Earnings Call: Q1 2018

May 8, 2018

Good afternoon and welcome to Diodes Incorporated's 1st Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen only mode. At the conclusion of today's conference As a reminder, this conference call is being recorded today, Tuesday, May 8, 2018. I would now like to turn the call over to Lian Sievers of Shelton Group, Investor Relations. Lian, please go ahead. Good afternoon, and welcome to Diodes' 1st Quarter 2018 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. Keshi Lu, Chief Financial Officer, Rick White, Vice President of Worldwide Sales And Marketing, Emily Yang, and Director of Investor Relations, Laura Marl. 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 subject to revision until the company files its Form 10Q for its first quarter 2018. 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 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's estimates as of today, May 8, 2018. Diodes assumes no obligation to update these projections in the future as market conditions may or may not call will include discussions 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 income. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 60 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. Keh Shew Luh. Doctor. Lu, please go ahead. Thank you, Diane. Welcome, everyone, and thank you for joining us today. 5th quarter revenue was at the high end of the guidance, primarily driven by strong growth in the consumer, automotive and industrial markets, complemented by revenue in Europe reaching record levels In fact, our automotive end market reached 9% of the revenue in the quarter as we continue to benefit Since implementing our automotive strategy in 2013, we shift a compound annual growth rate of 27 percent in this business, reflecting our expanded customer base increasing pipeline of design wins and the growing content across multiple applications. The quarter was also highlighted by gross profit dollars, reaching a record growing 33% year over year. Twice the rate of our revenue growth and contributing to an almost 3.5x increase. In non GAAP earnings per share over the same time period. Additionally, EBITDA in the first quarter reached a record $54,200,000 or 20 percent of revenue. The operating leverage in our business model partitions diodes to deliver increasing profit and cash flow in the coming quarters. As revenue continues to increase at a faster rate than operating expense and approach our target model of 20 percent of revenue. Looking to the second quarter, we expect to extend our growth momentum with continued strength across our target geographies and the end markets, which we anticipate when we sell in the achievement of new quarterly records for both revenue and gross profit. With that, let me now turn the call over to Rick to discuss our first quarter financial results and our second quarter guidance in more detail. Thanks, Doctor. Lu, and good afternoon, everyone. Revenue for first quarter 2018 was $274,500,000, an increase of 16.2 percent from the $236,300,000 in the first quarter 2017. And an increase of 2.3 percent from the $268,400,000 in the fourth quarter 2017. Revenue increased in the quarter with Europe achieving record revenue, mainly due to strength in the automotive and industrial end markets. Gross profit for the first quarter 2018 was a record $98,600,000 or 35.9 percent of revenue, compared to $73,900,000 or 31.3 percent of revenue in the first quarter of 2017. And $96,400,000 or 35.9 percent of revenue in the fourth quarter 2017. 460 basis point year over year increase in gross profit margin was primarily due to favorable product mix, increased contribution from Pericom products as well as improved capacity utilization. GAAP operating expenses for the first quarter 2018 were $71,700,000 or 26.1 percent of revenue. And $64,700,000 or 23.6 percent of revenue on a non GAAP basis, which excludes $4,800,000 amortization of acquisition related intangible asset expenses, $2,600,000 of expenses related to officer retirement and a $300,000 credit related to the Kfab restructuring. This compares to GAAP operating expenses in the first quarter of 2007 of $64,600,000 or 27.3 percent of revenue and non GAAP expenses of 57.3 or 24.2 percent of revenue. And GAAP operating expenses in the fourth quarter 2017 were $72,900,000 or 27.2 percent of revenue. And $64,300,000 or 24 percent of revenue on a non GAAP basis. Looking specifically at selling, general and administrative expenses for the first quarter, SG and A was approximately $47,200,000, or 17.2 percent of revenue. On a non GAAP basis, excluding the officer retirement expenses, SG and A in the first quarter was approximately 44 point $1,000,000 or 16.2 percent. This compares to 39.7 percent or 16.8 percent of revenue in the first quarter of 2017. And $44,700,000 or 16.7 percent of revenue for the fourth quarter 2017. Investment in research and development for the first quarter was approximately $20,200,000 or 7.4 percent of revenue. This compares to $18,000,000 or 7.6 percent of revenue in the first quarter of 201719.7000000 dollars or 7.3 under revenue in the fourth quarter 2017. Combined SG and A plus R and D for the first quarter 2018 was $67,400,000 compared to $57,700,000 or 24.4 percent of revenue in the first quarter 2017, and $64,400,000 or 24 percent of revenue in the fourth quarter 2017. Total other expenses amounted to approximately $600,000 for the quarter including a $3,000,000 foreign currency loss, a $2,800,000 interest expense These losses were partially offset due to the Kfab shutdown. Income before taxes and non controlling interest in the first quarter 2018 amounted to 20 $300,000 compared to $2,100,000 in last year's first quarter $20,800,000 in the fourth quarter of 2017. Turning to income taxes. Our effective income tax rate for the first quarter of 2018 was approximately 29.6%. GAAP net income for the first quarter 2018 was $18,500,000, or $0.37 per diluted share compared to GAAP net income of $1,200,000 or $0.02 per diluted share in the first quarter of 2017. And a net loss of $30,700,000 which included the impact of the Tax Reform Act. The share count used to compute GAAP diluted EPS for the first quarter 2018 was 50,600,000 shares. 