All right. Hello there, everybody. Good afternoon. Welcome to the afternoon sessions of the TD Cowen TMT conference. My name is Matt Ramsey from the Semiconductor Research team, and, this is, people that have joined in this room, you've heard a lot from us, in this exact same room all week. Really excited to have Gurmeet and Emily from Diodes with us. And gonna spend a little bit of time digging into their business. But I think, Gurmeet, you wanted to give a little bit of an opening statement of kind of where things are with the business, and a little bit of an introduction of the company for some that might not be as familiar. So fire away, and then we'll jump into the questions.
Sure, I'll start with some background. So, just an overview, and then we can go into the questions and answers. So Diodes Incorporated, we have been in business for 65 years. Last year, we finished our year at $1.7 billion revenue. We have about 28,000 products that we ship to 50,000+ customers, and we have been profitable for the last 32 years consecutively. Our CAGR growth has been, since 2005 to 2023, 12%, and gross profit CAGR growth has been 13%. When our CEO, Dr. Lu, joined the company, he had set a bunch of $1 billion goals for us. The first one was $1 billion market cap that we achieved in 2010.
The next one was $1 billion revenue that we achieved in 2017, and that's when we set the next goal of $1 billion gross profit that we are currently working on. So, we're marching towards that goal and hoping to achieve that soon. At the same time, we serve 5 market segments, which is automotive, industrial, compute, communications, and consumer. At the same time, he had set a goal that we wanna get 40% of our revenue from automotive and industrial. As of last 8 quarters, we have achieved that goal. We have been at or above 40% revenue from automotive and industrial segments. So currently, we are focused on our $1 billion gross profit. Our strategy has been both organic and inorganic. We have acquired companies along the way.
Every two, three years, we acquire a company. I and Emily, we both come from acquisition that was done in 2015, called Pericom Semiconductor. Since then, we have acquired three other businesses or companies. Our most recent acquisition was SP Fab from ON Semiconductor a year ago. Prior to that, we acquired a company, Lite-On Semiconductor, which was a business, a bucket of factories, as well as share buyback. So our focus has been on growth. Currently, the market we are going through is, we are focused on how can we get out of this cycle faster, and focus on the things that we can control, managing our factories, our, qualifying our, processes in these factories, our newly acquired factories, and continue to improve our product mix.
Thank you for the... It's a great introduction of the company. I wanted to—One of the things that was interesting during the pandemic is we—there were many, many companies that were supply constrained, and Diodes was, I think both strategically fortunate and a bit lucky as well, to have just done some fab acquisitions, one from TI and one from Lite-On, and you had quite a bit of capacity. And were able to really grow, not just revenue, but gross margin recovery, way, way faster than I think a lot of us thought. And then, we went from that immediately into a down cycle for the industry. So it'd be interesting to hear your perspectives on kind of where you are now.
You did the acquisition from ON Semiconductor as well, that came with some fab. So, like, where do you think the company is now? Sort of where revenue could be if you're not under shipping or over shipping, but like steady state revenue with the company, versus the capacity footprint that your company has. And there's a lot of different variables of what that means for economics and whatnot, but I'm just, you know... Do we still need more capacity? Do you have too much? Like, there was a lot of things changing at the same time.
Mm-hmm.
And as we come out of the cycle and get back to steady state, just it’d be interesting to hear you talk a little bit about where you feel like you are with the capacity versus demand perspective.
Yeah. So maybe let me talk about the capacity versus demand, right? So with the SP Fab from ON Semiconductor that we recently acquired, plus the TI Fab back in 2019, so we believe we're very well positioned from the capacity point of view. There's still a lot of upside, potential for us to ramp up more, because, you know, we talk about manufacturing services agreement. We still continue to support, the original seller with, some of the wafers. Unfortunately, that came down faster than what we expected. But all in all, right? So when they continue to ramp down the capacity or usage, we will have chance to continue to increase our own internal capacity.
Currently, between the internal, external fab, utilization point of view, we're really loading about 50% external and 50% internal, which really means that we actually have potential to continue to ramp up more to our internal factory. Unfortunately, ramping up qualifying new product technology as well as customer qualification, it takes time. So, you know, we are kinda right now in the gap between, right? But I think the upside potential is definitely there. I think from the overall demand point of view, right, our revenue peak around $500 million, right? And now we are really more with the, our new guidance for the second quarter, 4.6% growth, is $316 million.
