Diodes Q1 2009 Earnings Call Transcript

| About: Diodes Incorporated (DIOD)

Diodes Inc. (NASDAQ:DIOD)

Q1 2009 Earnings Call

May 07, 2009 11:00 AM ET

Executives

Leanne Sievers - Investor Relations, Shelton Group

Keh-Shew Lu - President and Chief Executive Officer

Carl Wertz - Chief Financial Officer

Mark A. King - Senior Vice President, Sales and Marketing

Richard White - Senior Vice President, Finance

Analysts

John Vinh - Collins Stewart

Vijay Rakesh - ThinkEquity

Harsh Kumar - Morgan Keegan

Gary Mobley - Noble Financial Group

Tristan Gerra - Robert W. Baird & Co., Inc.

Shawn Harrison - Longbow Research

Steven Chin - UBS

Operator

Good morning and welcome to the Diodes Incorporated's First Quarter 2009 Financial Results Conference Call. At this time, all participants are in listen-only mode. At the conclusion of today's conference, there will be... instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder this conference call is being recorded today, Thursday, May 7, 2009.

I would now like to turn the call to Leanne Sievers of Shelton Group, the Investor Relations agency for Diodes Incorporated. Leanne, please go ahead.

Leanne Sievers

Good morning and welcome to Diodes first quarter 2009 earnings conference call. I'm Leanne Sievers, Executive Vice President of Shelton Group, Diodes Investor Relations firm.

With us today are Diodes President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Carl Wertz; Senior Vice President of Sales and Marketing, Mark King; and Senior Vice President of Finance, Richard White.

Before I turn the call over to Dr. Lu, I would like to remind our listeners that management's prepared remarks contain forward-looking 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 risks and uncertainties in the company's filings with the Securities and Exchange Commission.

In addition, any projections as to the company's future performance represent management's estimates as of today, May 7, 2009. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change. Additionally in the company's press release and during this conference call, management will discuss certain measures and financial information in GAAP and non-GAAP terms.

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, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.

Keh-Shew Lu

Thank you, Leanne. Welcome everyone and thank you for joining us today. I'm pleased to report that our first quarter revenue of $78.1 million exceeded our guidance of 71 to $75 million.

We are encouraged by the earliest time of stability in the marketplace. As we increased market share at the current customers for existing designs and rented our new design wins. Based on the expected revenue results we're also treating by increase in demand in the China market for our products utilized in mobile phone handsets, LCD TVs and the netbooks.

Based on our current estimates, we predict this trend will continue into the second quarter, coupled with further improvement in demand and order rates by our customers. As a result, our revenue projection for the second quarter of 2009 exceeds our fourth quarter 2008 revenue guidance, which is a further indication of an improved impetus environment.

In term of gross profit, our margins for the quarter was 18.6%, which was slightly above the midpoint of our guidance range of 16 to 20%. Gross margin was affected by the lower utilization of our manufacturing facilities, caused by the global economic market conditions, a reduction in distributors' inventory and our planned finished good inventory reductions.

As I reported last quarter, we implement a number of cost savings initiatives which we completed during the first quarter. We also initiated a second round of deals of approximately 29% of the work force at the FabTech.

In total, we have reduced headcount by 348 people or 11% since the end of 2008, leaving our employee headcount to 2,719 people. We expect the full benefit of those actions to be realized in the second quarter, resulting in operation expense, within our expected range of 21 to $23 million compared to our third quarter 2008 level of $28 million.

Also, during the first quarter, in response to the decline in the demand, we took immediate actions to reduce our authorization on capital expenditures as well as inventory.

Capital expenditures were reduced to $4.3 million in the first quarter, which was a significant reduction from the 2008 quarterly run rate of approximately $30 million.

In the second quarter, we experienced a change in product mix to a more complex device as a result of the ramp of our analog and Zetex products, which would require some additional investment to balance our manufacturing lines.

Therefore, we expect our capital expenditures will be 6 to $7 million, which includes approximately $2 million that we expected to be in the first quarter, but it will able to delay until the second quarter as a result of our caution spend on the demand and our desire to conserve cash.

Also, during the first quarter, we began efforts to significantly reduce inventory resulting, a $16 million decrease or 16.4% from the first quarter.

Additionally, we took further steps to improve our balance sheet by repurchasing $9.6 million of our convertible senior notes for $6.6 million in cash.

As a result of those corrective actions, we achieved positive cash flow from operations and positive free cash flow in the first quarter.

Looking at the second quarter of 2009, we expect our margins (ph) will further benefit from increase in demand in China and the continued ranging of our new design wins.

During the first quarter, we reduced our sale channel inventories. And in the second quarter 2009, we expect distributors' inventory will remain relative flat despite the demand increase on a global basis.

Carl will discuss our detailed guidance in minute. But I would like to highlight that we expect to significantly improve our profitability due to higher revenue and the better factory utilization. And once again generate positive cash flow from operations in the second quarter.

Discontinued accomplishments during this tough economic environment serve as a testament to the stability of our biggest motto and our ability to constantly execute in all type of business environment.

With that, I would turn the call over to Carl to discuss our first quarter financial results and the second quarter guidance in more detail.

Carl Wertz

Thanks, Dr. Lu. Good morning, everyone. As Dr. Lu mentioned, revenue was $78.1 million as compared to 87.1 million last year quarter and $95.6 million reported in the first quarter 2008.

Quarterly revenue was affected by the continued deterioration of the global economic environment and the related overall decrease in demand. On a positive note, our results exceeded expectations due to stronger than anticipated demand in China as well as the ramping up of new design wins.

Gross profit for the first quarter 2009 was $14 million or 18.6% of revenue, compared to $22.9 million or 26.2% in the fourth quarter 2008. Dr. Lu mentioned, gross margin was affected by the low utilization of our manufacturing facilities caused by the global economic market conditions, reduction in distributors' inventory and our finished goods inventory reduction.

We expect loading at our facilities will continue to improve in the second quarter and we will be approximately 70% utilized in the second quarter.

Selling, general and administrative expenses for the quarter were approximately $16.1 million or 20.6% of revenue, which was comparable on an absolute dollar basis with $15.9 million or 18.3% of revenue last quarter.

