Diodes Incorporated (NASDAQ:DIOD)
UBS Global Technology Conference
November 14, 2012 9:00 a.m. ET
Laura Mehrl - Director, Investor Relations
Thanks for coming out. We are going to get started with our first presentation in this room. Our next speaker here is from Diodes. It’s my pleasure to welcome Laura Mehrl from Diodes. She is the Director of Investor Relations. So our format is going to be 25 minutes of presentation here or so and we will have few questions after that, and then there is a breakout session in the Broadway Conference Room, just one floor down. So we will have more Q&A over there. With that I will and it over to Laura. Thank you.
Thank you. Good morning everyone. Welcome to Diodes presentations. I will get started here. So here is the safe harbor statement. Everyone is probably familiar with it. So for the sake of time I will not review it in detail but we do encourage you to review our detailed SEC disclosure which can be found in Investors Section of our website at www.diodes.com.
So this is our CEO and President. CEO, Dr. Lu. He has been with the company since 2005 and before that his entire career is with Texas Instruments. Held several top executive positions from President TI Asia and General Manager of Memory group and Senior VP of Analog and Logic. He has been in board of directors for ten years even though he has been CEO since 2005.
So about Diodes. Diodes is a global leading semiconductor manufacturer and supplier, IC provider, and our focus is application specific product and serving the high volume market segment, computing, consumer and industrial, communication, automotive.
Our business objective is continuously achieve above market profitable growth. Our strategy is to utilizing our cost effective innovative packaging, design excellence and process technology to address the high volume application. So here is the semiconductor SAM and we serve the high volume discrete, standard logic and standard analog. So together the SAM we are serving is about $26 billion to $32 billion and you can see as end of last year our revenue was $635 million. So we are only about 2% to 3% of our SAM, so we have plenty of opportunity to grow. We don’t necessarily count on market growth. We mainly grow by gaining market share and we have been doing that for almost last decade.
Diodes has been growing in many different ways. In product sales we have aggressively introduced new product and also through our performance improvement. Both have increased our SAM and revenue. Each quarter during earnings call our Senior VP Marketing will announce during that quarter how many discrete and how many analog products are being introduced during that quarter across how many platforms.
In packaging, which is our competitive advantage and in addition to cost reduction and capacity expansion, we are mainly focused in developing power in smaller package with higher density. So that’s from packaging side. From application space, we have really increased our customer space tremendously and once we get into each account we do good service though we also expand our application, our footprint in different application. As we introduced more and more new products we also increase the content of each application. That’s how we are ramping up. That’s the way actually we gain market share. We don’t really gain certain competitors, we mainly gain market share by expanding our footprint with each large accounts.
So for those of you who know Diodes before 2006, Diodes was a pure provider of discrete. Then after Dr. Lu become our President and CEO, he led us into analog, standard analog space by buying two small companies. And then in 2010, we stepped into standard logic. So as I mentioned earlier, one of the ways we grow, we have prepared to reprocess technology, especially after we bought Zetex in 2008. Zetex has a lot of -- has own fab in UK and has prepared to reprocess technology. With that we have developed, in last several years we have developed and introduced several family of, we call trademark product. And that have tremendously increased our SAM as well.
For example, before Zetex we only have standard SKY Rectifier and after introduction to our trademark DIODESTAR, that lead us into Energy Star applications. Similar things that we used to just have low-end MOSFET and Zetex bring in to the high-end MOSFET and also we research process technology. We developed DIOFET for mid-end applications and DIODESTAR for high applications. Similar things in analog space we used to just Bipolar LDO, now we have CMOS LDO. Just during this earnings call Mark King has been talking about several quarter of record revenue for CMOS LDOs. And similarly in DC to DC synchronized space, it’s been record revenue. So these really really help us to grow.
Here is the examples of high volume applications. About six years ago we didn’t have any product go into this application. But then in 2006, we bought Anachip. So there [high] sensor and power management enabled us into this application and after that it’s just like mushroom bloom. Our discrete, analog and now logic, all go into this application. And for last several years this has been our key driver, revenue drive in mobile applications.
