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Diodes Inc. (NASDAQ:DIOD)

Q1 2008 Earnings Call Transcript

May 8, 2008 11:00 am ET

Executives

Leanne Sievers – IR, Shelton Group

Keh-Shew Lu – President and CEO

Carl Wertz – CFO, Secretary and Treasurer

Mark King – SVP, Sales and Marketing

Analysts

Harsh Kumar – Morgan Keegan

Ramesh Misra – Collins Stewart

Steve Smigie – Raymond James

Shawn Harrison – Longbow Research

Christopher Longiaru – Sidoti & Co.

Operator

Good morning. My name is Latasha and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Diodes first quarter 2008 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you. I'd now like to turn the call over to Ms. Leanne Sievers of Shelton Group Investor Relations. Please go ahead, ma'am.

Leanne Sievers

Good morning and welcome to Diodes' first quarter 2008 earnings conference call. I am 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'd like to remind our listeners that 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 filing with the Securities and Exchange Commission. In addition, any projections as to the company's future performance represents management's estimates as of today, May 8, 2008. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change.

For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 60 days at the Investor Relations section of Diodes' web site at www.diodes.com. And now, it is my pleasure to turn the call over to Diodes' President and CEO, Dr. Keh-Shew Lu.

Keh-Shew Lu

Thank you. Welcome everyone and thank you for joining us today. We continue to make significant progress during the quarter towards our strategic growth objectives. In terms of our financial results, revenue for the quarter was impacted by seasonality combined with overall weakness of the global economy, as well as our foundry and the subcontracting business, showing greater weakness that our own core revenue drivers.

As expected, gross margin remaining comparable to the prior quarter, yet increased 130 basis points over the prior year period as our business continued to benefit from operational and manufacturing efficiencies. As many of you know, our first quarter was highlighted by the April 4 announcement of our proposed acquisition of Zetex. Since we discussed this transition extensively on that conference call and our presentation is saved on our Web site, I'll only provide a summary of the key highlights.

When looking at the strengths and expertise of each company, Diodes has cost effective packaging capability and a larger capacity in our manufacturing facility in China, as well as strong sales and marketing presence in Asia, and our focus on consumer, computing and communications market.

Zetex, on the other hand, has a strong proprietary wafer process and packaging technology, a solid application and design team, a strong presence in Europe as well as a focus on industrial, communication and automotive markets. When combined with Diodes, there are many synergies that exist, including a broadened product portfolio to support a world class customer base, array of manufacturing and operational synergies, and increased geographic footprint and an expanded market segment diversification.

From a financial perspective, the combined 2007 Diodes and Zetex financials would have resulted in revenue of approximately $528 million, gross profit of $170 million and EBITDA of $75 million, with solid gross margin and operational margin for both companies. We believe this combination will provide a strong base for future growth and improvement as we begin the integration toward being accretive to earnings within 12 months.

As we mentioned on our conference call, our evaluation process took almost two years to find the right company that would complement the strengths and the growth of our business. We believe that Zetex meets all of our acquisition criteria. The transaction is expected to close next month.

Until the transaction is approved and closed, we are unable to discuss any further detail regarding our plan for integration as it is related to the business, the cost savings or any specific financial benefit. We plan to provide more intensive detail to our shareholders in the coming quarters.

With that, I am going to turn the call over to Carl to discuss our first quarter financial results in more detail.

Carl Wertz

Thanks, Dr. Lu. Good morning everyone. As Dr. Lu mentioned, the first quarter as anticipated proved to be a challenging revenue quarter for Diodes on a sequential basis, but increased across all metrics on a year-over-year basis. Revenue for the first quarter was $95.6 million, an increase of 4% from the first quarter of 2007. Sequentially, and as expected and previously announced, revenue was down 11% from the fourth quarter.

New product sales account for 30% of revenue as compared to 40% in the previous quarter. The decrease in new product sales in the first quarter was due to our high-volume QFN products being aged out of the three-year new product category, even though sales of these products remain strong. Gross profit for the first quarter of 2008 was $31.9 million or 33.4% comparable to 33.5% in the prior quarter. Gross margin improved 130 basis points from the year ago quarter. Sequentially gross margin remained stable despite the decline in sequential revenue due to improved product mix and operating efficiencies.