Research and development investments in the first quarter were $5.3 million or 6.8% of revenue compared to 6.3 million or 7.2% of revenue in the fourth quarter as a result of previously discussed cost reduction initiatives. We continue to invest in R&D at the similar level, while remaining conscious of market conditions.

Total operating expenses of $922.5 million, which is within our expected range as a result of our cost reduction efforts. Included in first quarter operating expenses was approximately $700,000 of non-cash whereas 123R stock option expense.

We expect the second quarter expenses to be comparable, the first quarter reflects in the completion of our major cost savings programs.

Total other expense amounted to $2.2 million for the quarter. We had $2 million in interest and other income primarily related to our portfolio and auction rate securities offset by interest expense of $2 million primarily related to our convertible senior notes and loan for the acquisition of Zetex.

During the first quarter of 2009, we also recorded a pre-tax non-cash interest expense of approximately $2.2 million due to the adoption of APB 14-1 which requires us to change how we account for our convertible senior notes. Effective January 1, 2009 APB 14-1 requires us settle the accounts for a liability and equity component which reflects in estimated non convertible burrowing rates of 8%.

New occurring loan also requires us to adjust prior periods back to the date of issuance of convertible senior notes and so we recorded additional non-cash pre-tax interest expense to 2006, 2007 and 2008 and the amounts of 1.7 million, 10 million and $10.7 million respectively.

Also as we stated last quarter, we expect this additional pre tax expense to amount to approximately 8 million to $9 million for the full year 2009. Also included in the total $2.2 million other expense was $1.5 million gain on a repurchase of the 9.6 million face value of convertible notes which is count for APB 14-1and offset by $1.5 million foreign exchange losses related foreign currency contracts that were part of the Zetex acquisition. The gain on a repurchase of notes would have been approximately $3 million under previous GAAP accounting.

Turning to income taxes, we recorded net tax expense of approximately $400,000 for the quarter. Here our decision to cancel our U.S. credit line to reduce cost, we repatriated $28.5 million of accumulated earnings for more of our Chinese subsidiaries.

This dividend required us to record non-cash income tax expense. This tax expenses more than offset the tax benefit from our loss in the quarter. Looking at calendar year 2009, we expect the effective tax rate to be approximately negative 10%, which means a tax expense on GAAP results.

Net loss on a GAAP basis was $10.8 million or $0.26 per share which included pre-tax charges of $2.2 million of non-cash APB 14, non-interest expense related to convertibles senior notes, $1.1 million of non-cash acquisition related intangible asset amortization cost, $720,000 of FAS 123R stock option expense as well as $1.5 million gain related to repurchase of convertible senior notes.

GAAP net loss adjusted for the change in accounting principle affected by APB 14-1 which is discussed previously with $9.5 million or $0.23 per share.

Cash flow from operations was $6.8 million for the first quarter with free cash flow of $2.5 million.

Turning to the balance sheet at quarter end we had $93.2 million in cash which was a decrease of approximately 10 million from the fourth quarter. Positive cash flow from operation was use to partially fund the $6.6 million in cash, and used to repurchase convertible senior notes, $4.3 million of capital expenditures and 4 million to pay down long-term debt and repay our U.S. credit line.

Long-term investments were $320.6 million which represents the fair market value of our auction rate securities and the put option as part of the UBS settlement.

Our working capital at quarter end was $200 million. Long-term debt including the loan related to Zetex acquisition and the convertible senior notes which renew on October 2011 was approximately $366 million.

Now turning to inventory, at the end of the first quarter inventory is $82.8 million which was a decrease of approximately $16 million or 16.4% from the fourth quarter as part of our successful efforts to reduce inventory.

Accounts receivable was $68.2 million of 82 days in the first quarter. Capital expenditures were $4.3 million for the quarter which was Dr. Lu mentioned was significant reduction for our 2008 spending level and part of that refers 0to better align expenditure with market and capacity demand.

In the second quarter, we have started to invest the new equipment to balance or manufacturing alliance due to change in product mix towards more complex devices as a result of the ramp of Analog and Zetex products.

We expect the capital expenditures in the second quarter 2009 will be 6 to $7 million, which includes approximately $2 million we expect to be in the first quarter but we're able to delay until the second quarter.

Depreciation and amortization expense for the first quarter was $11.4 million.

Turning to our outlook. Looking at the second quarter 2009, as Dr. Lu stated we expect our business to further benefit from increasing demand in China and a continue to ramping our new design wins.

As such this makes that second quarter revenue will revenue increase 14 to 22% sequentially. Additionally, with our cost reduction initiatives implemented and then loading at our manufacturing facilities improving, we expect second quarter gross margin to range between to 20 to 24%. We also continue to focus on cash flow and expect once again to achieve other cash flow from operations in the second quarter.

That said I will now turn the call over to Mark King, Senior Vice President, Sales and Marketing. Mark?

Mark A. King

Thank you, Carl and good morning. As Dr. Lu and Carl mentioned, the first quarter began to show signs of improvement in the global environment with increases in demand and order rates each month throughout the quarter. Our business benefited from the stronger than expected demand in China for our products utilized and mobile phone handsets, LCD TV's and netbooks.

Additionally, our continued focus on new product development and our high level of design win activity resulted in increase market shares at current customers for existing designs and the further ramping up of our new design win.

We also gain traction with the Zetex products as we continue to work with our existing customers while also attracting new customers with our expended product line. All targeted product conversion to dials and internal fact rates were completed by the end of the first quarter with four manufacturing ramp expected in the latter part of the second quarter.

Also during the quarter, we strengthen our inventory position in the sales channel by significantly reducing and repositioning inventory and although we expect inventory to remain flat in the second quarter, we've positioned ourselves for future growth.

In terms of our segment breakout, computing represented 33% of revenue, consumer 26%, industrial 22%, communication 16% and automotive 3%. In regards to geographic breakout Asia represented 74% of total revenue. Revenue in Asia was down 9% from the fourth quarter but better than originally expected.

Demand rose sharply beginning in mid February due to the China government stimulus for white goods and TVs which followed large inventory reductions in the fourth quarter. First quarter demand was driven by panel and LCD TVs as well as China domestic mobile phone.

