $42,000,000, compared to $42,800,000 in the fourth quarter 2018. Turning to income taxes. Our effective income tax rate for the first quarter was approximately 24 point or $0.62 per diluted share compared with $29,500,000 or $0.58 per diluted share last quarter. Share count used to compute GAAP diluted EPS for first quarter 2019 was 51,500,000 shares. First quarter 2019 non GAAP adjusted net income was a record $35,400,000, or $0.69 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 $33,200,000 or $0.65 per diluted share in the fourth quarter 2018. EBITDA for the first quarter 2019 was $69,900,000 or 23.1 percent of revenue compared with $70,500,000 or 22.4 percent of revenue in the fourth quarter 2018. 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 $69,900,000 for the first quarter 2019. Free cash flow was $51,200,000 which included $18,600,000 of capital expenditures and Turning to the balance sheet, $307,900,000. Working capital was $524,800,000 and long term debt including the current portion was $215,800,000. We are now in a positive net position with cash exceeding long term debt. At the end of the first quarter, inventory increased 1,200,000 from fourth quarter 2018 to approximately $216,600,000. The increase in inventory reflects a $5,100,000 increase in work in process, offset by a $3,700,000 decrease in finished goods. And a $200,000 decrease in raw materials. This is the 4th consecutive quarter of finished goods inventory decreases, reflecting our focus on reducing finished goods inventory. Finished goods inventory days were 27 in the quarter compared to 28 the fourth quarter of 2018. Total inventory days were 102 in the quarter compared to 100 last quarter. Capital expenditures on a cash basis or 6.2 percent of revenue. We expect CapEx for the full year 2019 to remain within our target model of 5% to 9% of revenue. Now turning to the outlook. We expect revenue in the second quarter of 2019 to increase to approximately $322,000,000, plus or minus 2%. At the midpoint, this represents growth of over 6.5 as well as revenue contribution from GFAB. We expect GAAP gross margin to be 38% plus or minus 1%. Non GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition related intangible assets, are expected to be approximately 20 interest expense to be approximately 5% plus or minus 3% and the shares used to calculate diluted EPS for 2nd quarter are anticipated to be approximately 52,000,000 Please note that purchase accounting adjustments of $3,700,000 after tax for Per common previous acquisitions are not included in these non GAAP estimates. Thank you, Brad, and good afternoon. As Doctor. Lu and Brad highlighted, first quarter revenue grew 10% year over year as we continue to gain increasing this year. Looking more closely at first quarter revenue, POS revenue was down slightly, mostly driven by the Chinese New Year and weaker demand in Asia. We started to see a recovery for Diodes business in March. Europad record high results and the North America remained strong. Distributor inventory in terms of weeks increased sequentially in the first quarter. But is within our normal range of 11 to 14 weeks. We expect distributor inventories to remain within our normal range of 11 to 14 weeks in the near term. Looking at global sales in the first quarter, Asia represented 70% of the revenue Europe 13% and North America 13%. In terms of our end markets, industrial was once again our largest represented end market at 29% of revenue, consumer 23% communication also 23%, computing 15% and automotive 10% of revenue. Now let me review the end markets in greater detail. As Doctor. Lu mentioned, our automotive end market had a record quarter, growing 7% sequentially and 23% year over year and reaching a record 10% of total revenue. This continued growth is a result of our past design win activity and momentum across and expanding customer base in all application areas. Particularly in our 3 focus areas of connected driving, which consists of ADAS, telematics, and infotainment system, Comfort's style and safety, including lighting and brushless DC motor control and powertrain covering conventional Hyperanelectric vehicles. From a product perspective, both our analog and discrete product family continue to be strong for us in the automotive market. PCI Express 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 product designed to support PCI Express protocol. In fact, that was the only supplier to offer PCI Express 4.0 lock generators and clock buffers with AECQ Grade 2105 C ambient temperature support. We are also seeing a lot of activities from Automotive customers for our DCDC converters, timers and USB switches for USB Type C infotainment and charging applications. Our sensor business also continues to grow in applications like power windows, doors, seatbelts, pumps and shift gears. We also continue to gain traction with MOSFET design ins across a number of auto applications as well as strong revenue growth in battery management system applications for automotive grade senior diodes and rectifiers. As a result of our automotive expansion initiatives, over the past 5, 6 years, we have increased our potential semiconductor contact per vehicle to $85 per vehicle, an increase from a prior estimate of $70. Which will continue to drive further revenue upside towards our long term targets. We also saw strong growth in industrial end markets with revenue increasing almost 12% sequentially and 39% year over year to reach a record 29% of total revenue. Our momentum continued with new design wins activities across applications such as metering, DC fans, power tool and power supply as well as home appliances, including Elau applications. With our newly introduced low power PCI Express 2.0 package, which we continue