Diodes' (DIOD) CEO Keh-Shew Lu on Q4 2015 Results - Earnings Call Transcript

| About: Diodes Incorporated (DIOD)

Diodes Incorporated (NASDAQ:DIOD)

Q4 2015 Earnings Conference Call

February 16, 2016 5:00 PM ET

Executives

Leanne Sievers - Executive Vice President, Investor Relations, Shelton Group

Keh-Shew Lu - President and Chief Executive Officer

Richard White - Chief Financial Officer, Secretary and Treasurer

Mark King - Senior Vice President, Sales and Marketing

Analysts

Steve Smigie - Raymond James & Associates, Inc.

Gary Mobley - The Benchmark Company, LLC

Christopher Longiaru - Sidoti & Company, LLC

Suji Desilva - Topeka Capital Markets, Inc.

Richard Sewell - Stephens, Inc.

Shawn Harrison - Longbow Research LLC

Justin Lee - Robert W. Baird & Co.

Operator

Good afternoon and welcome to Diodes Incorporated Fourth Quarter and Full Year 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of today’s conference call, instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded today, Tuesday, February 16, 2016.

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

Leanne Sievers

Good afternoon and welcome to Diodes fourth quarter and full year 2015 financial results conference call. I am Leanne Sievers, Executive Vice President of Shelton Group, Diodes’ Investor Relations firm.

Joining us today are Diodes’ President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Rick White; and Senior Vice President of Sales and Marketing, Mark King; and Director of Investor Relations, Laura Mehrl.

Before I turn the call over to Dr. Lu, I would like to remind our listeners that the results announced today are preliminary, as they are subject to the company finalizing its closing procedures and customary quarterly review by the company’s independent registered public accounting firm. As such, these results are subject to revision until the company files its annual report on Form 10-K for the fiscal year 2015.

In addition, management’s prepared remarks contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions.

Therefore the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission; in addition, any projections as to the company’s future performance to represent management’s estimates as of today February 16, 2016.

Diodes assume no obligation to update these projections in the future as market conditions may or may not change. Additionally, the company’s press release and management’s statements during the conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. Included in the company’s press release are definitions and reconciliation of GAAP to non-GAAP items, which provide additional details.

Also throughout the company’s press release and management’s statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 60 days in the Investor Relations section of Diodes’ website at www.diodes.com.

And now, I’ll turn the call over to Diodes’ President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.

Keh-Shew Lu

Thank you, Leanne. Welcome, everyone, and thank you for joining us today. Diodes closed 2015 with increased market share, the achievement of our 25th consecutive year of profitability, as well as the successful completion of the Pericom Semiconductor acquisition.

The market share gains we achieved were exclusive of Pericom. And we expect to continue to increase our market share in the coming year.

Pericom is well-aligned with our acquisition strategy and expands our analog footprint, while also adding a strong mixed-signal connectivity offering that will drive expanded product content in target applications. Over the past two months since closing the acquisition, we have been diligently working on the integration efforts to maximize sales, design, operations and administrative efficiencies for 2016.

As expected, this transaction is accretive to our margins and the non-GAAP earnings per share. Also during the quarter, we implemented the share buyback program approved by our board last quarter, repurchasing 466,000 shares and allowing us to return approximately $11 million to our shareholders.

When looking back over this past year, 2015 was characterized by weaker demand across several key end-markets and geographies. The softer environment impacted loading and utilization at our manufacturing facilities, but yet also provided some unique opportunities in terms of market share gains at key customers.

Gross margins were under pressure especially in the second half of the year. From a market perspective, first quarter 2016 is shaping up to be a difficult quarter. But excluding Pericom and a specific sector of our communication market, our first quarter revenue is expected to be up slightly in contrast to our normal first quarter seasonality.

In addition, I believe we are well-positioned for margin expansion in 2016 based on improvements in product mix and the manufacturing performance, as well as the benefits from previous cost reductions. Similar to past cycles, our flexible business model enabled us to respond quickly to the changing conditions in order to preserve revenue and gross profit.

Looking forward to the coming year, we remain focused on fully integrating the Pericom acquisition to capitalize on the margin expansion opportunities, as well as cross-selling synergies for expanded content across target and emerging applications.

With that, I will now turn the call over to Rick, to discuss our fourth quarter financial results as well as first quarter guidance in more detail.

Richard White

Thanks, Dr. Lu, and good afternoon, everyone. Revenue for the fourth quarter 2015 was $214.4 million, which included approximately $14.6 million of revenue from Pericom, and compares to $208.9 million in the third quarter 2015 and $223.7 million in the fourth quarter 2014.

Excluding the revenue contribution from Pericom, revenue for the quarter was down 4.3% sequentially, due primarily to weakness in the computing market, weak domestic demand in China as well as normal seasonality.