Distributive point of purchase was down 21% due to uncertainty early in the quarter but point of sales was down only 11% in comparison. Distributor inventory decreased 41% as we use this period to balance and utilize channel inventories. We expect second quarter growth in Asia to be driven by increases in panels, LCD TVs, netbooks and mobile handsets.

In North America, sales represented 13% of total revenues. OEM sales were down 8.5% from the fourth quarter due to the decline in overall economy, specifically in industrial accounts as a result of the housing market.

The decrease in set-top boxes due lower demand as well as the continued shift of manufacturing to Asia. POS sales were down 14% from the fourth quarter with declines across a broad spectrum of customers and markets. Distributor inventory continued to decline down 9% from the end of the fourth quarter as distribution POP decreased by 20% sequentially.

Diodes now has an improved inventory profile as all distributors based on cost and product mix due to a focused effort to clean up inventory throughout the first quarter. Sales in Europe accounted for 13% of revenues in the quarters. Total revenue increased slightly over softer quarter.

Distributor sales were up 22%, while OEM sales were down 27%. Distributor POS was up 8% and channel inventory remains flat. Sales to direct automotive and consumer customers remained relatively flat in the first quarter, whereas the business to broad industrial customers base experience a decrease of 36%, after a relatively decent fourth quarter.

While we expect further stabilization or slight recovery in the second quarter for our automotive and consumer accounts in Europe, the weakness in the industrial segment is likely to continue. The channel network strongly exposed the industrial market is still experiencing decrease in the orders and has been to reducing inventory in results of this trend.

Now turning to new products, the new product revenue was 15.6% of sales in the quarter. This was a decrease from 23.5% of sales last quarter primarily due to customer order mix and the aging out of older analog products. During the fourth quarter, we released 49 new products consisting of 3 analog, 4 haul devices and 42 discrete, which included 14 transistors, 17 MOSFETs and 11 SBR devices.

Our continued focus on Bipolar transistors further broadening the range of the devices introduced in the fourth quarter which utilize silicon technology of Zetex in the packaging expertise of Diodes and are aimed at winning market share from competitors.

11 new SBR parts included high voltage devises targeted netbook power adapters. The 17 new markets for consumer and battery management applications and the telecom market, which included four application specific devices and four innovated H grade devices for DC fan motor control applications.

Additionally; our self-protected batt which we introduced to the market in December 2008, have secured eight design wins in three months since its release.

Initially this product was end at the industrial and automotive markets but is currently under evaluation in several more applications which underscores the exceptional flexibility and broad appeal of this new technology.

Also during the quarter, we introduced two low voltage Omnipolar Hall switches that substantially reduce power consumption in battery powered handheld devices.

End market usage include contact less LED or display orientation and position protection task in notebook and mobile phones.

Additionally we announced an active borrowing controller ship enabling shared power system designers to replace keep anticipating locking Diode with high efficiency mark that.

This chip ensures cool running, low maintenance and high reliability operations in uptime critical telecom, server and mainframe applications.

Lastly Diode introduced a family of LED driver -IP capable of significantly reducing the number and size of external components required by driver circuits.

The drivers are suitable for a broad range of high brightness, general illumination, applications including science, architectural emergency lighting and ensures uniform LED brightness as well as illuminates the need for balance resistors.

We have already secured several design wins for these products. In terms of global design wins, despite the soft economy in process design activity remain high and design wins were strong in the quarter with the wins at a 114 accounts globally, 84 wins at 60 customers in Asia, 94 wins at 36 customers in North America and 38 wins and 18 customers in Europe.

We continue to gain momentum with our USB power switch series in end equipment such as notebook, netbook and set-up boxes with over 35 active projects.

We also continue to gain traction with our Omnipolar Hall sensors with more than 30 active projects for mobile phones and notebooks. We also have 27 LED lighting projects and 30 MOSFET working projects.

In summary, I believe Diode has taken the size of action to appropriately respond to the current market conditions by aggressively reducing cost, inventory levels, debt and capital expenditures in order to maintain positive cash flow.

We remained focused on ramping design wins, capitalizing on our product synergies of our Zetex acquisitions and expanding our position with customers.

As we've stated in the past, we're confident in our ability to emerge as a stronger company with expanded growth opportunities as the economy improves, which is evidence in the improvement of our first quarter revenue results and our second quarter expected results.

With that, I'll open floor to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of John Vinh. Please proceed sir.

John Vinh - Collins Stewart

Hi. Good morning and congratulations on the better expected results. First question if you Carl, is this, can you clarify what you said about the tax rate for 2009?

Carl Wertz

Yeah, basically for the tax rate of '09 we estimate to be about negative 10% overall which is actually not a credit, so it'll be an additional expense added to our EBIT number.

John Vinh - Collins Stewart

Okay. And then second question I had was on China, can you help me understand roughly what percent of your kind of end market demand comes from domestic China and then what do you think is the incremental impact to revenues from the China Stimulus package on top that?

Keh-Shew Lu, Ph.D.

Well, I'm talking about (ph) our Asia revenue in 1Q is 74% of our total revenue. Okay, now although that if you look at it majority will coming from China because all the OEM company is in China now that direct is only in China. So other than Korea is big market for us and Taiwan is another one but as if majority of more than half of the revenue is coming from China market, if you see China market, if I (ph) go to China because for example you may go to the OEM, may go to the airport go to the grim go to somewhere else, but for such is the China market.

Now, you took that estimated the stimulus package initiated by China, which is one of the reason our revenue actually much better than expected or our previous guidance. In addition to our market share gain, okay, than another major reason is China's stimulus package. The reason we are doing good in that area is year-ago we want to see this coming, so we -- so working with the China local manufacturing in the -- like a cell phone, like netbook, like -- those so we see gage we walk in with the channel manufacturing. So this time have been the stimulus package initiate by China government, really the sale is coming from those companies. And China local manufacturing company. And so we got benefit from there.

And again that's why start from February, our bit rate start to pick it up and in March, even higher.

John Vinh - Collins Stewart

Are you able to maybe quantify the stimulus package benefit little bit more maybe in terms of -- what is the size of kind of that TV market that's driven by stimulus package or maybe --

Keh-Shew Lu, Ph.D.