to expand our market position in industrial PC, with expanding design in activities. Our product low power performance is diode leading position in the small lane expansion applications. We are also seeing USB Type C adoption into medical equipment with our DMI over Type C crossbar switch design in for transporting video image to the monitor over our USB Type C interface. In the consumer market, we continue to see growth for our SBR and Shopee products for new applications like smart speakers, handheld portable devices, wire and wireless chargers, gaming, white goods, OLED TVs, as well as USB EOS and data line dollars. Additionally, we have seen significant design win activities with DCDC products, driven by IP TV over the top TV and set top box applications as well as bipolar transistor design ink for TV and monitor applications. We're also seeing strong demand for our hall sensors in applications like wireless earbuds and IoT. And our audio products are gaining traction in monitor and gaming applications. Also in the first quarter, we our increasing content growth in TV panel applications across a broad range of products, including switching diodes, senior diodes, and transcend voltage suppressors. We're also beginning to see revenue growth in Ambulance Reliability applications on low profile negotiations end market, we're seeing new design wins in 5G applications like base stations, CPE, small cell, and data center for many of our products, including PCI Express 2.0 Packet switches, IceQUARE C SBI port expanders, level shifters, mOSets, and timing. We're also seeing an increasing need for our sensors in smartphone applications with the demand for high speed, low loss, mid switches continue to grow in mobile applications as display resolution and number of camera module increase. Power density in particular is a key concern for smartphone manufacturers, and Diodes has been actively engaged in this market with its comprehensive small footprint DFN and CSP MOSFET portfolio as well as our ACDC products in charging adapter applications. The mobile device and smartphone market continues to be a key growth area for our protection products, especially in support of the later trend to replace a 3.5 millimeter audio jack with a USB Type C connector. Lastly, in computing, power density and efficiency are driving our hardware evolution and diodes at the forefront with our comprehensive portfolio of MOSFET power blocks and SGT MOSFETs in the DCDC power conversion. Additionally, our diodes and rectified product continue to expand in notebook and desktop power applications as well as wireless charging and printer applications with broad range of products, including SaaS and Ultra SaaS recovery rectifier a high voltage switching diodes and TVI Zinger diodes. With an increasing adoption of USB Type C in the notebooks and PCs, We have been seeing strong revenue growth for our complete USB Type C solutions, including switches, redrivers, timing, charging and protection process. In summary, our first quarter once again demonstrated a solid operating leverage in our business model, resulting in a record profitability despite the sequential lower revenue. Our strong position with customers as well as our past design win activities has enabled us to consistently gain market share and outperform the market. Additionally, our increasing content in both the automotive industrial market, combined with expanded opportunity for our Pericom products, position us to drive continued revenue and profitability growth in the coming quarters. With that, We'll now open the floor questions. And our first question is from Sean Harrison with Longbow. Your line is open. Good afternoon. This is Gace Chowdhury on behalf of Sean. Congrats on a solid quarter and guidance. First off, can you give the POS versus POP number? I think said POS was down slightly. If you have more details, please? Yes. So this is Emily. So our POS is down slightly compared quarter to quarter. P or P also down slightly quarter to quarter. That's based on our guidance. So, you know, that's how we look at the inventory level as well, right? So it's still within our range, as defined as normal between 11 to 14 weeks. Okay, thank you. And then can you reconcile your view on the auto and industrial strength that you're seeing given the weakness that was cited by of your peers? And then also your view on Pericom within these markets, are you still bullish for 2019? Any further detail be helpful. Thank you. Right. So, if we look at the automotive market overall, the consensus is actually from the demand point of view is down. So where gallo is actually gaining is really based on the past the demand creation effort and also the content expansion. So even the overall market is down, we're still seeing a very good growth, right, 7% quarter over quarter growth, 23% year over year growth. So that's specific related to the automotive. And then related to the Pericom, you know, we also seen a significant growth contributed to our Q1 revenue and we expect the growth will continue into 2019 and the rest. This is really based on the, you know, the demand creation pipeline and also the information that we receive from the contact engine point of view. And our next question is from Tristan Gerra with Baird. Your line is open. Hi, Doctor Lu. During the earnings call, I think it was in October of last year, Rick was highlighting the potential for diodes to reach 38% gross margin by the second half of this year. And then it sounded like your outlook for gross margin early this year was more muted to about 36%. Today, your Q2 gross margin guidance is 38%. That's even ahead of last year's expectation. And at the time, one could contend that the end demand environment was stronger than what you're