Diodes Incorporated (NASDAQ:DIOD)
UBS Global Technology and Services Conference Call
November 15, 2011 10:00 AM ET
Laura Mehrl – Director of Investor Relations
Steven – UBS Investment Research
Good morning, everyone. It’s my pleasure today to introduce Laura Mehrl from Diodes Incorporated. She is the Director of Investor Relations. Today, she’ll go through a presentation overviewing the company and afterwards, we will have a few minutes for Q&A.
Laura is very experienced in the analog space. She has a wealth of experience on technical side, as well as the product side. She has number of years under her belt from Texas Instruments.
And, with that, I’ll hand it over to Laura.
Thank you, [Steven]. Good morning and welcome to Diodes’ presentation. So we can get start here. But I won’t use the whole 25 minutes. You can stop me at anytime if you have questions. This is the Safe Harbor statement, most everyone are familiar with this statement. For the sake of time, we’ll not review it in details here, but I encourage you to review our detailed SEC disclosure in the Investor section of our website at www.diodes.com.
This is our President and CEO, Dr. Lu. He joined the company since 2005. He has been the Director for 10 years, Director of Board, Director for 10 years. And before that, his whole career was with Texas Instruments for 27 years held various senior positions such as, President of TI Asia and he is the Senior VP of Memory Group and also the last position he held before he retired was Senior VP of Mixed-Signal, Logic, Analog.
Myself, I have been in semiconductor industry for 25 years, my background mainly engineering and marketing and sales. I joined Diodes in May 2010 as Investor Relations.
So, about Diodes, Diodes, our main focus is application specific standard product for our discrete, logic, and analog serving the consumer, computing, communication, industrial and automotive.
So, our business objective is consistently achieve above market profitable growth, utilizing our innovative and cost-competitive packaging, process expertise and design excellence to address the high volume and cost sensitive market. And for those of you who know our company, we don’t really at this moment set any target for our gross margin. We’re focusing on revenue growth and gross profit dollar.
Here’s a whole marketing. As you can see, yeah, I’m sorry, yeah, sorry, I’m trying to use the laser point. It doesn’t have laser point there? Anyway, as you see the pie chart, the whole SAM that we’re serving, again is $80 billion.
But for SAM, for a servable market for us, together with a discrete, logic and analog together is about $26 to $32 billion and our revenue as of last year is only $613 million. So we have a lot of space to grow. We don’t necessarily countdown the market growth. We mainly grow by gaining market share. Here’s how we’ve been growing. We have growing many ways in product space. We aggressively, this one slide here...
Okay. Thank you very much. So in product space, we have aggressively introducing new products as you -- any of you have listened to our earning calls, every quarter earnings calls, our Senior VP of Marketing Sales release the number of products, in every quarter we release, it’s always has been over hundreds of them. Also we have continued to improve product performance. Together, they have helped us to increasing our SAM growth and revenue growth.
In packaging and application space, packaging, we continue improve the power density and miniaturization besides the increasing capacity and capability. I’ll go through this in detail later.
In application space, we continues increasing our key account in the Tier 1 customers and within each account, we increase the footprint with an application and then, as we introduce more and more new products, we increase the contents of each application.
As those people who follow Diodes, you know that before 2006, we’re just pure provider for discrete. After Dr. Lu joined the company, he knew that if we want to grow, we have to because discrete market doesn’t really grow that much anymore. So he led us into analog in 2006 by acquiring two companies. Then in 2010 last June -- actually in UBS Conference last June, we announced we get into the standard logic.
Diodes has extensive processing expertise to help us through, enhance our product performance. Just last year, we have announced a several trademark products. Here just some detailed examples. I forgot to mention in the previous slide, yeah, in 2008, we also acquired a bigger one called Zetex and they brought in a lot of proprietary process technology that really help us to improve the product performance.
For example, before we had Zetex, Diodes just have some really basic rectifier, such a rectifier after we brought in Zetex, we divided this middle range that’s called Super Barrier Rectifiers, which brings down voltage to less than 400 volts.
And last year, we announced a trademark product DIODESTAR Rectifier, which bring down voltage greater than 600 volts and that lead us into unregistered applications, same thing as MOSFET. MOSFET is one of the really key sellers for Diodes. Before, we just have really low end MOSFET then we introduced the DIODESTAR with very low RDS on lower breakdown voltage.
Last year, we introduced the DIODESTAR MOSFET with breakdown voltage over 600 volts. These are just examples that we use. We were normally used to be in low end and Zetex is more towards the high end. Now, we’re using their technology really develop tons of product stressing true high-volume mid-range in application.