We cannot really, at a separate for example, I'll give you a example, okay. When the LCD TV started to pick it up because of this package who is really the one day that buying the panel. Is the low cost manufacturing to building the TV -- LCD TV but did buy the panel from like a Samsung, from that AUO and the CEMD (ph). And for those is not really a channel company Samsung, AUO and the CMED they are not but we got a benefit because that you go to reading the newspaper from Taiwan your going to see Chile the $40 deal (ph) AUO is $40 deal, Samsung ramp it very quickly and the reason they are not really for the U.S. market that when those panel when to China LCD TV manufacturing and by building the LCD TV.

And so for us its very difficult to separate which effect is buy this the stimulus package reaches to that. Its very difficult for us. All we know is our sales is much better than what we expected and we know we continue gaining the monthly.

Operator

I'm sorry an error has occurred the system was unable to find the conference file you have requested.

Keh-Shew Lu, Ph.D.

What? Hello.

Unidentified Analyst

I'm still here.

Keh-Shew Lu, Ph.D.

Done with your question.

Unidentified Analyst

Yeah, just one follow up question one gross margins. Can you give us a sense going forward what sort of revenue run rate do you think you need to get back to lets 30% gross margin rates at this point?

Keh-Shew Lu, Ph.D.

Well if really the gross margin now have allow us to do is loading. Okay. And we want to keep the guidance in second quarter. Our loading in second quarter goes into be above 70%. Though the and this or that we estimate about 20% to 24%.

Okay. And so when we go into 80%, loading you are going to be improve that gross margin again and so you should depend on the revenue level and how the factory was loading for us. Since that we have produced the pass our sales and we have move there to produce and increase our sales.

Loading sector going to be the one decide our GPM and other than if you fund really (ph) and support come to everybody the only ASP effecting the gross margin but for us making function loading is the significant sector or our GPM improvement.

Unidentified Analyst

Okay.

Keh-Shew Lu, Ph.D.

So when we see our rating continue going up, I would loading will get it better and now GPM should be back.

Unidentified Analyst

Okay. Fair enough. And then just last two question from me I'll get back in the queue. Some of your peers have talked about pricing pressures in Q1. Can you maybe talk about where ASPs, were ASP declines during Q1 and if you are seeing any sort of pricing pressures?

Keh-Shew Lu, Ph.D.

Well, how about, Mark, could you answer this.

Mark King

Yeah, Q1 pricing pressure was pretty good, pretty strong. I think we had ASP decline of about 9% in the first quarter. First quarter is generally a pretty strong decline for us generally, but maybe as running about 4% more and part of that is just due to mix. But some of the commodity products took some pretty, some pretty difficult hits during this quarter as people try to load. But those parts are pretty elastic. So as things tighten up again those prices should go right back up. So I think we should see improvement. I don't think those are life long declines. I think those are short-term decline.

Keh-Shew Lu

Yes. I think 1Q is really short-term because everybody is underloaded and so everybody is trying to drop that price and the...

Carl Wertz

As well as some of our goals of reducing our inventory by the $16 million. So, its all those combinations, particularly some pricing pressure that we probably won't see in the second quarter.

Keh-Shew Lu

But in a second quarter you can see, I think you probably know people have started to see some kind of shortage in March and then going to April not many people can really react. Fortunately for us is we have inventory and we take this opportunity to reduce inventory from us and reduce the inventory from distributors, from our customers. But you can start to see... or actually in the March-April timeframe we always start to seeing some shortage.

Unidentified Analyst

Great. Thank you very much.

Keh-Shew Lu

Yes.

Carl Wertz

Sure.

Operator

Your next question comes from Vijay Rakesh. Please proceed sir.

Vijay Rakesh - ThinkEquity

Hi guys. Just wondering if you can give some color on where inventory levels started to get distributors here versus what normal level should be and where do you see that as you exit the quarter?

Carl Wertz

I'm not sure I got all that. There were some cloudiness in the line. So I think our inventory levels in distributor, at this point globally are actually quite low and quite solid. At the end of the fourth quarter, inventory levels in Asia were up because of the sudden drop in demand and as they were planned say for two months, they maybe went to three and half months and are possibly down to one in a quarter months or lower at this point.

So we don't really expect to be able to build any inventory back into channel in this quarter. Okay. Possibly, depending on the outlook of the... as we go a little further along in the quarter, we'll get a better vision of what the third quarter is going to look like but it maybe some time before we're able to build inventory in the channel.

Keh-Shew Lu

Yes, if you got to look at 1Q inventory level is significant lower than our traditional 1Q inventory level.

Vijay Rakesh - ThinkEquity

Okay.

Keh-Shew Lu

And we really do not have opportunity or the mere capability to build that inventory level back up.

So you can see in Mark's speech we could just say inventories would be flat in the second quarter and it's just because we have no capacity to backfill those inventory.

Carl Wertz

It will be difficult to keep it flat. It decreased 41% in the first quarter.

Vijay Rakesh - ThinkEquity

Yes.

Keh-Shew Lu

Right now for your information, we actually is a main capacity limited. Even we talking about second quarter, we are 70% loaded. The question is when you have main capacity limited because the time you hiring the people it takes about two months for training them, to put them back to the line. Okay.

So, we rented in April and May and then June because we start to hiring the people in March. So we have started building that and rented that in May and mid June

Vijay Rakesh - ThinkEquity

Okay. And one question, as you look at May, you guys have done a job before in giving kind of how point of sales looks like. As you look at the major geographies in U.S., Europe and China, can you give us color by geography how that point of sales is tracking?

Carl Wertz

Actually I would say the European point of sale tracked relatively was very soft in Q4. Actually grew in Q1 and I think I mentioned that its going to have pressure in Q2. North America was relatively flat and in fourth quarter was down roughly... it's in my thing but I think it was 10% in the first quarter, and I think its tracking more positively. And Asia was down in the fourth quarter significantly. It was down further in the fourth quarter, I think around... again around 10% and I expect it to track very positively in Q2.

Vijay Rakesh - ThinkEquity

Got it. And then last question here. In the long lead-time orders that you're seeing that can give you some indication on how orders could track at the end of Q3 or into Q3?