For the full-year 2015, revenue was $848.9 million, a decrease of 4.7% over $890.7 million in 2014. GAAP gross profit for the fourth quarter 2015 was $53.9 million, including a $3.1 million inventory valuation adjustment related to the Pericom purchase or 25.1% of revenue.

Non-GAAP gross profit, excluding the $3.1 million inventory adjustment, was $56.9 million or 26.5% compared to the third quarter 2015 GAAP gross profit of $61.6 million or 29.5% of revenue, and the fourth quarter 2014 GAAP gross profit of $70.7 million or 31.6% of revenue. The sequential decline in gross profit margin was due to a lower capacity utilization, product mix and pricing.

For the full year, non-GAAP gross profit was $251.9 million or 29.7% of revenue, compared to GAAP gross profit of $277.3 million or 31.1% revenue in the prior year.

GAAP operating expenses for the fourth quarter 2015 were $52.8 million or 24.6% of revenue, including $1.6 million for the Pericom purchase accounting adjustment. Excluding the $1.6 million purchase accounting adjustment, non-GAAP operating expenses were $51.2 million or 23.9% compared to GAAP operating expenses of $51.7 million or 24.7% of revenue in the third quarter 2015 and $48.6 million or 21.7% of revenue in the fourth quarter 2014.

Looking specifically at selling, general and administrative expenses for the quarter, SG&A was approximately $34.7 million for the fourth quarter or 16.2% of revenue, compared to $34.7 million or 16.6% of revenue in the third quarter 2015, and $34.2 million or 15.3% of revenue for the fourth quarter 2014.

Investment in research and development for the fourth quarter was approximately $15 million or 7% of revenue, compared to $13.7 million or 6.6% of revenue last quarter and $12.6 million or 5.6% of revenue in the fourth quarter 2014.

Combined SG&A plus R&D was $49.7 million or 23.2% of revenue compared to $48.4 million or 23.2% of revenue in the third quarter 2015. The increase on a dollar basis primarily reflects the one month of expenses for Pericom. For the full year, SG&A plus R&D was 22.2% of revenue. Total other expense amounted to approximately $81,000 for the quarter.

Income before taxes and non-controlling interest in the fourth quarter 2015 amounted to $1 million compared to income of $10.2 million in the third quarter 2015 and $23.2 million in the fourth quarter 2014.

Turning to income taxes, our effective income tax rate in the fourth quarter and full year 2015 was approximately 26.8% and 33.9% respectively. GAAP net income for the fourth quarter 2015 was $700,000 or $0.01 per diluted share compared to third quarter 2015 of $2.8 million or $0.06 per diluted share and fourth quarter 2014 of $16.7 million or $0.34 per diluted share.

Share count used to compute GAAP diluted EPS for the fourth quarter 2015 was 49.5 million shares. GAAP net income for the full year 2015 was $29.8 million or $0.60 per diluted share compared to $63.7 million or $1.31 per diluted share in 2014. 2015 represented our 25th consecutive year of profitability.

Fourth quarter 2015, non-GAAP adjusted net income was $6.7 million or $0.14 per diluted share, which excluded net of tax $4.1 million of Pericom purchase accounting adjustments, $1.5 million of additional non-cash acquisition related intangible asset amortization costs and $400,000 of other non-acquisition related severance costs. This compares to non-GAAP adjusted net income of $6.3 million or $0.13 per diluted share in the third quarter 2015, and $18.3 million or $0.38 per diluted share in the fourth quarter 2014.

Non-GAAP net income for the year was $42.3 million or $0.86 per diluted share, which excluded net of tax $4.9 million of Pericom acquisition related costs, $6 million of other non-cash acquisition related intangible asset amortization costs, $1.3 million of asset impairment costs and $400,000 of non-acquisition related severance costs. That was compared to $70.1 million or $1.44 per diluted share in 2014. We’ve included in our earnings release, a reconciliation of GAAP net income to non-GAAP net income, which provides additional detail.

Included in the fourth quarter and full year 2015 GAAP and non-GAAP adjusted net income was approximately $2.5 million and $10.1 million respectively, net of tax non-cash share-based compensation expense. Excluding share-based compensation expense, both GAAP and non-GAAP adjusted diluted EPS would have increased by an additional $0.05 per diluted share in the fourth quarter and $0.20 for the full year.

Cash flow generated from operations was $21.4 million for the fourth quarter, $119.8 million for the full year 2015. Free cash flow was a negative $16.9 million for the fourth quarter, which included $38.2 million of capital expenditures, primarily for the Chengdu site expansion. Free cash flow was a negative $13.4 million for 2015, which included approximately $133.2 million capital expenditures.

Net cash flow for the quarter was a positive $29.7 million, including the pay down of approximately $18.8 million of long-term debt and the $11 million share repurchase. Net cash flow was a negative $24.6 million for the year, which includes the pay down of approximately $66 million of long-term debt and the $11 million share repurchase.