1st quarter 2018 non GAAP adjusted net income was $24,200,000 or $0.48 per diluted share, which excluded net of tax, $3,900,000 of non cash acquisition related intangible asset amortization costs, and $2,000,000 of officer retirement expenses. This compares to non GAAP adjusted net income of $7,000,000 or $0.14 per diluted share in the first quarter of 2017. And $21,600,000 or $0.42 per diluted share in the fourth quarter 2017. We have included in our earnings release a reconciliation of GAAP net income to non GAAP adjusted net income, which provides additional details. Included in the first quarter 2018, GAAP net income and non GAAP adjusted net income was approximately $5,000,000 net of tax of noncash share based compensation expense. Excluding share based compensation expense, both GAAP diluted EPS and non GAAP adjusted diluted EPS would have increased by an additional $0.10 per diluted share in the first quarter of $2,018.05 in the first quarter of 2017, and $0.06 in the fourth quarter of 2017. EBITDA, which represents earnings before net interest expense Income tax, depreciation and amortization was a record $54,200,000 or 19.7 percent of revenue in the first quarter of 2018. Compared to $28,600,000 or 12.1 percent of revenue in the first quarter 2017, and $47,000,000 or 17.5 percent of revenue in the fourth quarter of 2017. Cash flow generated from operations was $54,000,000 first quarter, which included $31,600,000 of capital expenditures. Net cash flow was a negative $21,300,000 in $46,500,000 of long term debt. Turning to the balance sheet. At the end of the first quarter, Cash and cash equivalents plus short term investments totaled approximately $186,300,000. Working capital was approximately 393 $900,000 and long term debt, including the current portion, was $221,800,000. At the end of the first quarter, inventory increased by approximately $20,000,000 from the fourth quarter 2017 to approximately $236,500,000. The increase in inventory reflects a $10,600,000 increase in finished goods, a $2,000,000 increase in work in process and a $7,400,000 increase in raw materials. The increase in finished goods inventory is to support our expectations for continued growth in the second quarter. Inventory days were 116 in the quarter, compared to 114 days sealable was approximately $174,100,000, a decrease of $26,000,000 from last quarter. AR days were 61 compared to 74 last quarter. Capital expenditures on a cash basis for the first quarter were $31,600,000, or 11.5 percent of revenue. This above model CapEx was to put capacity in place with the expected strong revenue growth in the 2nd quarter and second half of twenty eighteen. We expect CapEx for the full year 2018 to return to our target model of 5% to 9% of revenue. Depreciation and amortization expense for the first quarter was $25,600,000. Now turning to our outlook. For the second quarter of 2018, we expect continued strong growth with revenue increasing to a range of 292 $1,000,000 $308,000,000 or up 6.4% to 12.2% sequentially. We expect GAAP gross margin to be 35.5 percent plusor-1 percent. Non GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition related intangible assets, are expected to be approximately 22% of revenue plus or minus 1%. We expect interest expense to be approximately $2,500,000. Our income tax rate is expected to be 29% plus or minus 3% and shares used to calculate diluted EPS for the 2nd quarter are anticipated to be approximately 51,300,000 With that said, I as Doctor. Lu and Rick discussed. 1st quarter revenue was up 2.3% sequentially and up 16.2% year over year. Q1 distributor POP was flat and POS was down 6.6%. Europe and North America remained strong with record high POS south. Asia POS is down due to impact of the Chinese New Year holiday shutdown on our customers. Channel inventory increased 7.8% sequentially. As evidenced by our above seasonal results, Customer activity remains strong across regions with solid design activity and design wins. We continue to penetrate our key customer base with an expanded sales footprint deeper product line and significant cross selling opportunities with the Pericom product line. We set revenue record across 4 product categories in the first quarter, including Connected ASIC interface, protection devices and signal integrity. We also continue to see strong momentum in the battery management DPMS, switches, MOSFAC and CMOS LDOs, driven by recent design wins on new products. Going forward, we expect our expanded product portfolio, new product introductions and design win momentum with support continued revenue growth. Looking at the global sales in the first quarter. Asia represented 78% of the revenue, Europe, 13% and North America, 9%. In terms of our end market, consumer