So I would say, you know, definitely at the peak, there may be some double booking, triple booking, in the numbers, but all in all, the actual business should be higher than what we're seeing right now. So there are just a lot of things going on with the inventory rebalancing, right? And then with the overall demand, impacted the overall business. But if I look from the pipeline point of view, if I look at different market segment, there's still a lot of potential for us to continue to grow and continue to expand.
No, that's, that's really helpful, and, and I, I apologize for the audio stuff. I don't know what we got going on here.
I have a special effect.
Yeah. They are very... I don't know if Bigfoot's coming after us or what, but, so I guess just to finish out on that point, Emily, you obviously there's room to grow-
Mm-hmm.
Going forward as you continue to grow the business, but you guys don't sit back and say, "Oh, I mean, maybe we went up one toe over the line on capacity, and we have too much." Like, are you feeling pretty comfortable about... I think that's some of the questions I get from investors is like, are we gonna be in a situation where maybe there is underutilization for longer because of the fact, like, capacity additions that you made that you then have to grow into?
Mm-hmm.
So, do you feel okay with it, or are you- is it a concern that, that is justified?
I think we feel okay, but one of the things we constantly ongoing review is really the overall strategy for long term, right? I think maximize the capacity is definitely the goal that we have. You know, we're also reviewing what makes sense, what not makes sense. So besides some of the other fab, we also have some others, like coming from like, Oldham and stuff like that. So we're doing ongoing, maximizing the utilization strategy. So, you know, that would be ongoing process. I think manufacturing efficiency always been a key focus and the strength out of Diodes.
The other thing I would add is, as you know, our manufacturing model is a hybrid model, 50/50. We are still about 50% external, 50% internal. So that mix can improve as we continue to qualify our products and processes into our own fabs.
Yeah. I think the hidden benefit, also the vertical integration also give us some cost benefit as well, right?
So it sounds like you do have some insourcing flex that you-
Mm-hmm
... could use as we move forward.
Mm-hmm.
That makes sense.
Yes.
All right. So one of the other, and by the way, for those in the audience, if anybody does have questions, everyone's listened to me talk enough this week, so please raise your hands. But one of the things I wanted to get to next is the visibility into inventory. You guys are not alone, believe me. The whole industry is going through this, but I think most of the companies that we work with, and that I cover, that Josh's team covers, have had very, very good visibility into their distributor inventory levels.
Mm-hmm.
You get probably weekly reports or and at least monthly from all your disties and know exactly what you have. The companies have had very, very little, unfortunately, visibility into customer inventory levels that sit behind distribution.
Mm-hmm.
I guess we could talk about this in a couple of ways. One, has anything changed on that in the last 36 months because of, of the shortages and then all of a sudden, over inventory, and now we're back trying to climb out of that? Do you feel like you have any better visibility to customer inventory levels? Has anything contractually changed, disclosure-wise changed? Are people being more quote, unquote, "partners?" Do you feel like you're in a better position to manage that if we have another cycle at some point?
I think we have to separate the customer into different tiers.
Yeah.
Tier One, Tier Two, we assign our own sales team, directly manage and work with the customer to build a relationship, to negotiate awards, to really, you know, execute on the demand creation side. Tier Three, Four, Five, usually we count on distribution, and, that's usually, we don't really have a huge, extensive direct sales team to manage all the customers, which is different than some of the big analog customers that everybody's familiar with, right? So from the inventory visibility point of view, we do receive weekly or monthly inventory report from all our distribution partners. That didn't really change. The only change, I would say, is really the Tier One, Tier Twos. We gear up a lot of focus in driving that engagement and driving that visibility overall.
So I think for that group of customers, we do have better visibility, but it's not from the distributors. It's actually directly driven by our own team. There's also a group of customers, especially Tier Ones, they can be a direct customers. So which really means that we have the B2B connected, and we usually receive weekly demand forecast, and that usually give us about 1.5-2 years visibility, minimum 1-year visibility, right? So that, that's really the difference. With the distribution customers, their actual inventory on hand, we still don't have that, right? That will be really, really difficult to get. Doesn't matter which distributors you talk to, I think they are also challenged with that information. Mm-hmm.
Yeah, thanks for sitting on the fireside. As you mentioned, it seemed like there's receptiveness to M&A. You mentioned you've done a couple deals in the past, and also you have the manufacturing there. I think we're good. Thank you. So you mentioned the receptiveness to M&A, and that you've done a couple deals in the past. And you also have the manufacturing assets. As we think about places you could look for a potential target, are you more focused on acquiring technology that fits in with your portfolio? Or how important is the potential of bringing an asset's parts onto your manufacturing network when you're thinking about potential targets? Thank you.