Selling, general and administrative expenses for the quarter were $14.7 million or 15.3% of revenue. SG&A expenses were comparable to last quarter, but higher as a percentage of sales due to the lower revenue base. Included in the first quarter SG&A was $1.1 million in non-cash FAS 123 share-based compensation. In the earnings release, we have included a table to reconcile the impact of share-based compensation expense to our reported results. Research and development investment in the quarter was $3.7 million, about the same as last quarter and 3.9% of revenue, as a percent slightly higher again due to the lower revenue base.

Looking at the second quarter and the remainder of 2008, we will continue to enhance our R&D capability in order to support our broader market focus and new product introductions, while maintaining R&D between 3% and 4% of revenue. Other income of $3.5 million in the quarter includes approximately $5.4 million of interest income, partially offset by interest expense of $1.7 million, primarily related to our convertible bonds outstanding. First quarter interest income has been impacted by the turmoil in the credit markets and in particular with auction rate securities. Since mid-February, all of our ARS portfolio auctions have failed and may continue to fail in the future.

With the decline in the overall market interest rates, as well as our failed ARS auctions, we are providing additional 2Q interest income guidance. We now expect to earn approximately 2.5% interest on the ARS compared to approximately 6.5% in the first quarter of 2008. This lower overall interest rate will result in approximately $2 million after-tax reduction in net income for the second quarter.

Our effective income tax rate in the first quarter was 13%, with our expectations for the full year of 2008 to be between 13% and 15%. Our tax rate takes into consideration income from our operations in lower tax jurisdictions as well as preferential tax treatment in Asia. Adjusted net income, which excludes the $1.2 million in non-cash stock option expense, increased 6.7% over the prior year to $15.1 million or $0.35 per share, up from $14.2 million or $0.33 per share in the first quarter of 2007. Cash flow from operations for the quarter was $10 million compared with $6.5 million in the first quarter of '07.

Turning to the balance sheet, as of March 31, we had approximately $320 million invested in student loan auction rate securities, which we have invested as part of our cash management program. The objective of our cash management program was to invest our cash at the higher interest rates possible, using AAA rated securities with short-term maturities. In addition, we staggered the maturity dates, so that at any one time we would have ample access to cash for corporate purposes including acquisition financing. We invested in the securities within our objectives of a cash equivalent without the foresight of the unprecedented events of the liquidity market. As you know, the recent uncertainties in credit markets have prevented us and other investors from liquidating our holdings in recent auctions. At quarter-end, our portfolio of auction rate securities was valued using a market to model valuation methodology, resulting in a discount of the total portfolio of 5.6% or an $18 million pre-tax unrealized loss. This discount is accounted for as an impairment.

We view impairments in accordance to SFAS 115 as well as related guidance issued by FASB and SEC in order to determine the classification of impairment as temporary or other than temporary. Evaluating the impairment of Diodes' ARS portfolio, we classified such impairment as temporary and recorded unrealized loss of $12 million after-tax in other comprehensive loss on the balance sheet. In addition, because securities are currently not liquid, in the first quarter balance sheet, we reclassified the securities from the current asset to a non-current long-term investment. We consider the liquidity issue to be temporary and currently intend to hold these securities until the recovery of the auction process. We continue to monitor the auction rate market and will evaluate the securities at each quarter end to determine the valuation allowance required.

Our Form 10-Q, which will be filed on May 12, will have extensive footnote disclosure related to the auction rate securities. As a result of this classification, cash and short-term investments at the end of the first quarter were $61 million in total, with $144 million in working capital, a long-term debt including the convertible bond was $230 million. Inventories increased during the first quarter to $62.2 million or 88 days, primarily due to the lower revenue as well as an increase in raw materials and finished goods for future loading and shipments. Accounts Receivable days were 82 in the first quarter compared to 75 in the prior quarter as some customers slowed payments. But, we do not currently believe there is a material decrease in collectability of Accounts Receivable.