Keh-Shew Lu

Right now we cannot really... we are not giving any guidance in Q3 or Q4. And what we see today the market in second quarter. We give the guidance. Look pretty strong for us. We give guidance of 14 to 22% growth. And even 1Q is quite high compared with originally forecast. So if you look at it from 4Q to 1Q, we only dropped less than 10% and now from 1Q to 2Q we're going to grow and our midpoint is 18%.

So that's what we said, we're going to be higher revenue than first quarter last year. So, we are very happy with continued gain in the market share with growth. We're basically going to be more than fourth quarter and get to the high... the record high of the third quarter.

Vijay Rakesh - ThinkEquity

Okay. Got it. Great job. Good job guys. Thanks.

Keh-Shew Lu

Thanks Vijay.

Operator

Our next question comes from the line of Harsh Kumar. Please proceed sir.

Harsh Kumar - Morgan Keegan

Hey guys. First of all good job on managing cash flow in this tough environment. I'm very happy to see the great guidance. Question is lot of cost reductions, can you, Carl, maybe help us with your new target model or if it's not changed just tell us that previously I think you were 3.5% R&D, SG&A was about, correct me if I'm wrong, 12 to 13%. How should we think of those numbers with the new cost cuts and maybe things ramping up?

Keh-Shew Lu

Well I think that key thing is this. You look at we have been able to maintain trends R&D and SG&A together. We already said 21 to 23 and in 1Q we hit 22 point something. That's the range. And in second quarter, we gave the guidance, same 21 to 23. So you can see that is a range we try to maintain.

Now we need someone to delve the design. Okay. People are just because the revenue a;; of a sudden come back.

So this transition moment it was in percent may not be a right way to do it. I think that the easier way to look at it is 21 to 23 million and that is the target. We tried holding it and then we get revenue continue to grow.

And when the revenue grew to like I've said in second quarter, then the percentage automatically go down.

So, while revenue go up fairly midpoint 18% for our guidance, then you can see as a percent of those expenses will go down 18%.

Harsh Kumar - Morgan Keegan

Very, very fair. That's very helpful. And then kind of going back to one of the previous questions. China, is this Carl and Mark, in your opinion is the pick up in China really stimulus driven or is there... are you able to gauge if there is any real customer demand to this at all?

Keh-Shew Lu

I think it's actually all of those. Number one, stimulus package is one but second is really our new design win, okay.

If you go through Mark's presentation in the last several quarters we said we have allowed the design win activity even in U.S. and these trends were adopted into Asia.

And so, if you go to look at it all those of the design win activity now we start to get benefit when our customers started changing the model and we are there and then we start to ramp up it up.

Harsh Kumar - Morgan Keegan

Great.

Harsh Kumar - Morgan Keegan

But at the same time, we gain the market share by some of the existing customers using design since we are able to support it during this difficult time since we can support it, then we can take that opportunity.

Carl Wertz

Yes, I think some of the revenue may have come a little bit bigger in this quarter than it would of without the stimulus. But most of that cellphone business was all new business for Diode Zinc anyway.

Keh-Shew Lu

Yes.

Keh-Shew Lu

Okay. So its new entry in those things. And those hand equipments and in those customers will be coming on emerging revenues stream for our company. It might have been a little bit better this quarter because of the stimulus but I think long term, we'll be positioned well in that marketplace in China on the local side.

Harsh Kumar - Morgan Keegan

Yeah, that's very helpful. I know you guys are doing a great job, thanks. Thank you.

Keh-Shew Lu

Thank you.

Operator

Our next question comes from the line of Gary Mobley. Please proceed, sir.

Gary Mobley - Noble Financial Group

Hi, guys I guess backing in to the number you're fully utilized that about $130 million in quarterly revenue and I am going to pressure little bit on the gross margin questions that we had previously but that $130 million mark, what is your targeted gross margin percent?

Keh-Shew Lu

Well, I think if we go back to 130 something, I will be above 30%.Okay, now how much they are depend on the ASP but we should be, okay, if we get to $130 million, (inaudible) 130 million probably at the 90 to 95%. Because that's above our third quarter run rate.

Yeah, our third quarter run rate, we have October ... we have a September really soft.

Gary Mobley - Noble Financial Group

Okay.

Keh-Shew Lu

So if you look at the last year's third quarter, July, August is strong then September is partly soft (ph). But the third quarter run rate is about $134 million, I remember that's the number. So if you go back to that kind of variable, we're probably 95% loaded and I think on that one our gross margin should be 30 ... I remember that is 32%.

So assume ASP, assume something. I strongly believe if we can roll 130 million, we should be above 30%, of course, (ph) EPS.

Harsh Kumar - Morgan Keegan

And with Zetex, do you think given the product contribution from Zetex, that you can at some point in future, DIOD's prior gross margin peak of, I believe, of 35% or so?

Keh-Shew Lu

Actually here, I want to take this opportunity to let you know, I think, Zetex purchasing is quite the best, number one, from sales and marketing we're pretty consolidate and then for the manufacturing side, I think, Mark mentioned about we're ramped in this quarter we should be fully ramped by end of this quarter to our manufacturing of SKE on the product we want to ramp.

And in addition on that people probably didn't know is, we really appreciate the support from Zetex people. Now we're able pick their most of the technology and hopeful to some other ramps. And then we can start to ramp up those with mostly products very nicely. And another the same is the Zetex they are helping us in the Frebtek (ph). Therefore, we ramp it up with them; not fully qualified yet but it's almost there and that if will ramp up Zetex again that give us a momentum to grow that bipolar transistor business.

So, you can see a lot of the growth really contribute by all these lines, not just Zetex for that sale, sale by cross selling by us. Okay, though it is just that, if they have most technology, we'll use that technology now and bipolar junction transistor, BJT is another help. And then at the same time, we transfer FBR technology to Zetex and they then start to build future technology for us.

So, I believe Zetex acquisition is really positive for us. And if you go to see our second quarter, our growth compared to first quarter is much better than what we expect it and allow the contribution really coming from what I mentioned above.

Harsh Kumar - Morgan Keegan

Thank you guys.

Operator

Your next question comes from the line of Tristan Gerra. Please proceed, sir.

Tristan Gerra - Robert W. Baird & Co., Inc.

Hi, guys. Where is your detainment range currency and your projection for Q2?

Carl Wertz

Could you say that again, Tristan?