Turning to the balance sheet, at the end of the fourth quarter cash and cash equivalents totaled approximately $218 million, and short-term investments totaled $65 million. Working capital was approximately $571 million. At the end of the fourth quarter, inventory increased by approximately $5 million from the end of third quarter 2015 to approximately $203 million, including Pericom’s inventory and purchase accounting adjustments of approximately $18 million. Excluding these items, Diodes inventory is down approximately $13 million, with decreases in finished goods, work in process and raw materials.

Inventory days were 115 in the quarter compared to 123 days last quarter. At the end of the fourth quarter, accounts receivable was approximately $218 million, an increase of $16 million from the third quarter. AR days were 90 flat to last quarter. Our long-term debt totaled approximately $466 million, which includes $391 million borrowed for the acquisition of Pericom.

Capital expenditures for the fourth quarter were $38.2 million or 17.8% of revenue, which includes the expansion of our Chengdu site. On a cash basis, capital expenditures for the full year total $133.2 million or 15.7% of revenue. Capital expenditures excluding the Chengdu site expansion total 8.9% of total revenue. For the full year 2016, we expect our capital expenditures to be 5% to 9% of revenue. Depreciation and amortization expense for the fourth quarter was $22.1 million and $80.1 million for the year.

Now turning to the outlook. For the first quarter 2016, we expect revenue to range between $214 million and $235 million or flat to up 10% sequentially, including the first full quarter of revenue from Pericom. We expect non-GAAP gross margin to be 30%, plus or minus 2%. Non-GAAP operating expenses are expected to be approximately 25.5% of revenue, plus or minus 1%. Interest expense is expected to be approximately $3.4 million and we expect our income tax rate to be 28%, plus or minus 3%.

Shares used to calculate diluted EPS for the first quarter are anticipated to be approximately $49.5 million. Please note that purchase accounting adjustments for Pericom and our previous acquisitions of $7.3 million after tax are not included in these non-GAAP estimates.

With that said, I will now turn the call over to Mark King.

Mark King

Thank you, Rick, and good afternoon. For the purpose of my comments, all figures in comments will be in reference of Diodes core business performance during the quarter, excluding Pericom except where noted.

Revenue for the quarter was down 4.3% sequentially due to distributor inventory adjustments, we mentioned last quarter predominately in Europe combined with normal seasonal trend. OEM sales were down 5.4%, while distributor POP was down 3.6% and POS was down 8% after an extremely strong Q3. Distributor inventory decline 5.3%.

Turning to global sales, Asia represented 81% of revenue, Europe 10% and North America 9%. In terms of our end market, consumer represented 32% of revenue, communications 25%, industrial 20%, computing 18% and automotive was 5%. The computing market remains soft in the quarter along with the consumer market due to weak domestic demand in China.

On the positive side, we continue to make progress on our automotive and industrial initiatives, despite the overall stock market customer activity remain strong across regions. Design activity remains that high level and design win for solid. We continue to penetrate our key customer base with a deeper product line and see significant customer synergies with our recent acquisition of Pericom. From a product perspective, we saw a strong revenue momentum for LED lighting, sensors, CMOS LDOs and MOSFETs.

Let me now talk about our business in more detail within each of our end market. For the consumer market, we released several devices to support large consumer electronics such as digital TVs and set-top boxes. For the portable space, we released a high efficiency Class-C audio power amplifier that can drive up to 4-watts through a 4-ohm speaker with a power supply as low as 2.8-volts. In terms of design wins, we secured nine significant wins for our audio and AC-DC lines for products such as sound bars, set-top boxes and Bluetooth speakers.

In the communications market, we released a family of current owned PW Controllers. When used in conjunction with our protocol decoder and a secondary side controller, these devices offer a high performance solution for mobile phone chargers and adapters that is compatible to the Qualcomm Quick Charge 2.0 protocol.

For cell phone battery packs, we released several new protection solutions for single-cell lithium ion and lithium polymer rechargeable batteries. We obtained a number of new design wins across several mobile phone charger and adapter applications, including several in support of the high-growth India market. We also saw continued success for our CMOS LDOs and hall sensors in mobile phone handsets with 11 significant wins.

For mobile communication applications including portable device charging, Diodes innovative active rectifier platform was used to develop our first device suited to quick-charging applications such as USB type C for 15-watt chargers. This technology embeds a low RDS (NASDAQ:ON) MOSFET together with a controller in a small footprint solution delivering high-power efficiency. Also aimed at efficiency for chargers and adapters, Diodes also launched several new SBR devices in a range from small packages with the industry-leading VF and leakage performance.

For the computing market, we continue to gain share in this space with our load switches and secured 12 new wins across seven leading manufactures. Other wins include CMOS LDOs and logic devices in notebook and servers. Additionally, our Pericom team released several new products including a 16-bit I/O expander for I-squared-C bus applications, a re-driver with AUX listener, a new POT [ph] generator family, and a plug-in detector for use in the emerging USB type C connector.