represented 27% of the revenue, Communications 24, Industrial, 23%, Computing 17 and automotive 9% of the revenue. As Doctor. Lu mentioned, our automotive market was a highlight in the quarter, setting a quarterly revenue record and growing 50% year over year. Given its strong performance, I want to start my end market commentary with the auto market, which has been a key focus area for Diodes for the past several years and also an area where we are seeing expanded opportunities for growth. During the quarter, we continued our penetration momentum by winning design ins with key automotive customers worldwide. There are 3 application areas where Diodes is gaining significant traction. Including connected driving, which consists of ADAS, telematics and infotainment system. Comfort, style and safety including lighting and brushless DC motor control, as well as powertrain, covering conventional hybrid and electric vehicles. Specifically in the connected driving applications, Diodes offers are led by PCI switches and redrivers as well as signal switches, timing and USB chargers, an area where Diodes currently offering some of the only AECQ qualified parts available in the market. For comfort style and safety, Diodes has a range of MOSFETs designed specifically to meet the needs of brushless DC driving, with many high and low power motor and vehicles covering functions such as fee adjustment, windshield wiping, fuel and water pump, as well as power steering. Also in comfort, style and safety, we've had strong success from LED products like bus, boost, lockboost, linear drivers and bipolar transistors in applications such as daylight running lights, real cluster, styling, instrument lighting, as well as the latest beam's durable LED matrix headlight technology. This segment represents a large portion of Diodes auto revenues with strong shipments, numerous design wins, and close engagement with target customers on further opportunity for growth. In the vehicle powertrain segment, Diodes supplies into conventional internal combustion engine powertrains as well as those for hybrid and electric vehicles. In fact, we have secured multiple design wins and opportunities for the battery management system to meet the needs of the fast growing electric vehicle market. As a result of our automotive expansion initiatives, over the past 5 years. We estimated that we can now address over $70 of semiconductor content per vehicle, which will contribute to driving significant revenue upside towards our long term goal of 20% of the revenue. Turning next to industrial market, which has also contributed to our growth both sequentially and year over year. Diodes also continue to secure expanding design inks for products such as LDO, LED lighting, and Packet switches as well as continued growth from our Triatt Fayettevilleofflineledproduct families. Our packaged switch products remain the primary revenue driver from our connectivity product family and are gaining increased interest for the application such as security systems, industrial PCs, and virtual currency mining machines. Additionally, Diodes launched new MOSFET for motor and DC industrial applications also aimed at industrial motor driving our 2 new devices in our recently launched and increasingly popular gate drivers ranging from 50 volt to 600 volt. Complementing the gate driver portfolio with 5 additional IGBT products with 600 volt and 1200 volt ratings and handling currents up to 60 amps. Now looking at consumer market, which continue to be a strong area for us, growing both sequentially and year over year with increased momentum for new applications like IoT gaming, quick charging, handheld portable devices, USB chargers, smart devices, and smart audio wireless speakers. We also continue to and speeds up to 10 gigabits per second that provides the red USB Type C connectivity with low power in a very small package. This products are suitable for applications such as IP cameras, as well as in computing applications such as LED routing tablets, and notebooks. In the same way, our USB Type C crossbar switch enables video applications over the USB Type C as is supports USB 3.1 Gen 2 for data and display port for video. We also continue to expand our food with our small size, low power, price performance, crystal and crystal oscillator product family acquired from Pericom. In the communications market, we continue to see strong designing activity with our house sensors, USB switches, LBOs, timing, TBS SCR MOSFETs and connectivity products that are designed in multiple applications, including telecom gateways, routers, switches, set top boxes, smartphones, wireless devices, and charges. Lastly, in computing application, we continue to gain increased content opportunities with our expanded portfolio of Pericom products. We secured several design in for our new interface products signal integrity, logic, LDL and low jitter PCIe gen 2, 3, gen4, crystal oscillators, box generators, and call buffers in the server, storage and data center application. Additionally, we launched several new products for computing applications, including a 30 volt bidirectional MOSFET low switch for USB power deliveries, as well as TBS products for USB-three X USB-three and Thunderbolt 3.0 applications. Diodes also launched 80 to 100 Volt TransShawke rectifiers for notebook power supplies. In summary, we are pleased with the growth and momentum we continue to achieve in particular in the automotive and industrial markets. We