Tristan Gerra - Robert W. Baird & Co., Inc.

I was looking at your range for lead times currently in, and what you're projecting in terms of lead times for Q2?

Carl Wertz

Yeah, I think our lead times vary depending on the importance of the customer project and product line. I think...

Keh-Shew Lu

Product mix.

Carl Wertz

And product mix. Again, in the second quarter we expect our product to be quite tight. We expect to be able to meet our customer demand but closely watching so no one's building any inventory. So we don't like to ... we kind of believe lead time is a decision.

Okay. So we don't ... we're not so firm about those things but I think we're running anywhere from 3 to 8 weeks on our products depending on the die positioning and so forth. So, we still have some flexibility but we're utilizing things to the best possible mix we can while we get our people back on board.

Tristan Gerra - Robert W. Baird & Co., Inc.

Okay. And could you mention the type of products that are currently running at 8 weeks, sort of the higher end of the range and could that take us above 10 weeks in Q2?

Carl Wertz

Yeah, I mean you could look at some our lighting products that are external fab based and so forth. They probably would be running in our longer product areas. Most of the products that we have in internal fab we can adjust very rapidly. You might see some of our analog products that might stretch to the longer side of that because of being mostly outsourced from a fab perspective. But we generally have always tried to keep some sort of solid buffer in place to be able to gain us some flexibility.

Keh-Shew Lu

And from an affirmative point of view, again the tender package which we have in our capacity we may not deploy them, but from those special analog package like PO220, IPO 220S and like SOT 323 allow them complicate packaging especially for analog and those for Zetex and those products we do not have the excess capacity in this time when you ramp up the Zetex product, when ramp up the analog product and we kind of hand to mouth (ph) and that's the reason in April I also like capital money, $3 million capital money to reduce some of the bottom neck and you can see our second quarter CapEx, we increased to 6 to 7 million, 2 million it's cut due to move from 1Q but the other 4 million out of that 3 million was due to some tester for analog and some special packaging, those we are hand to mouth. So does those kind of products we are going to see a little longer lead time because of the assembly capacity issue.

Tristan Gerra - Robert W. Baird & Co., Inc.

Okay, and then you are working guidance for Q2 in nearly the same run rate as what you had in Q1 '08 and, of course, the gross margin profile in Q1 '08 was even it was above 30%. So just going back on couple of questions that were asked earlier, is mix of ASPs having a significant impact or could it also be delay in post margin recovery based even though we have run rates that our similarly now to Q1 '08 and do you have room for further manufacturing permanents cuts if you don't get back to the 130 million run rate that would optimize your utilization rates?

Keh-Shew Lu

Okay. It's probably is not that clear to compare 1Q '08 with 2Q '09 and the reason is 1Q '08 we had no Zetex.

Tristan Gerra - Robert W. Baird & Co., Inc.

Okay.

Keh-Shew Lu

And 2Q we do have Zetex and the Zetex product that I mentioned we're not fully transport to SKE's. We qualify now by end of 1Q we'll qualify but our customer won't take it right away. They are ... we need to deteriorate our inventory and then we and the customer need to accept our manufacturing side change. And therefore, we say, we won't be fully ramping until end of second quarter or third quarter. Okay, so, it's not that apple-to-apple comparison but let me ... might want the answer.

Carl Wertz

Yeah, as well as picked up three manufacturing facilities, we've got two assembly sites, one full assembly site, one joint venture assembly site and another fab, then we also have to move into the utilization mode. And we've got very active programs. The brain comes up to full utilization the same way via our own facility. But I think it changes the mix quite a bit.

Tristan Gerra - Robert W. Baird & Co., Inc.

Yeah.

Keh-Shew Lu

You can see right now, the fab is helpful, okay. And when you have fab reality, they are the one training the GPM dollar and corporate for $7 (ph). And if we can go back to $40 those fab then everything will be back to above 30%.

Operator

Your next question comes from the line of Shawn Harrison. Please proceed, sir.

Shawn Harrison - Longbow Research

Hi, first just a clarification on the variance between GAAP and non-GAAP earnings for the first quarter. My math was showing at least the non-cash interest expense charges about a $0.05 hit versus kind of the $0.03 variance that was highlighted in the earnings release.

I was wondering if maybe you could just talk through what the tax impact was there, if there's something I'm missing on that, in that variance.

Keh-Shew Lu

Okay. Well, we have Rick to answer this.

Richard White

Yeah, if you look at the major that we put in the earnings release, we talked about GAAP less the APB 14-1 cost, that's the $1.3 million.

Keh-Shew Lu

Which is $0.03.

Richard White

Which is $0.03, right. But in the things that you are talking about, we didn't removed those from the GAAP number that we gave you. So, therefore it's a little apples and oranges the comparison that you're making.

Shawn Harrison - Longbow Research

Okay. So the 2.2 million highlighted in the income statement includes the number of other items the amortization of that discount?

Richard White

Yes, right.

Shawn Harrison - Longbow Research

Okay. So it's a $1.3 million cost.

Richard White

Right, after-tax, right.

Shawn Harrison - Longbow Research

After-tax. Okay.

Keh-Shew Lu

It's confusing right now because we tend to use APB 14-1 and then we've driven quite a surprise adjustment and those two options not that really is not operational. Yeah, there operational stuff was put in. So I don't know, we are talking about maybe we start to, should start report like, hoping one operation couple of things instead of a lot of fab, if you go to look at GAAP, they've allowed non-operational cost which does not really affect our operation.

So, maybe we should start to concentrate more on the profit from operations.

Shawn Harrison - Longbow Research

Okay. And just really quick, Rick, it's 2.2 million pre-tax, 1.3 million after-tax, I mean that is a pretty hefty tax impact, correct?

Richard White

Yes, that's right, that's all U.S. based.

Keh-Shew Lu

Yes, because it's U.S. based.

Shawn Harrison - Longbow Research

Okay. Second question is looking at guidance, two parts; first, the run rate of sales you're seeing here in April, if you extrapolate that, the sales that you saw in April, if you extrapolate that to the quarter, where would that put you within the guidance?

What I am trying to get at is ... what I am try to get is what type of upside you need to see that may be get high-end versus the midpoint?

Carl Wertz

I think we are on track to our guidance.