In the industrial market, Diodes released a family of new products for entry into the high-voltage gate driver market, offering a mix of 600-volt half-bridge drivers as well as high-side and low-side drivers. These products complement Diodes growing MOSFET technology base and strengthen the ability to address motor drive and power supply applications in the near term, with a potential to migrate to electronic vehicles in the future. We also released a family of single-chip motor driver ICs with integrated H-bridge high-sensitivity hall sensors for driving low-profile, single-coil brushless DC motors and cooling fans.

For general illumination applications, we released a family of LED drivers for dimmable retrofit lamps that can operate in either buck or buck-loose architectures with output power up to 12-watts. During this quarter, we secured 16 new industrial and smart lighting design wins, including wins for large-scale industrial equipment as well as standard linear in e-metering and light good applications.

And finally, in automotive we had another strong quarter of new product releases, including a family of automotive precision stunt references as well as medium-voltage LED drivers. We also extended our range of automotive qualified MOSFETs with 10 new products from our 175 degrees C-rated portfolio featuring our shielded gate technology.

These products are 100% avalanche-tested for ruggedness and suitable for under-hood and other high-temperature application. 13 other automotive-qualified MOSFETs were released in the quarter, bringing the total of automotive MOSFET releases to 79 for the year. In terms of design wins, our wins in the quarter were dominated by LED sockets for daytime running lamps and emergency lighting.

In summary, despite the weaker environment throughout the past year, we remain focused on achieving continued market share gains as we capitalize on our expanding product portfolio and design win success across our end markets. We believe there are significant opportunities in the coming year as we integrate the Pericom acquisition and further broaden our content at customers and end market penetration. We continue to place a strong emphasis on the portable and wearable space as well as automotive market, where we continue to maintain strong momentum going into the New Year.

With that, I will open the floor to questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Steve Smigie from Raymond James.

Steve Smigie

Great. Thanks a lot, guys, and good execution in a pretty soft macro here. Dr. Lu, I was hoping you could follow-up on gross margin. To your point, it looks like Pericom is definitely coming in and driving some gross margin accretion there. Can you talk about as we look out to 2016, is there a chance that even in this weak environment, maybe exiting 2016, you guys could get up to a mid-30s gross margin? Or would that be topping sort of a soft macro?

Keh-Shew Lu

Well, I don’t think we give the clear focus on the gross margin yet. Actually we ought to 1Q, we focused on 30%, and that really is better than third quarter of last year and fourth quarter of last year. So we know typically 1Q is the lowest one. And if the revenue continued going up, our reorganization will continue going up, then that 30% will continue to improve from there.

So since we do not really talking about what would be the gross margins, but we believe our pointing should be the lowest one, if the market continues to improve from 1Q. And we’re looking at, if the utilization gets better and our under-loading costs go down, then our GP will continue to improve.

Steve Smigie

Great. Thanks. And then just curious, any first thoughts once of having Pericom acquired, if any positive surprises? And what kind of growth are you thinking about long-term in that business?

Keh-Shew Lu

Well, the Pericom acquisition - so far, we don’t see any negatives. Now, we do see some spots are greater than expected, but I do not really want to go through the details because it seems too early to say. But so far, we could not find any surprise from the next start.

Steve Smigie

Okay, great. And last question, is there a concern out there about China? And I was just curious if - how you’re thinking about the China local market at this point. Is that stabilizing at all, or is it still pretty soft?

Keh-Shew Lu

Well, I think it’s stabilized, but I would say it’s still very soft. So you are hitting on both, right. We don’t see yet extent of improvement, but it still is quite stable now. Right now, they just finished the Chinese New Year. And we - right now, we don’t see any signs yet, but we’re hoping after Chinese New Year and start from March, then we would hope to see some improvement. But right now, I won’t say definitely, it’s good. I’m still thinking first half is still quite weak.

Steve Smigie

Okay, great. Thanks. Well, congratulations on closing Pericom and the good execution there. Thank you.

Keh-Shew Lu

Thank you, Steve.

Operator

Thank you. And our next question comes from the line of Gary Mobley from Benchmark.

Gary Mobley

Hi, guys, thanks for taking my questions. I wanted to ask about seasonality for Diodes as the year unfolds. Should we think that, for any reason, 2016 will be any different in that Q2 and Q3 are typically the strongest two quarters, Q4 is typically flattish on a sequential basis? And with the contribution of Pericom - and I know it’s a small percentage of the overall revenue - would you expect that seasonality will be muted a little bit? Just because I was seeing Pericom’s revenue isn’t quite as seasonal as yours.