Capital expenditures for the current quarter were $13.3 million, which represents 13.9% of revenue, slightly above our expected range of 10% to 12% for the full year. Capital is primarily focused on expansion of our packaging capacity in China. Depreciation expense for the first quarter was $7.4 million.

Turning to our outlook, as we look to the second quarter 2008, we expect revenue to increase to $100 million to $106 million. In addition, we expect gross margin to be down slightly due to a stronger China currency affecting our manufacturing costs, but gross profit will increase 4% to 9% sequentially. With that said, I'll now turn the call over to Mark King, Senior Vice President of Sales and Marketing. Mark?

Mark King

Thanks, Carl, and good morning. Let me begin with our segment breakout for the first quarter. Computer represented 36% of revenue, consumer also 36%, communication 16%, industrial 10% and automotive 2%. During the first quarter, we released 51 new products, including one analog device, two haul devices, ten MOSFETs and 14 SBR devices. As Carl mentioned, new products accounted for 30% of revenue due to some seasonality in products targeted at the computing and consumer segments, as well as aging out of several of our high-volume QFN products, which remain high-growth products for Diodes.

Our new product revenue was driven by a continued expansion in our MOSFET product offering, as well as increasing demand for our medium-power bipolar transistors. With this pending completion of the acquisition of Zetex, we will be able to build upon our growing strength in bipolar transistors since this is an area where Zetex is very strong with a solid market presence.

Additionally, during the quarter, we introduced the industry's smallest 1 Amp SBR Rectifier in a DFN package. This new product is designed to enable further miniaturization and low power consumption, resulting in extended battery life, which are key requirements of today's portable electronics. Also during the quarter, we expanded our standard linear product line with a 1.5 Amp very low dropout linear regulator for processing and ASIC-based applications targeted at network equipment, notebook computers and servers.

In terms of overall design activity, it was another strong quarter with broad based design wins across multiple regions at 80 accounts globally. Design wins and in-process design activity were highlighted by hall sensor wins in four different notebook platforms, smart phones and mobile handsets, (inaudible) DC fan and mini motors, Bluetooth headsets and two automotive applications.

We also continue to see a slow but steady ramp on previously announced mobile handset wins, which we expect to continue ramping throughout the year. SBR wins with DC to DC converter, LCD TV, motor control, switch mode power supply, cable telephony modem and home appliance. PowerDI wins in fieldbus, multiple design wins in notebook, DC to DC converter, telecom power supply and automotive GPS, medium power bipolar transistors in notebook, motherboard and DSL modem, switching regulator and LDO wins and LCD TV metering, mass storage, two set-top box platforms, in-car DVD, as well as our first win with our new AP7173 in a major server platform in which we work directly with this customer to develop this device.

In regards to geographic breakout, Asia sales decreased approximately 13% versus the fourth quarter and represented 77% of total revenue. The sequential decline during the quarter was attributed to seasonal slowdown in the computer and consumer industry, specifically in notebook and digital audio players, which was further compounded by a sharp drop in OEM subcontracting packaging demand. Asia design activity in core end equipments remained strong across all product lines with 70 wins at 40 accounts, including 15 analog, 10 SBR and 7 hall sensor wins.

Now turning to North America, sales were down 13% over the prior quarter and represented 17% of total sales. Although direct sales were up due to strength in set-top box and increases in the industrial market, seasonal decreases in other areas of the consumer segment offset these gains. Distributor point of purchase was down 17%, and distributor inventory was down 14% in the quarter as distributors took a very conservative stance on the current economic environment. Distributor point of sale was up 4% sequentially.

In total, we achieved 72 design wins in North America during the quarter at 27 customers, 13 of these were analog, 54 discrete and 5 in SBR. Wafer sales were off 25% in the first quarter. As Dr. Lu mentioned previously, our wafer sales and subcontracting business were significant contributing factors to our first quarter revenue decreases.