Here are some examples of high volume application. Five, six years ago, we didn’t have any product going to high volume like mobile phone applications. But then in 2006, we acquired Anachip, their hall sensor and also power management really enabled us go into this application. And then later on with the Zetex, LED, LCD drivers and a lot of other products with our own USB power switch. Now you can see we have many, many products going into this application.
The other thing to remember when I started presentation, I mentioned our focus is applications standard product. The downside of that you can see from Wall Street point of view is lower margin, but then beauty of that recent standard product going into every high volume applications, I can show you in later slide.
As you can see the same thing, the USB power switch, DC-DC converters, current monitors, it just go into all these high-volume application. Anyway from monitor TV, before we get into the analog, we didn’t really have any product for this application either. But in 2006, we acquired APD and their SBR line is very large and they led us into this application later on with the Zetex, with our own product development. Now we’re really big on this application as well.
Similar thing is computing. As you can see again the standard product going LED drivers, Schottky diodes, DC-DC convertors, so hall sensors, all these standard products go into all kinds of applications. That’s the reason for example, last year in the starting, yeah, 2010, some segment LCD TV going down or some segment going down, we get phone calls.
If the revenue 2010 just keep going up that’s because we can always -- because we, all of our product line discrete, analog, logic share the same packaging. So we can switch them really easily, so we just put into different application.
Similar story, yeah, so here is the packaging besides cost reduction and capacity expansion, we have continue invest in packaging development. Each quarter, we introduce more and more new packaging for standard product that’s really welcomed by our key customers, because a lot of company don’t necessarily spend a lot of effort developing new packages for these all commodity products.
As you can see here, this is probably the smallest of discrete semiconductor packaging, this is a fingerprint. So, the 0.6, 0.3, 0.3 height and width, this is for one of our largest customer developed for them.
Also, talking about power density improvement comparing to traditional TO252, our power -- trademark PowerDI5 delivers more than twice a power density with less than half the footprint. That is really breakthrough for all portable applications.
And we have continuously invest in packaging expansion, as you can see from -- for the last 10 years, our compound annual growth rate for output packaging has been 38%. For those of you are familiar with Diodes’ business model, we spent about 10% to 12% of our revenue on CapEx and majority of them going to packaging expansion to support our business growth. As of last year, we have output 23 billion unit a year, that’s about 2 billion a month.
Because of that we’re able to, yeah, we also, for those of you who don’t familiar with us, we have two wafer fabs. We have 1, 5 and 6-inch fab in Kansas City and we have 1 fab in Oldham in U.K. and we have majority of our packaging right now doing in-house in Shanghai SKE and then in July this year, we just opened -- had a grand opening in Chengdu that’s for risk management, that is also inland a lot of the China government push for inland development.
When that finished, that’s a long-term plan supporting the future company growth. When that’s finished, who knows eight years, 10 years the capacity will be 2.5x of what we have in Shanghai, right now, Shanghai is already this year $23 billion and we still have room for another two years growth.
So you see talking about over $30 billion is probably when that’s full. But we already started Chengdu, right now they’re doing buildings and we have rented a small space to do the qualification. Once building done, it depends on the market situation, we can start putting the equipment.
Because we have this large capacity, we’re able to support our top customers on emergency and daily basis. For example, if our key customers call us saying, I need a $2 million in two years, I mean in two weeks, most of the company is not able to do that, but we’re -- why not you can do that, because our business model, our Diodes source most we produce a wafers and so our lead times basically, it’s just a packaging time. It’s about two weeks product plus shipping something like that. So we’re -- that the reason we have build a lot of strong relationship with our Tier 1 customers.
We have continuously outperformed our SAM industry. In the last eight years, our SAM industry grown about 6.5% and we have grown almost 24% of compound annual growth rate.
So this is our revenue for the last eight years. As you can see even in 2009, we were able to quickly turn around and have a record revenue, and also this year, year-to-date, we’re 10% growth, I mean not year-to-date, as of September 30th, when Q3 finish, we still grow 10% over last year even economy has been softening since May.
So because we have continuously grown our capacity to support our customers, so our OEM customer has grown tremendously. We have about 30, I’m sorry, we have 44% of our revenue from -- directly from OEM and EMS, even though the distribution is 56%, actually there were some large customer there that at this stage use their engineering team to support that, but (inaudible) but it’s a large, a lot of large accounts. So almost half of actually revenue come from OEM, unless -- unlike the other majority company with standard products 70% of revenue come from distribution.
Because we’re focusing on a high volume consumer, computing communication, so more than 70% of our revenue comes from Asia-Pacific and Europe since we bought Zetex in 2008 was really bad timing, but last year, the synergy finally keeping and European market share has grown tremendously. Now represent 13% of our revenue as our revenue growth. So the percentage growth that’s a lot of revenue growth there and North America is also about 13% of our revenue.