Yeah. So, let me answer that question, right? So usually, when we look at merchant acquisition, we look at four synergy areas. Some can be manufacturing synergy, it can be end market synergy, product synergy, or customer synergy, right? So, all the acquisition we did, which is part of our DNA, it's actually either fit one or multiple, right? So you know, when I say, you know, from the capacity point of view, especially from the front-end capacity fab point of view, we believe we're in a pretty good position. I don't really think that will be our future focus in the next few years. The focus for next few years will be more on the product side, on the end market, on the customer side, right? So you know, so I, I would say yes, absolutely. Thank you.
I guess before I dive into a couple of the end markets, and we'll, I mean, this has been a longer discussion than I thought it might be, which is super interesting. I wanted to ask, you've gone through the cycle, and we're coming out the back end of it now. You mentioned where the revenue levels were versus what the peak was. Steady state consumption, revenue level looks like what? Is it 400, 425? Like, where are we, where do you think the end market consumption is relative to revenue?
I think that's a really very difficult question, right? So the end demand at end market, driven by consumers' behavior and how they purchase it, right? We all have an expectation that should be much stronger than what we're seeing. I think we still expect that, right? I think from Diodes business, we actually openly call Q1 what's the bottom, right? We guided Q2 with 4.6%. We also mentioned second half of this year will be stronger than the first half. I think the unknown, whether it's gonna be a V-shaped recovery or it's gonna be a U-shaped recovery, right? It looks more like a U versus a V, but we're still hopeful, right? I think, you know, from that point of view, right, it, it's difficult to say where it should be.
But I think looking at the design pipeline and looking at the potentials in front of us, I think we're confident that the growth is going to come back. And you know, using automotive as an example, we actually have compound annual growth rate of 28% within the last 10 years, right? And we released more than 450 new products alone just last year. So we believe all this product mix initiative with the new product introduction will continue to help us to grow into different market areas, market different applications, and continue to expand the SAM as well as the TAM.
Now, that makes sense. Like you said, calling the peak was hard, calling the bottom was hard, calling the exit rate is hard.
But we called the bottom. We didn't call the peak, but we called the bottom.
You guys might have. Some others tried to call the bottom and found a couple false bottoms before they found the real bottom, so. I just wanted to—completely different topic, and I know you get questions all the time about the different business lines in the P&L.
Mm-hmm.
I wanted to ask first about competition from China.
Mm-hmm.
There's some of you guys might have been in the session that we did at lunch with Chris Miller on Chip War and what the political tensions are and it's amazing how effective some of the commerce legislation has been on the import of semicon tools into China for leading nodes.
Mm-hmm
... and also the manufacturing of Chinese products at TSM and other places.
Mm-hmm.
But if you'd asked me 10 years ago, if the Chinese would try to go and cannibalize, like, analog, I would have thought that was crazy.
Mm-hmm.
But now, that's kind of the only frontier they have left, so that's exactly what they're doing.
Right.
How have your—how have the views of your company evolved around that? You guys have a large presence in Asia. Are you worried about that? Are you—I mean, did it go from a, "I don't worry about it at all, to I worry about it a little bit?" Is it something that you guys talk to in management and board meetings all the time?
Mm-hmm.
Have you seen any impact on the business yet?
Yeah. So I, I think for the China-specific business, Diodes China portion of business is actually somewhere between 40%-45%ish, right? And, but that's actually based on ship to locations. So if I take that portion of business and then really kind of understand into the next level, which really means whether it's a transfer business or not, what does that mean? You know, Tesla can be building in China, buying in China, so we count that as a China revenue, but in reality, it's really American, right? Or Microsoft or Amazon, a lot of U.S. brands build in China. So if I look into that angle, I would say more than 50%, somewhere between 50%-75%, we classify as a transfer business.
So if you take that out, then what's left is really, I call it local, local China, you know, design, make, and sell within China market, right? I recently visited China, specifically on some of the strategic customers. I think you're gonna get competition no matter where, but of course, you get more intensified competition from China because the government subsidize, because the promotion going on and stuff like that. But I think at the end of the day, it's really about the CP value. I think a lot of people use a lot this term in China. Basically, it's, it's really the, the, the quality, the, the performance versus the price they're paying. What we're seeing is actually if we focus on the features and functions and the differentiated product in China, there's still a market.