seeing today. So I know you mentioned Europe and automotive, but could you go more into details about the catalyst for gross margin what makes it better than you thought earlier this year? Maybe quantify how big Pericom is as a percent of revenue and how tangible using this gross margin outlook is into the 2nd half? Okay, Jason, if you know, I didn't emphasize if we group the Automotive And Industrial Revenue Automatically the gross margin will be improved better than our expectations. And So, you can see the result. Automotive while the market went down, our sequential still go up 7% and year over year it's a 28% So you can see the effort due to the past design win plus the content increase as I mentioned to you several times. This loan growth enabled us to reach 10% now 10% of our revenue. And we continue to improve the automotive performance. And that is the one key sense to improve the gross margin better than expected. Another one is Now this quarter industrial is 29% of our total revenue. An indication of the significant growth in the industrial area for tayo, while the market kind of slow down. And I think you see through other people's earning conference call in Nashville is actually slowed down a little bit, but for Tayo, we continue gaining the market share. So if you like to if you look at my long term strategy, I've been talking about I want to improve the industrial and automotive to 40% of our revenue We already reached 39 and we'll continue our long general of getting higher and higher automotive industrial, industrial applications. And this will enable us to continue to improve our gross margin. One more thing, due to our Pericom acquisition, you know, our Pericom product result the frequency control or yes, those kinds of the IC product have been contribute a significant growth contribute to our margin. If you remember, our Pericom product typically, have a 50% GP or higher. And so if that sector grows very faster, then it again enable us to exceed our gross margins guidance. And if you look at the Pericom product concentration on the data center, crowdcomputers and servers and automotive applications. All those is a good and deep growth effort for us and contribute better than average growth in diodes patients. So I'm still very confident we'll continue able to benefit from this three key area which is high GP and change our product mix to work the ITP product. Even we get some pressure from the low end commodity type of product the price pressure is there, but due to our effort on the other market segment, I mentioned that our GP still able to continue to improve. That's very useful. Thank you. And then as a quick follow-up, the market share gains, we can certainly see that and understand it in automotive because your ramp started or your exposure in autos are smaller than some of your peers. But in industrial, you do have a very meaningful percent exposure. So what would you say at a high level is driving the share gain? Is that packaging? Is it pricing? Any particular factor that you could emphasize? Right. I think, this is Emily. Let me address the question, right? I think it's really about contact expansion. Right. So, you know, even the market may not be growing from the total demand point of view, but we've seen significant content expansion within the industrial area, right. The leverage between the diodes and also the Pericom product line that we've seen significant push in this area for us. Yes, packaging is one of the packaging is one of the health But right now, we are not just depend on the packaging. The real reason is which we start to focus on solution providers. Since through all different acquisitions, Our product line now is very completed and it's enabled us to provide to our customer a total solution. So with Emily's drive, we now focus on provide our customer the total solution. And this is the difference from the past. Great. Thank you very much. And we have a follow-up from Sean Harrison with Longbow. Your line is open. Hi, again. Can you talk a little bit about the TI back acquisition. What is associated with that within your guidance? I think any details you might be able to provide on the expected accretion or impact to margin or OpEx would be helpful. And then also having to do with the acquisition, how does the fab affect CapEx profile? Thank you. Okay. The Tier acquisition, one of the elements is we will provide PI with some wafer supply agreement, but it's material, it's not material. So it's not big compared with our diodes revenue. Okay. 2nd, we keep it emphasized. It's accretive. Even the margin is not as high as our average, but it's accretive to our business. And we're going to use and we are, like I mentioned, we are aggressive now to qualify our own process because we want to use it to support our future growth. Okay. So we are tied up pretty tight on our wafer supply and we have a lot of wafer needs to outside and controlled by other foundry patients, foundry people. So what we want to do is increased again our own supply, our own. So it will helping us in the future for the growth. To other questions on CapEx. So this is within our CapEx model. Yes, the I think that the company is autodial. We maybe missed here there for some of the equipment needed for our process. Okay, but most of the equipment is already there. So with the GFAP and therefore, it's still within our CapEx model of 5% to 9% of our revenue. So it won't increase our CapEx requirements Thank you. And I'm not showing any further questions in the queue. I would like to turn the call back to Doctor. Kishu Lu for his final remarks. Thank you for your participation on today's call. Operator you may now disconnect. Thank you everyone for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day.