So this is the Q3 result. The revenue is about $161 million, that’s 5% down from sequentially and then, yeah, 2% down from 3Q a year ago. And then gross margin is 28%. During this earnings call we mentioned, gross margin down mainly due to the ASP degradation larger than normal and also both price hike and also product mix change.
So this is our balance sheet and we had about $166 million cash outflow, mainly we’ll use the $134 million for the retirement of convertible senior note and also we use the $14 million for the Eris we acquired another packaging from Taiwan.
And also $20 million for the CapEx, $10 million due to Chengdu, our packaging build-up and also our inventory went up about $10 million, mainly $14 million from the finished goods, $1 million from raw material and offset by $10 million of work in progress.
In Q3, we are on purposely increased finished good relatively because we prepare for a three-day shutdown during the first week of October, which fall in 4Q. Also the Chinese New Year this year fall in January, so we’re going to shutdown another three days.
Let say, for the 4Q outlook, the revenue expected to be ranged between $140 and $150 or 7% to 13% sequentially. Gross margin expect to be 25% plus or minus 1%. Operating expense should be remaining approximately flat with the Q3 on dollar basis. Income tax, expect range between 17% to 23%. The share used to calculate the GAAP earning per share for the fourth quarter are anticipated about $47.2 million.
Right now it’s kind of tough because of macro-economy environment but we really set for, I think we’re really well-positioned ourselves. We have really strong markets and design wins across regions, even though right now some of and customers delay their project, but design win has remained very strong.
Also we have capacity in place just like in 2009 but most of company did not do anything. We see market about turn around. So we heavily invest in packaging expansions. That’s really helped us to gain market share in 2010.
So right now we do put second half CapEx 40% in hold but we still have capacity in place. Right now our backend running at full load with people’s capacity, but our equipment capacity is still more than the people capacity. So if market turn around with speculation in Q1 or Q2 we’re definitely ready.
So I think our long-term strategy, which is profit growth has been working for us. We have manufacturing cost leadership. We’re focusing on high volume and application. We have strong customer relationship and we rapidly introduce new product that’s the reason you don’t see our R&D -- our R&D dollar, I mean actually has been up and we’re still looking at M&A opportunities constantly. We have innovative processing packaging technology. So all this together really ensure our strategy, our business success of profitable growth.
So, that’s my, I mean, that’s my presentation. I think I still have some time for questions.
Yeah. We have a microphone at the back of the room that’s floating around. I’ll go ahead and start off with a few questions first Laura. Just going back to your recent earnings results. So I think one of the key surprises was the in terms of the gross margins, how the performance was in Q3 and also with the guidance was for Q4?
So understanding that -- those three different components in terms of what’s been influencing it, I guess looking at the ASP degradation in particular. I think compared to some of your other competitors. I think ASPs have also been down but probably not having as big of an impact on their results compared to yours but I know that also it was a decision to capture some near-term business to maintain high utilization rates at your fabs?
I guess, could you talk about some decisions that the management team went through to go after some of that near-term business even though it’s much lower ASPs than typical as a risk of not being able to have those revenues in the future when the market demand recovers at a potentially high ASP, if you could talk about that potentially?
The reason, I heard hard from you. You’re talking about the ASP degradation because of margin?
Yeah. The ASP degradation.
Yeah. We talk about Q3 mainly because the ASP degradation definitely is contribute to margin, went down more than any other factors. But that’s really enabled us to gain market share. But you are talking about competitors, ASP didn’t, what you mentioned competitors?
Yeah. The -- so in terms of the decision to pursue and capture some of that near-term revenue even though it’s at much lower ASPs then I guess you would typically see in terms of ASP degradation. I guess the trade-off between that lower margin business now versus waiting for demand to recover and then having, you referring those revenues for later and capturing then at a higher ASP, if I guess that thought process there?
We have pretty much flexibility like, I mentioned before, with -- this was related to product mix change also in the packaging. In the demand, in fact last year 2010, the demand is, I mean supply is really tight. We are able to switch to higher margin stock pretty easily and we’re just not taking any of the lower margin orders. So but, right now, it’s vice versa. Right now we take what orders we get. So right now it’s hard to sell high, really expensive equipment, but in Asia since you have holidays, so if you’d maybe cheaper stuff, so a lot of lower margin stuff you’re selling.
But as far as, yeah, we’re trying to load up our packaging. The wafer fab actually in KFAB is under-loaded right now, because we don’t want to build up more inventory. But the packaging is really people capacity fully-loaded. Because we -- remember during the last year Chinese New Year, we had a manpower problem. We finally by Q3, we got that improved and we want to maintain that productivity and keep our packaging fully loaded.
Okay. We’re almost out of time. So I think we’ll wrap it up there. There is a breakout session and we’ll head over there for further questions.
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