Keh-Shew Lu

Well, typically 4Q is much stronger, 3Q is even stronger and then 4Q slow down. That’s been learnt. But don’t forget, in 2015 that 3Q was actually going down on 2Q and then 2Q even further down. So if you look at it, I think I’m talking about the past. If the seasonality is correct, then 40% to 45% in one half and 55% in second-half. And last year, sure enough, it’s not happened to that kind of pattern.

In 2016, there is no sign of telling which way it will go. Okay. Because so far we think the first half is still quite weak. You can see from 1Q, 1Q is 35% and 1Q is quite weak. And as far even Diodes is flat or slightly better on homogenous we saw the Pericom acquisition, that their market in general, 1Q is weak. And so far, we don’t know the second Q yet. So it’s even, I cannot really tell you this year what is the pattern going to be looking like. We don’t know.

Gary Mobley

And, Mark, related to that, I think you mentioned in your prepared remarks that distributor inventory was down over 5% sequentially. And if I’m not mistaken, distributors, probably about half of your revenue, and you probably don’t have detailed insight into shipment directly to OEMs as far as inventory goes. But what is your sense is, as you sit here today in terms of distributor and customer inventories relative to where they have been over the past 12 or 18 months?

Mark King

I think the customer inventories - I think customers take their product if they need it. I don’t think customers - we all are on agreement that we have to ship dozen times. I don’t really see a great deal of inventory build at the customer. I think the channel is getting in pretty good shape. I think we’ll expect to see some channel build for us in North America and Europe in the first quarter.

Asia may be a little bit flattish in the first quarter, because I think they expect a little bit better fourth quarter than they got. And thus, the inventory level stayed a little higher than we thought they would in the fourth quarter. But I think everything is in line. There’s not too big of on an inventory hangover. So I think we’ll be in pretty good shape to regain some POP and position ourselves for the second and third quarter.

Gary Mobley

Okay. And Rick, I know Q1 will be the first full quarter with Pericom results and business integration. So I don’t know what the plans are specifically with respect to OpEx synergies and whatnot with Pericom. But would you expect Q1 to represent the high mark for non-GAAP operating expenses for the full year or should we model roughly flattish trends off of that Q1 base?

Richard White

Yes, so the - basically what’s going to happen in the first quarter is we have another purchase accounting inventory adjustment equal to the one that we had in the fourth quarter.

Keh-Shew Lu

Rick, is that...

Richard White

No, no, it’s the same as what we had in the fourth quarter. We took half in the fourth quarter, half in the first quarter, and then that goes away. And then the rest of the year will be just the acquisition-related intangible asset acquisitions.

Gary Mobley

What about on a non-GAAP basis? Do you foresee some cost synergies to be wrung out from the acquisition?

Richard White

Well, I think if - as we move through time, not only the non-GAAP, but the GAAP expenses will go down, just because we will be getting rid of double the costs that we had. For example, forward costs and things like that. So I think both GAAP and non-GAAP expenses will go down.

Gary Mobley

Okay. All right. That’s it for me. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Christopher Longiaru from Sidoti & Company.

Christopher Longiaru

Hey, guys. Can you hear me?

Keh-Shew Lu

Yes.

Richard White

Yes, we can hear you.

Keh-Shew Lu

We can.

Christopher Longiaru

So my question has to do with - you talked about you’re in a position to expand your gross margins. And there are usually a lot of pieces to that, right. You have a - the addition of Pericom, they had some high gross margins, so there’s a mix feature there. Automotive and industrial, some higher margin cost for you guys. But also utilization is a big part of that. So can you give us a little granularity into how to expect that to kind of play out relatively over the next four quarters; and where you see opportunity first and where you see opportunity later?

Keh-Shew Lu

Well, if you look at 2015, both 2014, the revenue, they actually went down. And that caused more under-loading sale for us, okay, especially second-half. If you look at second-half revenue really going down instead of growth. So then looking for this year, 1Q and the revenue - starts to have revenue rise, and we can see gradually improvements, and so its utilization should be improved, okay, especially the S Fab.

You can see we are in a - where S Fab’s BCD fab, right. We have been working on how to improve that utilization of the S Fab by move some of the products inside into S Fab 2 and convert S Fab 2 into the 8-inch. So all the new products we’d introduced are - I mean, it’s other important majority is used in the S Fab. So is S Fab - if the new product starts to run, S Fab loading will continue to improve.

And so I’d say, back to 2016, based on 2016 I believe that S Fab 2 loading would later improve, okay, the concerning product started going in this year. And so in general, I believe this year the underutilizations will be improved. And as we have some hope, which I do on the revenue growth in this year, Taiwan alone, excluding Pericom, I think that would improve the utilization rate from both fab and assembly.

And that will give us a better [indiscernible] cost and improve our GP. For still asking for GP for this year, I expect 30% in 1Q. And I hope it’s the lowest one. And while the revenue started going up in second quarter and hopefully in third quarter, then utilization will get better, GP will be getting better.