But if our focus is on commodity and de-commodity, there's 10 other suppliers making it with a much cheaper or government-subsidized cost, there's no way we can be successful in the longer term, right? So what we've been doing is actually making adjustment to our strategy and a refocus on the areas that we're winning. So for example, right, we're seeing a lot of, they call it smart cockpit in China. I don't know whether you guys seen one or not, but recently, I did a test drive at the number one auto EV customers in China. It was very impressive. So it literally is actually an entertainment center on the wheel, and they actually use a lot of very high-speed muxes and redrivers from us. For this type of product, you don't have a Chinese supplier making it.
We're competing with NXP's, we're competing maybe with TI's, right? Then we're all American, so we're really on the equal battlefield, right? So that's an area we can be successful, and it's a long-term, sustainable business. So that is really the strategy I think everyone need to adjust because if you continue to say, "Hey, I compete with price and delivery," it's never going to be successful at the end. It's more optimistic. You might win it a quarter, and you lost the next one, right? So that's really not the business we're aiming after anyway.
Got it. No, that, that was really helpful. Thank you. I think we got four or five minutes left here, and, and Emily, if you could maybe do the CliffsNotes version of the flying through the you mentioned automotive already.
Mm-hmm.
I think we've covered that one, but industrial and the 3C-SiC , if you could just kinda give us a bit of a status report about where things are, if there's anything different from the cyclical nature of the company, and what the drivers are from here.
Yeah. I think, you know, I mean, we all live through multiple cycles, right? We'll get out of cycle, no question. The only question is how long and when, right? I think auto industrial still going through this readjustment period, and, you know, personally, I don't expect it's gonna last as long as the 3C-SiC . But, you know, of course, the market is also, dynamic at this moment. Regarding the 3C-SiC , on the compute side, right, I did talk about it. Inventory is really clean, and we did actually expect some of the uptick from the demand point of view with some of the AI-driven server, demands, with some of the refresh of the chipset launching. We do expect the second half will be stronger the first half, so I think that's really...
At least we've seen the light at the end of the tunnel. Consumer, Q3 is always the peak because of holiday bill, and usually start ramping about now, June, and ramp down about October. So even the demand may not be as strong as before, but we still think that's gonna be better than Q1. I think on the communication side is really need to separate into two. One is really more on the smartphone. The other one is more I call the enterprise networking telecom, right? Traditional, communication. That portion, enterprise-related, I would say still, with the inventory rebalancing, and that probably going to last until the, I would say, the second half, and possible to the end of the year.
But on the smartphone side, because the inventory is relatively clean, of course, we're going through a little bit bumpy up and down, but all in all, should be positive, right? So that's really what we see. I think with the 3Cs increase, and Diodes is very well-balanced in the five market segments, so even we see auto industrial still going through some of the challenge. But with the 3Cs, that's the reason we are confident to guide it at 4.6% quarter-over-quarter increase from the revenue point of view. And, I think, you know, hopefully, everything will clear, second half of the year, and then we can actually have a really, good momentum getting into 2025.
No, that's helpful. Last question from me is on pricing. There's obviously prices went up during the pandemic because, like, everybody was in shortage. And a lot of companies I've spoken with are resuming sort of normal to 3% a year price downs-
Mm-hmm
... off of a much higher base. There's one very large guy that's not being totally rational. And so I'd just be curious as to what your expectations are on pricing across the franchise, and is that one large irrational player having an impact or not?
Yeah, so I think, I call it stabilized. Overall, that's what we're seeing, right? I think people will start to be more logical and making decision now, including the big guys you just mentioned. I think, you know, as the demand start recover, once people start seeing the light at the end of the tunnel, I think they will be less emotional, making illogical decisions. That's what we're really seeing. You know, before COVID, we're actually building 1.5%-2% per quarter worse price erosion. We're really kind of going back to the same model, driving the cost down, manufacturing efficiency to really kind of balance the pressure from the pricing point of view. But all in all, I would say it's normalized.
But you, you do feel like you're normalized off that higher base? It's not- we're not back to where we were pre-pandemic, it's a sort of a higher base and coming down, or is it- are we back to-
I would say what we're seeing, you know, what we're tracking, I think the price pressure is actually still less than pre-COVID-
Mm-hmm
... when I talk about 1.5%-2%.
Okay.
Mm-hmm.
That's a really helpful discussion. Thank you very much for your time, both of you, and-
Thank you
... all the best as you guys push forward and we all come out of this.