have made excellent progress with our products and content expansion initiatives that have resulted in increased market share and a deeper sales footprint. We are well positioned to capitalize on the continued strength in the global market and expect to continue our Thank you. Thank you. And our first question will come from Tristan Gerra with Baird. Your line is open. Hi, good afternoon. Question on gross margin, which typically increases sequentially in Q2. And also presumably given the strength at the top line is something that should help gross margin as well. What is the reason for the midpoint of the Q2 gross margin guidance to be slightly down quarter on quarter? And is this possibly related to the ramp of your 8 inches capacity? You're right, Tristan, if that's one of the reason The other reason is, we focus a significant growth in 2018. Evidence by we guidance 2nd quarter, 9% growth over the 1st quarter. So because that we have been increased the capacity and I think by the CapEx number in 1Q you can see we're adding capacity to support the growth of this year. And therefore, it could be the equipment is already in place. It will gradually ramp. So depreciation will be heated right away. And therefore, the depreciation from CapEx in December 9 plusahcapacity expansion. Those will be increased the depreciation and introduced under audit negative PV. But look at the GP gross profit GP dollar, we actually, if you look at the midpoint, the guidance actually about $8,000,000 from 2Q to 1Q. So, the percentage went down a little bit due to the capacity, under lobby capacity but the gross profit is actually Great. That's very useful. Next, could you then give us quick update on 8 inches capacity ramp and also when we should expect gross margin to to rebound on the basis of the background you just gave us? Okay. I think the age, I think we already said the focus is ramping up to about 9000 to 10000 wafer per month by end of 4Q. So right now, we look like, 1Q is only, total 800 wafer only. Then Q2 probably ramped it up gradually 2 probably 2, 3000, 3000 a month. Then go to 3Q, 6, 7000 a month. Then spend 4Q at end of 4Q, probably 9 to 10,000 inches wafer per month. And the CapEx is already spent. And now I think we already somewhere around 6000 wafer capacity equipment is already installed. Then we probably have another piece of gear, they thought the year will give us the capacity up to 10,000 per month. Thank you. And our next question comes from Sean Harrison with Longbow Research. Your line is open. The increase in channel inventory of about 8% sequentially, do you expect that will be consumed by distribution during the second quarter? Or do you believe you'll need to continue to build channel inventory or they'll build channel inventory, I guess? No, you will consume for sure, okay. We already, you know, look at the apple month It's already consumed some, okay? But end of the quarter, we expect it will be most of them will consume. Okay. And the reason, actually, it's due to the Chinese New Year. Most of our customer during the Chinese New Year is shut down the whole week. And so the PRS, it is reduced. And typically our 4Q in Asia TRS is always very high. So if you take U. S. And Europe, the POS actually record high. So the whole problem, alongside the problem, the whole inventory view is actually in Asia. And the Asia was due to Chinese failure, our customer shutdown, they are not using the product. But the design in is already there and they, right after Chinese New Year, they'll start to ramp. So in March, the POS is already set to move. It's really the 1Q pro, 1Q roll is in February. And then the March start to move and Apple we report is quite well. The POS is quite well too. Okay. And as a follow-up, are you seeing the pricing environment where you're kind of flattish now year over year? Having any ability to see pricing go slightly higher? And then is a separate follow-up to Rick when do you think you'll be in a net cash position? Could you be there by the September quarter? Okay. Let me answer the the pricing and then that re answer the cash balance issue. The pricing In all, we typically put 2% aquarterdecoration that's typically our motto. And when the good time or when the capacity time we now, they said 1%. But very hard to go to the customer and say, I want to raise the price. We, you know, it's very difficult, but we try to do is product mix. So that's one of the key is new product driving the new product to replace the whole product and typically new product because of the performance because the cost reduction typically new product gives you a better margin. And by doing that, is easier to improve the GP instead of go to the customer and say, now your shortage we want to raise the price. That is just in our business, that is not the traditional way to do it. But we can slow down the price reduction and therefore, now our price reduction it's best and helpful. Yes. So, the issue here is that we have debt outstanding of about $222,000,000 and we had cash of $186,000,000. So the difference is 45 So the question is whether we're going to be able to pay down $45,000,000 by the end of the year to just get to a net position. Doctor. Louis would like us to do that. He is pushing, but I'm not sure we're going to be able to do that because we have to make equity injections into our Chengdu facility. And so that might preclude us from doing that. But I would say that by the time by this time, the end of next year, we