Richard White

Yes, this is…

Christopher Longiaru

And so…

Richard White

This is Rick. There is another factor that Keh-Shew didn’t mention, which was CAT, our Chengdu assembly site. The last couple of years it has kind of been getting going. And in 2016, as you can see, we spent quite a bit of money there to get the equipment in, get the buildings ready to go. And so we’re hoping that it can be fully efficient this year. So in addition to the wafer fabs issue that Keh-Shew talked about, CAT is going also improve, we think.

Christopher Longiaru

And would I be right in saying, if you - if I stood at Pericom from the number, it would look like your Diodes properly up, Pericom revenue was about flattish from December and also the March quarter or through the year guidance, which is much better than typical seasonality, is that fair to say?

Richard White

Yes, I think what Keh-Shew said in this speech was that, if you take out Pericom and if you take out a certain sector of the communications business, we’re actually slightly up, if you just look at those two pieces of Diodes from fourth quarter to first quarter.

Christopher Longiaru

And so looking at kind of the exclusion of Pericom from a mix perspective, utilization-wise you probably are around at the same level. And so, the majority gross margin improvements was from the mix addition of Pericom unless that when the 8-inch wafer at S Fab, starts [Technical Difficulty], and that’s all upside producing kind of gross margin run rate around 30%. Is that a fair thing to say?

Richard White

Yes, I think that’s fair. That, as you move through time the Diodes piece - because you have to remember that Pericom is basically outsourced to both wafers and assembly tests. And so their - if you say that their revenue and margin are stable, then the improvement would come from Diodes’ utilization of our manufacturing facilities.

Christopher Longiaru

And the only part of Pericom that’s not outsourced is the frequency control products part. Correct?

Richard White

Yes, that’s true.

Keh-Shew Lu

Yes. It’s they’re on an inflection point, wafer and for the MOSFET-system [ph] and for the packaging - oscillator.

Richard White

Oscillators using the crystals, right.

Christopher Longiaru

Okay. That’s all I have today. Thanks for taking my questions.

Keh-Shew Lu

Thank you.

Operator

Thank you. And our next question comes from the line of Suji Desilva from Topeka.

Suji Desilva

Hi, guys. Can you talk about the debt reduction plans here post the merger, and whether the priority is debt reduction or buybacks?

Richard White

Yes, as we’ve always tried to do, as we did in 2015, we’re going to try and pay the debt back as quickly as we can.

Suji Desilva

With the targeted EBITDA level?

Richard White

What was that?

Keh-Shew Lu

EBITDA level.

Suji Desilva

Your targeted that EBITDA level, Rick.

Richard White

Yes, right, right.

Keh-Shew Lu

Yes. Our agreement with banks is that it’s the 3x, and we need to continue to bring down that 3x down to 2.5.

Richard White

Yes, so the coverage ratio or the leverage ratio is - the maximum is 3, and we can stay there for a year. And then in the fourth quarter, it has to go down to 2.5. And so that’s what we’re going to achieve.

Suji Desilva

Okay, great. And then Dr. Lu, you talked about key customers and share gains that were happening in this environment. Can you elaborate on why that is occurring in this environment? Thanks.

Keh-Shew Lu

I don’t think we want to talking too much about this. So I prefer - since, in the speech I have made it clearly, without Pericom, without that, we are still in 1Q, we are actually slightly better than 4Q. And I think, I wish just stop there.

Suji Desilva

Fair enough, Dr. Lu. Maybe last question on the quick charge functionality in smartphones. What kind of a tax rate do you expect that to go to this year versus last year, and what kind of share do you think you can get in that market? It seems to be a very hot topic into Barcelona for the Mobile World Congress?

Mark King

Yes, I don’t think we really have a way to document that now. Actually, Pericom has had a lot of progress in that area, and we are continuing to win significant design wins. So we think the tax rate is - I mean it’s still slow, okay, but the type C is a big focus for them. And Diodes also has some products in that range, so we plan to participate strongly in that marketplace.

Suji Desilva

Okay, great. Thanks, guys.

Keh-Shew Lu

Thank you.

Operator

Thank you. And our next question comes from the line of Harsh Kumar from Stephens.

Richard Sewell

Hey, guys, this is Richard in for Harsh. Thanks for taking my question, and congratulations. Wanted to start with pricing, I think you had a comment in the prepared remarks that pricing was a little challenging. Is this more than normal ASP pressure, or what are you seeing from that perspective?

Keh-Shew Lu

Well, it’s at the high end of our normal pricing ASP dropping. I think if you remember, I’ve been talking about ASP in our mobile is 1.5% to 2% a quarter. So - and right now in the 4Q, it’s at the high end of that, okay. So it’s just somewhere around 2% or slightly worse. It’s not really significantly higher, but it said that - I should say at the high end of our model.