Shawn Harrison - Longbow Research

Any clarification whether that's high, mid or low?

Keh-Shew Lu

I don't know we probably don't prepare to talking about ... I think we give the guidance, we say put in the 22% and then I think you can do whatever you wish to change you from that guidance.

Shawn Harrison - Longbow Research

Okay.

Keh-Shew Lu

Not meant that guidance because right now we see that.

Shawn Harrison - Longbow Research

And that's following up on a question from our prior caller, it looks like there is going to be some incremental cost savings, some headcount reductions that were made recently but then your also facing some headwinds from loading Zetex better internalizing some of those functions, maybe is there a way to qualify on a dollar base or quantify in a dollar basis, what the savings from these headcount reductions will be in the second quarter and then also kind of maybe what is the dollar drag you are seeing right now from Zetex is just not having full utilization or having some of those functions internalize as you'd like until we see that happen in the early part of the third quarter?

Keh-Shew Lu

Okay, let me answer that. I think we have to keep the guidance for the R&D and SG&A for each portion is 21 to $23 million second quarter. That is probably the range composes the first quarter and then why we put that range of then because the first quarter we still have some of the people do not get reduction yet but we have a short like a Chinese New Year and we have fourth vacation in the U.S. style and then in the Asia, again, we have fourth vacation.

So in 1Q, all the people action would not fully reflect in 1Q, but 1Q has additional Chinese holiday and the fourth vacation. 2Q, all the people action already may affect but we do not implement anymore fourth vacation. Therefore we think from bottom-line they're about the same. Okay?

Now, what we say we have the capacity problem, we're hiding back the walker (ph). That is in the assembly side and that would be implement into the gross margin portion. It won't be affect R&D and SG&A. And therefore our operation in a GPM percent would not be all the way higher is because we're hiring more people in SKE, okay?

Now if look at the load in Zetex and the FabTech they are not fully loaded yet they still have all these, okay? So all of those the big things we'll continue to pick it up then I believe our gross margin will be improved because that load in the fab will be improved on that.

Shawn Harrison - Longbow Research

Okay. And then just one point I want to be crystal clear on this the pricing pressure and the negative mix effects that occurred during the March quarter, are you seeing those issues alleviate and kind of a less in here as we moved into April and early May, correct?

Carl Wertz

Correct.

Keh-Shew Lu

That's correct because this product capacity now I don't think anybody is prepared to try to short the place, and try to gain the units.

Shawn Harrison - Longbow Research

Okay. Thank you very much and congratulations on the solid cash flow generation this quarter.

Keh-Shew Lu

Thank you.

Operator

Your next question comes from the line of Steve Chin. Please proceed sir.

Steven Chin - UBS

Great. Thank you. As we look at to Q3, is that possible that we could see another several hundred basis points jump in gross margin?

Keh-Shew Lu

Well, Steve, if this business continue to improve our loading continue then it will. But really I don't know if so far we do not really have any indication on the third quarter yet. We do not see the picture on June, if you remember, if you ask me last month, actually we don't even see the picture in June, but now we see the picture in June very much clear but July still not that clear yet.

But traditionally third quarter should be a gross quarter, now if this year going to be tradition or not I don't know but I do sure hope so.

Steven Chin - UBS

Okay. I know in past cycles when business has got a little bit soft you have been willing take on more commoditized type products at a lower gross margin. Did that happen this cycle such that as we get into Q3 or Q4 that stuff will mix back out in and you'll be shipping more of your higher value added parts?

Keh-Shew Lu

This time may not, but remember what I say is today we've main capacity, in the past we do not, we just continue loading it and try to chop the price and now I think what we do since the -- we put there back the people action in 1Q and now in SKE is the main capacity did meet it. Now, we're hiring the people, give training, prepare for second quarter will be this third quarter if it is an offence then no problem, if they're going down then attrition mix that those people go down too and therefore I do not foresee for us to chop the price significantly and try to gain the market share -- gain that loading.

Steven Chin - UBS

Got it. In terms of the pick up, you guys are taking about here for Q2, how much of that is wafers, I know that's I think that's a business I know you got hit pretty hard, are you seeing the wafer part of the business pick up or is it more other pieces of business?

Keh-Shew Lu

No, wafer area do not really pick it up.

Carl Wertz

We've targeted those wafer fab for internal consumption going forward.

Keh-Shew Lu

Yeah.

Steven Chin - UBS

Okay. It's interesting, okay. And then, obviously I think one of the main features that want to drivers of going after Zetex is better is going to give access to European market.

How far are you in terms of penetrating European accounts with previous Diode's parts I mean 20%, there or could that be significant driver going forward not much more than we, I mean today?

Carl Wertz

Yeah, I think that, I think there is a tremendous amount of opportunity with their customer position in that marketplace and the overall distributor position and so forth.

It's unfortunately right when we started moving that the economy changed and the economy changed relatively drastically in Europe. So I think it will take us a little bit of time to work those two areas.

Actually, we're doing well on both sides there's Diode's customers in Europe and Zetex was traditionally doing very much business with, or were struggling with that we've readjust itself. I think that synergies in the -- in all geographic regions that we expected remain the same and as the economy and as the market situation improves we'll be able to capitalize on them.

Steven Chin - UBS

Okay. And then in terms of the handset, I know you had originally started with some hall sensor products, how many parts you have available or maybe dollar content is a better way to ask that question seems like it's a billion unit market roughly that because you just starting in and you're going from a few pennies to maybe some more than that in terms of your total exposure so we could just sort of size market for us there?

Carl Wertz

No, I can't size the market for you and where we are unknown. Each cellphone you've got in smartphones we've got certain kinds of contents in local phones. We've got a different kind of content on main grand phones we've got a different kind of content.

Zetex brings us some contents in some of their current monitoring devices, in some other areas we've got LTO opportunity, we have hall sensor opportunities, we have load switch opportunities, we have performance transistor opportunities, there's just -- the product line for us is coming together in that area but each phone set and each type presents different opportunities for us.