should be there for sure. When you say equity injections into Chengdu, Could you elaborate a bit? I'm sorry. Yes. We have a commitment to the Chinese government that we will invest so much money from an equity standpoint. It was one of the original things we agreed to back they give us the event. And we kind of buy both events, but they give us the money back. Okay. And so there we have some commitment is by each year how much money we'll put in for expansion? Yes. So it has to do with expansion. So as we've talked about previously, we're continuing to slowly expand the capacity in Chengdu and this helps fund that capacity expansion. Okay. Our next question will come from Edgar Roche with Sidoti. Your line is open. Yes, hi. Nice quarter. Congrats. I had one follow-up on capacity and the CapEx sort of the pacing in 2018. I mean, would you think that you can stay ahead of demand with the additions you're making or would you expect maybe you're going to get on the allocation with any products in the second quarter? Do you have any thoughts on that? Well, I hate to say it, but currently, we still have some of the product under allocation. Okay. So we'll continue that situation and but we do foresee the market's time since last year and we are putting the request to put in the CapEx, okay? And it just started to come in by day power 1Q And we are in store that, that, and then we're going to start to rent in 2Q. But that's just enough to support the expansion because, for the, for this year, and we will still see the capacity is quite tight on certain package, okay. I'll also say that Ed, if you look at the first quarter, we did about $31,500,000 worth of CapEx on a cash basis. And that's higher than our model. As I mentioned in my speech, it's to front load this for the capacity expansion. And during the year, we think we'll go back to the 5% to 9% model that we've had on a yearly basis. So to answer your question is going to be more front loaded than it is backloaded. Yes. So our mobile, we still want to keep our CapEx expenditure at our model, which is 5% to 9%. Now in 1Q, we are more than 10% It just front loaded and because typically our rent is in the 2nd quarterand3rdquarters. Okay. So by the 4th quarter is too late to put in the CapEx to support this year. Okay. Thank you for that. And then on the packaging side, just kind of on a broader level. You've had so much success in the automotive side. Are you finding that your packaging is as big of a differentiator and leads to the product wins in that end market as much as it has historically for Diodes? Well, Yes. Packaging is one of the key technology we have in our third automotive And by this case, we are since our installed strategy that the 2013 We are now NHCAGR at the 20% for the last 5 years. So you pair you our strategy is working and our from the product, from the packaging, from the thing we have been doing is successful. So we're going to continue, continue the stamina effort to continue to grow quickly in automotive. And I think this year, I think we are targeted at 9% and, we're going to achieve better than 9% and then move to 10% probably next year. Yes. So just to add a little bit beyond the packaging, I think performance and features are also very, very important This is also a direction we continue to invest in technology and working closely with the customer to really find the perfect solution for their applications. Okay. Thank you. And then one quick one. I don't know. I was looking through my notes, but the purchase accounting adjustment that you're including the Q2 guidance, Rick, is for Pericom and other acquisitions, is that a fairly typical adjustment or did something trigger that particular adjustment? Thank you. No, that's an adjustment we've made every quarter for many quarters. Okay. All right. Thank you. Yes. Thank you. And we have a follow-up question from Tristan Gerra with Baird. Your line is open. Could you mention the percentage of your product portfolio that has lead times exceeding 12 weeks and give us a range of how far lead times are stretching and also how does that compare with the quarter ago? Well, actually, product vary the lead time varies based on the product. For example, most of the telecom products other than, crystal and mossed acres, most of the pill component because the proof of air coming from foundry and packaging from Supercom the D time is low compared with Skyo product. And Dialo product typically are well prepared the number of mask is way less than Pericomporter, you know, start from like a tayo at the Diodes Oxkey at the four part there to most fab probably 989 layers. And CALCOMporters 20¢ in daters. So the datum on the wafer fab makes significant difference. Packaging is not that much different except they are outside. And the style of product is we do in our internal Therefore, we can shorten the D time a little bit, but majority the D time really coming from fundry wafer and because number of their significant difference between the Discrete and the Pericom product. So I think in general, supply is still very constrained and we really do not see a significant change from our overall lead times situation point of view. Thank you. And I'm showing no further questions at this time. Would now like to turn the call back to Doctor. Keishu Lu for closing remarks. Thank you for your participation on today's call. Operator, you may now disconnect. This does conclude the program and you may all disconnect. Everyone have a great day.