Richard Sewell

Got you. That’s very helpful, Dr. Lu, thank you for that. And then, in terms of utilization, can you kind of point where you are there? And then in terms of Pericom, are you seeing any opportunities to bring some of that outsourced wafer or assembly and tests in-house. And what’s kind of the plan there from a manufacturing consolidation footprint?

Keh-Shew Lu

Okay, let me answer the outsourcing Pericom first.

Richard Sewell

Okay.

Keh-Shew Lu

Pericom from a wafer point of view, no, we cannot [indiscernible] because the majority of their wafer for almost other than the crystal and crystal sedater, all their products is somewhere at 8-inch and is the fungeomystry [ph] type of wafers in BCD 8-inch, so we cannot - we have no capability of the wafer point of view to bring that inside. From a packaging point of view, I’d say half of the packaging, we do not - half of the packaging, we do not have capability, okay.

And, again, the daily - that will take the time, because of lot of them is the key customer. It takes time to bring those in. Since, Pericom has good CP. For me, it’s not try to bring inside to get the CP high. For me is spend more effort to quickly to get more markets. It basically is already in somewhere around 40% something 50%.

My focus on Pericom products is open up more channels, open up more customers, do more design wins to eodice [ph] the sales legacy - more cycle sales who have Pericom sales team to sell Diodes’ products, and Diodes’ sales teams sell more Pericom products. This is more important than try to spend an effort bring them inside the GP. I think I get more benefit by gross sales.

Richard Sewell

Got you. That’s extremely helpful. Thank you, Dr. Lu, and good luck.

Keh-Shew Lu

You were talking about…

Operator

Thank you. And our…

Keh-Shew Lu

Well, Mark, didn’t answer - I think didn’t answer your utilization questions. Utilization…?

Mark King

Yes. So just let me quickly say that in - from a fab standpoint, fabs were in the fourth quarter in 50% to 60% utilized range except for maybe OFAB, which was higher than that. And we actually slowed down our assembly test in Shanghai, because we were trying to reduce the inventory, which we successfully did in the fourth quarter. So, maybe not quite as high in Shanghai as it has been over the last three quarters, four quarters, but still fairly well-utilized.

Richard Sewell

Got you. Thank you, again.

Keh-Shew Lu

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Shawn Harrison from Longbow Research.

Shawn Harrison

Hi, good afternoon, everybody. Maybe some basic questions. So, I just, I want to level set, I guess, expectations on Pericom in terms of what was the annualized run rate of sales for the business exiting 2015, because if I take the December quarter run rate, it implies a healthy step up from where it was. So maybe if you could just give us the run rate of sales annualized and maybe a range of contributions for the March quarter, that would be very helpful in setting expectations?

Keh-Shew Lu

Well - yes, I think if you look at their revenue, somewhere around 130 in 2015, divide by four that would be $33 million, that’s about their run rate. And right now for 1Q, we look at about $33 million. The reason in December is higher, is typically October is low, November is low, and the third month is higher. That’s why December is $14 million from Pericom. But typically, each quarter is about $33 million.

Shawn Harrison

That’s very helpful.

Keh-Shew Lu

Did I answer your question?

Shawn Harrison

Very, very helpful. I guess one more follow-up on that. The - if I remember correctly, the gross margin on a non-GAAP basis for Pericom was in the mid- to upper- 40s, and the EBIT margin was maybe in the low- to mid- teens. Is that the right ratio to think of the business currently?

Richard White

We don’t do our non-GAAP margins the same way they did. So if you look at their GAAP margins, they are between 45% and 50%.

Shawn Harrison

Okay.

Keh-Shew Lu

So then margin is 35% to 50%. The…

Richard White

Right. And that doesn’t include the purchase accounting adjustments that we made on our books.

Shawn Harrison

Got you, and the OpEx is kind of in the high - I thought it was in the high 30s.

Keh-Shew Lu

Yeah, their OpEx is much higher than Diodes’ because their GPs are higher, their R&D is higher. And even SG&A, since it’s a small company is higher.

Richard White

Yes, that’s probably right. OpEx is in the low to mid 30s.

Shawn Harrison

Okay. Very helpful, Rick. I guess, as a follow-up, in terms of just thinking about the markets where there could be growth for 2016, it sounds like you are very positive on auto and industrial, would you expect any turnaround in the consumer electronics or computing markets? And, I guess, within communications, do you believe this is more of just a temporary inventory correction pause versus the market turning over?

Mark King

I think it’s really hard to say right now what we were going to expect in the consumer electronics and the computer market. I think they have been kind of both struggling a little bit. So I think we are optimistic but unsure of where they are going. We have a lot of new products going in. We’re still continuing to add products and penetrate further into same customers. So we hope to be able to squeak out some growth.