And similar thing, several years ago we didn’t have any product going into this TV and monitor applications either. But SBR from acquisition APD in 2006 enabled us into this application, then the Zetex LED/LCD drivers MOSFET enabled us increase our large steps into this application. And now you can see all this products into this application. Another thing to be noticed is that all these products are standard products going into all applications. Just like earlier in the cellphones you can see LED driver, you can see all these products go into (inaudible) current monitors. They are used in mobile applications and then they are also used in TV and monitor. And similar story goes to computing.
So these products, our DC-DC convertors, Schottky diodes, these are standard products. The reason, if one segment is kind of slow, we kind of push into another segment. Another thing about Diodes, you know our product space share all similar packaging. So that’s very easy for us. It’s very easy for us, it’s very flexible for us to change new packaging, push product into different region, to different application.
In addition to continuous cost reduction packaging and capacity expansion, we spend a lot of effort constantly developing new packaging and that’s our key competitive advantage. This earning quarter we have new packaging and even during this earnings call, even with this economy the way it is, we are still adding capacity for special packaging which enable us to win special advanced packaging, very small, for portable applications.
Here are some examples like DFN 0603, on top of the fingerprint, and this is all for mobile applications. And comparing to TO252, our PowerDI 5, this is another packaging we are adding capacity this last two quarters. Deliver twice power density with less than half footprint. This is an example of why we are wining, gaining market share and winning this market.
So we have been continuously for the last -- continuously invest in our packaging expansion. For those of you who don’t know our business model, we spend about 10% to 12% of our revenue on CapEx and majority of them go to packaging expansion. So you can see from 2001 to 2011, the compound annual growth rate for output is 35%. Reached the capacity of 27.8 billion units, which means each month we produce more than 2.5 billion units. So that really gave us a lot of competitive advantage, edge.
And then we have two wafer fabs. One is in Missouri, Kansas, one is in UK. They are 5-6 inch wafers. And then we have our largest -- I mean majority of our packaging is done -- we do mostly in-house packaging. That’s our key winning space. This capacity, all we are talking about in Shanghai. And then last July we opened ground in Chengdu for another packaging for supporting us in future long growth. But that one right now is not in production. Right now the building is finished. We are kind of delaying the (inaudible) and just wait to see how the market goes before we add in a capacity.
Because we have this huge capacity and cost effective packaging, we are able to serve our customers daily and emergency needs. As a result we have developed large wide range of tier one customer in our product space. As you can see we have continuously outperformed SAM industry. From 2003 to last year, the SAM industry grew about 4%. We have grown 21%. This is our revenue growth since 2003, 21%. There are two acquisitions, small acquisitions in 2006 and one in 2008. But then as soon as we got that 2008 and the market [trend] so this growth doesn’t have much of the contribution except the revenue.
So like I said, our gross sales, design wins enable us to gain a lot of market share in revenues in OEM business. Unlike most standard product producers, more than 70% of revenue comes from distribution. We almost have half of our revenue directly come from OEM EMS. Even with the 63% of distribution, we actually have some large customers in that group just because we don’t have enough resource. So they support our customer so we put revenue on distribution. And because we focus on high volume, again high volume applications, so more than 70% of our revenue from Asia, because we focus consumer, computing, communication. Now industry is growing because we bought Zetex, they are based in Europe.
But this quarter -- these are the Q3 results, the revenue from Asia Pacific is 79%. That’s -- this quarter we grew 5% sequentially and majority of it by gaining market share from Asia. So U.S. and Europe has not been doing well everybody knows. So this is revenue by end markets. Consumer 33%, computing 28%, which is up 1%. Most companies not doing well in computing. For the last two quarter we have been continuing gaining market share in computing. Communications 16%, industrial 19% and automotive went up 1%. Even though in Europe as a whole region revenue is down a little bit but the automotive was really the bright spot in Europe for us.