Keh-Shew Lu

I think what we said in the past, we some have emerged into the deal in us into the cell competitors. Hall sensor opened that gate for us. Since we're able to get into the cellphone manufacturing by using the hall sensors. Now, we're able to and then now since we have the Zetex in our hands again it's just like hall sensors. They have to open the door. Therefore, today we have much more product in the handset business than before and it is not just hall sensor. Different handset manufacturing have different product and that is where we gain the market, our growth coming from.

Steven Chin - UBS

Okay. Last question I apologize for the questions but in terms of inventory building out there it sounded like you guys are not building inventory but is it possible that your customers or your customer customers basically the OEMs, do you think they are restocking some of their own inventory and that could maybe make say a Q3 - Q4 seasonality more challenging?

Carl Wertz

Again I really don't think that our customers ever build excess inventory on products that they buy from us and that would our end customers. Our distributors in North America and in Europe will still want to continue to shed inventory, okay? That's a natural phenomenon that's going on in our channel now. And in Asia they are all trying to build inventory and we're not allowing it.

Keh-Shew Lu

Asking to allow them.

Carl Wertz

Right. So, we I mean if the third quarter is good, there will be no inventory build in Asia until late fourth quarter and early first quarter.

Steven Chin - UBS

Okay, great. Thank you very much.

Operator

Our next question comes from the line of Steven Shein (ph). Please proceed, sir.

Unidentified Analyst

Thanks for squeezing me in let me also add my congrats on in navigating the environment. Couple of questions on revenues and margins. First on revenues, for the guidance for Q2, how much of that is due to the new analog in Zetex products that are ramping it's production as opposed to just normal and underlying orders for the existing product lines already out there.

Keh-Shew Lu

Retail ramp production is not it's just like we realize after this customer we caught it by with our SKE manufacturing retail customer will combine from some of time to our own manufacturing. So the ramping is not due to we move Zetex to SKE Packaging. Now we do gain some business by able to push the Zetex product into our customer base. That we do gain the remaining.

Unidentified Analyst

Okay. And then also on revenues is the quarter expected to be on somewhat more linear than normal because of the new products are ramping or well it still follow very normal patterns throughout the different months of the quarter?

Keh-Shew Lu

Well, I think second quarter is highly normal in the past because in the past second quarter typically is about 5 to 10% growth from second to third -- second compared to first but this year we already gave the guidance 14 to 22. So we believe this is much stronger than the just historical growth.

Carl Wertz

I would say it's pretty linear there might be a slight drop off in the end of June but we don't see that.

Keh-Shew Lu

We don't see that.

Carl Wertz

We don't see that, we've taken that into consideration.

Unidentified Analyst

Okay, that's helpful. And then question on your exposure to the industrial market. It sounds like there were some positive activity in the routine market during Q1, but just more broadly like on a global basis. I guess first of all, how was the entry level for approx that target industrial market? And secondly what is the underlying factor or factors that's helping to take out actually earnings?

Carl Wertz

I think, actually what I said was that the industrial level is the problem area, okay? Actually in Europe consumer -- in the fourth quarter the industrial level. It seems like the industrial is responding later. In the fourth quarter, the automotive -- automotive and consumer totally crashed and came back quite strongly in the first quarter. But the industrial just totally tanked in the first quarter.

So I think that -- and our outlook going forward is this that consumer and automotive don't look as bad for us as we originally expected where we don't see a great deal of recovery in industrial for a period of time. And I think that -- that's also evidenced in the U.S.

Unidentified Analyst

Okay. Got it. And lastly in terms of margins for the Zetex products they are now qualified as SKE that hasn't quite ramped yet just for the -- I guess the underlying or new cost structure for those Zetex products is that now more in line or even above your corporate average?

Carl Wertz

There should be improvements in our cost structure for those products.

Keh-Shew Lu

But there will be probably -- we though to be fully ramped in the end of second quarter, so you won't see the full benefit in that second quarter.

Unidentified Analyst

All right.

Carl Wertz

We really won't see the full benefit of those conversions until we reach our utilization point and when we reach our utilization point, we -- the synergies there should be quite good.

Unidentified Analyst

Okay. And lastly in terms of the repatriated $28 million in offshore funds, is there a particular use that the company currently has in mind for that?

Keh-Shew Lu

No, it's just because of the weakness or credit lines because they want you start you up in the credit line and we have the money we don't really want to spend the money to have a credit line, we have the money put in the bank. So we just decided to move the money back to U.S to support that crazy man. To make a crazy man (ph) ourselves, just general working capitals.

Unidentified Analyst

Okay, great. Thank you.

Operator

Your last question comes from the line of Vernon Steve (ph). Please proceed, sir.

Unidentified Analyst

Thanks for fitting me in there just two quick technical questions. Just on the last line requesting--

Keh-Shew Lu

Hello?

Carl Wertz

Hello?

Operator

I apologize.

Carl Wertz

The last one.

Operator

Yes, Vernon, if you could dial back in please.

Keh-Shew Lu

Got it.

Operator

Here you go.

Unidentified Analyst

You now hear me?

Carl Wertz

Yeah.

Keh-Shew Lu

Yeah.

Unidentified Analyst

Sorry about that. Just in terms of industrial on the last line in questioning there do you feel that's a reflection of end demand or do you think there could be something more taking place in the channel side of that.

Carl Wertz

No, I think it's end demand.

Unidentified Analyst

Okay. And then my next question where there any specific part origins that you saw in your portfolio where your competitors that occurred in this recent downturn that people are touching upon.

Keh-Shew Lu

I don't know it. Mark?

Mark King

Yeah I think it's to high to tell I think it's different people have different problems with different areas depending on what their mix was but, I mean the key thing is that when you shut things down it takes a little bit of time to get them ramped back up effectively so everybody has different issues. And some people perform better than others and some have better inventory or whatever.

So we just took the stance that we were going to utilize all inventory available whether within the channel or whether within our facility and we were going to trust try to get product to customers as quickly as we possibly can and get our self ramped up. And we really don't focus so much on what we do, we've seen some shortages from other people but I don't think our business says or our sales maybe being slightly better, is any relevant to other people shortages.

Unidentified Analyst

Okay. It's fair enough, thank you.

Keh-Shew Lu

Thank you.

Operator

I'd now like to turn the call back over to Dr. Lu. Please proceed.

Keh-Shew Lu

Well thank you for your participation today. Thank you very much. Operator you may now disconnect.

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