I think the communication sector between Diodes and Pericom, I think we have some decent opportunities to grow in those markets in the coming quarter. So I think the combined force of the two companies gives us a strong position in that market. I think it gives us a strong position in the computer market also. I’m just not sure that computer market is going to be as strong as we need it to be to get the kind of growth that we would like. So, I mean, we still see significant amount of opportunities. There is just a certain level of overall demand that we can’t control.

So we’re excited about the opportunity. We are excited about the cross-selling. We are excited about the customers that they are strong on, and bringing our products into those customers. And we are pretty excited about being able to take them into some of our strongholds. So we think there’s a significant amount of opportunity for us, and we are very excited about it.

Keh-Shew Lu

Yes, as far as the computer market on the deal, 2016, it probably either flat or slightly colder, the computer market. Okay. From the cell-phone market, the total cell-phone probably flat. But virtually the smart-phone area has some growth and that’s smart-phone area. But Diodes plus Pericom, we are not looking for that market.

Obviously, if markets turn into good, we would like it and we’ve no problem. But we are more focused on cross-selling, market share gain and to help us to grow. So, 2015, I’m still hoping we can continue gain the market share; and hope in 2016, we’ll have a better growth than 2015, due to the market share gain.

Mark King

Yes, just to add, another advantage of the Pericom for Diodes is they’re a little bit more upstream in the design cycles. And so, we think that they can help drive us farther along with our analog product lines in some of these areas and get us a little sooner look at some of these products. So we have already started to see some examples of that. And so, I think that they give us - they are giving us a little bit visibility in different areas that we haven’t had in the past earlier.

Shawn Harrison

It’s very fair, Mark. Thanks so much.

Operator

Thank you. And our next question comes from the line of Justin Lee from Robert W. Baird.

Justin Lee

Thank you for taking my question.

Keh-Shew Lu

Yes.

Justin Lee

This is Justin from Baird for Tristan Gerra. And my first question is, in China, what end-markets do you have residual excess inventories?

Mark King

I had trouble understanding you on that. Where do we have residual inventory?

Justin Lee

All right. So in China, what end-markets - what end-markets do you have excessive inventories?

Mark King

I don’t think we really have any excessive inventory. I think generally the end-market and the market in China in the fourth quarter was soft. So we would probably just have general inventory issues there. I would say the most - most of the softness we saw was in the consumer sector during the fourth quarter. But I can’t say whether that’s where our residual inventory is. A lot of - a lot of our products is overlapping sector.

Keh-Shew Lu

But, I don’t know…

Justin Lee

I see…

Keh-Shew Lu

Are you talking about the hub - he may talking about the hub inventory, because we don’t see that is - we have the - that customer are OEM customer. And the hub inventory is - I don’t think we have excess inventory.

Richard White

No.

Justin Lee

Okay. That’s good. Thanks. The next question is could you provide an update on the opportunities you see with Pericom acquisition, and what is the estimated accretion for 2016?

Keh-Shew Lu

Well, while Rick was thinking about that, let me address the previous question. If you look at our inventory, it actually went up. Okay. Our inventory went up, because Pericom portion. If you pick up the Pericom portion of the inventory, our Diodes inventory actually went down. And that’s including our hub inventory. So hub inventory is a part of Diodes inventory. And Diodes inventory without Pericom actually went down.

So to answer your question, we don’t really see an excess of inventory in China. Okay?

Justin Lee

Right, Dr. Lu. So could you provide an accretion update for the Pericom acquisition in 2016?

Richard White

Yes, I haven’t really done that, because we got all these purchase accounting adjustments. I would say, it’s probably - I don’t know, this is a swag; but maybe $0.05 to $0.08, something like that.

Justin Lee

Okay. Thank you. The next question is, given the potential combination of ON Semi and Fairchild, would you see any - would you see any effects with - to Diodes?

Keh-Shew Lu

Yes, as far as you…

Mark King

I mean, we think the consolidation offers opportunity. Okay. It narrows the playing field down, and it opens up spaces for Clip [ph] to enter his accounts and maybe they were already - all the spaces were full. We have already seen a lot of opportunity emerge for us due to the IR Infineon acquisition. And we would expect to see similar or if - or possibly more opportunity coming out of the Fairchild and ON acquisition. That’s a big acquisition and lot of - so again, I think that’s a big effort to consolidate. So we’re excited about it.

Keh-Shew Lu

It opens up the second source opportunity for us, especially at the standard EMEA [ph] and the logic and all the…

Mark King

Power management and [indiscernible] products.

Keh-Shew Lu

…power management, which is - which I have been focused on. And now, Fairchild owned, combined together, then we open good opportunity for second source. And we have new products, I think we check or come up with the Fairchild’s. So it is a good opportunity for us.

Justin Lee

All right. Thank you so much. That’s all about my questions.

Operator

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back to Dr. Lu for any closing comments.

Keh-Shew Lu

Thank you for your participation today. Operator, you may now disconnect.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in this conference. This does conclude the program. And you may now log off and disconnect. Everyone have a good evening.

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