Sales in Europe increased 36% over the fourth quarter 2007 and 34% over the first quarter of 2007 and accounted for 6% of revenue. The strength in Europe was driven primarily by a 46% increase in distributor point of purchase after a seasonally weak prior quarter. OEM sales were also up 20% due to strong sales at top consumer and automotive customers. Distributor point of sale increased 13% in the quarter, driven by new analog switching regulator business ramping at several key customers.

Our design win momentum in Europe continued to expand in the first quarter with 21 wins at 15 accounts including 6 hall sensors, 3 SBR and 5 analog design wins. Specifically, our high power SBR product line received strong interest from the European customer base and we believe these products will have potential to become a major contributor for our future growth in the region. We are very pleased with the strong performance in Europe, especially when considering our announced acquisition of Zetex, which will only further increase our penetration and success in the European market.

In summary, we believe Diodes is taking all the right steps towards becoming a global, leading provider of complete analog and discrete solutions. We continue to execute our growth objectives by leveraging our highly efficient manufacturing and packaging capabilities and capacities, broadening our product portfolio, increasing our geographic footprint and diversifying our market segments.

Our proposed acquisition of Zetex will significantly enhance our future growth prospects by providing complementary strengths and cross-selling synergies with a greatly expanded customer base.

In addition, our investments in R&D and dedication to product innovation have created a strong pipeline of design wins that will contribute to revenue momentum in the coming quarters. Also, our analog business continues to expand as we remain focused on mobility and portability, which we expect to provide increased upsides in the later part of the year.

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

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Harsh Kumar with Morgan Keegan. Please proceed.

Harsh Kumar – Morgan, Keegan

Hey guys, congratulations on a very good June guidance in what is a tough economy. Just a couple of quick questions, gross margin impact, when you said slightly, Carl, are you saying – could you be more specific, 20 basis points, 30 basis points or less or more than that?

Carl Wertz

Yes, I think that is a good estimation, Harsh.

Harsh Kumar – Morgan, Keegan

Okay.

Keh-Shew Lu

We have focused our growth and our operation on the gross profit increase instead of gross margin. And what we tried to do is driving the revenue growth as much as possible and such that at the bottom line it'll give you a better gross profit. And so, I always focused on gross profit and we show a great increase sequentially on the gross profit.

Harsh Kumar – Morgan, Keegan

All right. There is not a lot you can do about the currency situation anyway. And then I might have missed something, but Carl, did you say interest income will go down to $2 million or by $2 million?

Carl Wertz

We'll have a net impact of net income of $2 million.

Harsh Kumar – Morgan, Keegan

Okay, so it will go down by $2 million, it sounds like.

Carl Wertz

Right.

Keh-Shew Lu

Yes, correct.

Harsh Kumar – Morgan, Keegan

And would you, if you are assuming that, Carl, would you expect that – are you expecting that the auctions will start pretty soon for the auction rate securities?

Keh-Shew Lu

Well, we don't know.

Carl Wertz

We've classified them as temporary and we don't know what the market holds out there.

Harsh Kumar – Morgan, Keegan

Okay, and then last question from me and I'll jump back in the queue, could you talk about – Mark, could you talk about the telecom and the industrial marketplace if those are holding in pretty steady? It sounds like consumer is doing all right for you, but what about the other two markets?

Mark King

Yes, I think that they are relatively steady. Obviously in the first quarter, it was the consumer and the computer that was down more than I think than industrial has a tendency to be better in Q1. So, I think that they are holding up pretty well.

Harsh Kumar – Morgan, Keegan

Thanks, guys. I'll get back in queue. Thank you.

Keh-Shew Lu

Thank you.

Operator

Your next question comes from the line of Ramesh Misra with Collins Stewart. Please proceed.

Ramesh Misra – Collins Stewart

Good morning, gentlemen. My first question was in regards to pricing trends in the quarter and how do you see it spanning out in the first few weeks this quarter?