So this is the Q3 financial result. Revenue is $166.6 million which is far above the 5% sequential growth. About 3.7% year-over-year. Gross profit $43.6 million, gross margin is 26.2%, has marginally improved from the second quarter mainly from the manufacturing efficiency improvement but offset by the low pricing and lower mix. So this is net income, GAAP earnings per share is $0.18. Cash flow from operations 17.6%.
So our cash position at the end of Q3, it has not changed. Net cash was zero because we have invested a lot in our manufacturing. We mentioned during the earnings call. But exclude Chengdu, we should have about some $3 million of free cash flow but because we have Chengdu and we add special packaging for those advanced packaging. So this is the inventory, $158 million, which is about $20 million more than the second quarter. That includes $8.2 million of raw material and work in progress and $12.1 million of finished goods which we billed on previously to support the Chinese holiday in October 1 and also 9 days shut down in China. And also the finished goods inventory including 3 million from Eris that we acquired. It’s a packaging company we acquired in Taiwan.
So looking forward, the outlook for Q4. The revenue is expected to range between $160 million to $167 million. Including $3.5 million revenue contribution from PAM that we acquired in October 29, and Eris, so we are down about 4% or flat sequentially. Gross margin is expect to be 25%, plus/minus 2%. The operating expense is expected to be 23.5%, plus/minus 1%. Income tax is expected to be in the range of 7% to 13%. The shares used to calculate the GAAP EPS are anticipated to be approximately 47 million shares.
So even though market remains unfavorable right now. But we believe our strategy of focusing on high volume applications. Maintain our strong customer space and aggressively introduce new products, on top of that acquisitions. All these ensure our business strategy which is above market profitable growth. So with that I turn to some questions.
Thank you. Can you just give us, in terms of your end markets, so just walk us through, are you seeing any sort of granularity in terms of further strengthening, weakening, sort of flat in terms of what's you are seeing from your end markets?
Yeah. While overall market is still weakening across the space, but for us we are still remaining strong in consumer which include mainly the smartphones and tablets. And we are also gaining shares in computing. During earnings call Mark mentioned that we have so many design wins in motherboard, in computing in some large customers. Other than that, yes, across the board it’s pretty weak still.
Do you feel like the weakness is sort of the trend line so to speak instead of flat? Things are not getting better. Do you feel like things have deteriorated more so than you would have thought originally?
Well, from the data we see so far, definitely it’s down. It’s going to be down quarter. Most time a company give guidance you already more than half this quarter, so it’s going to be a down quarter. I mean Q4 seasonally is down quarter. So we don’t really see really really bright spot but again our driver is still the tablets and smartphones.
So given that you have a weaker December quarter, I know you don’t guide beyond this quarter but for the industry do you think that we could have a better than seasonal March quarter?
Well, the visibility is getting really short but normally Q3 most companies are down and Q4 most companies are down. It’s just my personal experience. Normally, while Q1 is supposed to be also down seasonally. Seasonally it’s supposed down but like some people said we hadn’t had a typical seasonality for quite a few years. But based on my personal experience, you have Q3 supposed to be a high growth season but it was down for most of the companies and Q4 is down. Q1 I don’t think can be as really really bad unless the macro environment still stays that way. But last year, if you look at last year, Q4 was really down. The next year we look for Q1, most companies are, I mean this year.
The inventory level, as our distributors, I think the inventory is really lean. I mean like we said this quarter our distributor inventory is down 4%. The global inventory is at the right level which is below three months. And more questions.
We want to grow. I mean, yes, we want to grow revenue long term. I mean we always -- our business model is we want to grow 2% to 3% ex of market growth percentage wise. And then we try to keep our OpEx at 20% which gave us about operating -- meaning we don’t really have growth. We don’t have target. As our business model gross margin is 35%. OpEx 20%. And then we led R&D growth as revenue growth and SG&A grew like half way the revenue growth, followed through (inaudible) earnings per share is to grow faster than revenue growth. That’s our business model. But then also of course it depends on the market situation. Sometimes you are little off but that’s our business model we try to follow.
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