Keh-Shew Lu

Well, we always are going to see our ASP decrease every quarter and all the time. 1Q is really normal, a normal drop. We don't see any significant drop. But with our cost reduction, and you remember I said the reason we are able to hold in our gross margin about the same as the fourth quarter and even we get a pressure from the exchange rate of the China money, renminbi, but because our goal profit or gross margin of subcon [ph] business especially foundry business is able to for us to keep the gross margin percent the same.

Go to the second quarter, the China money exchange continues getting worse – to our perspective is continue getting worse. Now, we are seeing that exchange rate down sometimes go to 7 renminbi to $1. And we will continue to do our cost reduction and continue improve our product mix to cover the ASP drop. But that is the renminbi effect, it will affect some in the second quarter. That is why we see our gross margin will be slightly down. But, how we are able to improve our gross profit is by continue to increase our revenue so that the number of units shipped are going to be even more than the focus because ASP actually go down. But the units going significantly up and that is why our revenue we forecast $100 million to $106 million.

Ramesh Misra – Collins Stewart

Okay. Dr. Lu, in terms of the foundry business, are you anticipating a rebound in Q2 or do you think that happens further down the year?

Keh-Shew Lu

Well, even they rebound some, okay, or still remember the purpose of our wafer fab is not really to support the foundry business; the purpose is to support ourselves. We use it whenever we have excess capacity, then we will support the foundry business. And therefore, move farther to the future. If our business continues to increase, if we are able to continue loading our funds in our factory, especially our wafer fab in Kansas City, then we just sell excess capacity to the foundry business.

Ramesh Misra – Collins Stewart

Okay. In regards to your comment about beginning to see improving signs in the consumer end PC market, is this related to new design wins, new market areas, new customers? And the reason I ask that is that in general the consumer market and even the PC market tends to remain soft even through the summer months, so I wanted to get a sense of …

Keh-Shew Lu

If you remember every quarter, Mark was talking about how many design wins, how many new products we announced, and so you're going to expect to see we are going to be growing faster than the market grows. And you remember our objective always we want to grow 2X faster than our market growth. And so, you can interpret that is what we are doing. We are doing quite good on the new products and new design wins.

Mark King

Ramesh, we see in a couple of our key end equipments in Asia though were quite soft in Q1 and they are recovering and starting to ramp back to what was more expected yearly rate. For example, like notebook.

Ramesh Misra – Collins Stewart

Okay.

Keh-Shew Lu

But still, second quarter is not that strong. It is still not that strong.

Mark King

But it is an improvement from Q1.

Keh-Shew Lu

Yes, if you look at second quarter and first quarter, yes, the market especially consumer and computer especially in the notebook area, they improved from the first quarter. But, you are right, we forecast we are going to improve better than the market improves.

Ramesh Misra – Collins Stewart

Okay, it's good to see Mark earning his keep.

Keh-Shew Lu

You want to make his – money worth it to pay him, right.

Ramesh Misra – Collins Stewart

Thanks very much.

Operator

Your next question comes from the line of Steve Smigie with Raymond James. Please proceed.

Steve Smigie – Raymond James

Hello, congratulations also on the nice revenue guidance there. I was just curious, in terms of Zetex acquisition, when does the voting actually take place by the investors?

Keh-Shew Lu

Actually everything that project has been progressed per the schedule. Right now, the shareholder voting—of Zetex shareholder voting is scheduled for May 12, which is next week. And if it is approved by their shareholders, then we expect to close according to our current project, our current plan is somewhere at end of first week of June.

Steve Smigie – Raymond James

Okay. I know in the past you've indicated that you can get a pretty substantial increase in gross margin by moving products in house and maybe 800 to 1000 basis points better sometimes than your competition by taking packaging from outsource to in-house. Is there any reason why you wouldn't be able to do that with the discrete products at Zetex?

Keh-Shew Lu

Number one, we won't say we cannot. I don't see any reason we cannot, but we still need to be careful. Remember, our Anachip acquisition. If we said we move everything to ourselves, you wouldn't see the support from our subcontractor partner (inaudible) and show the support. And so our Anachip acquisition, we always do is we said, keep the current run rate, but any additional growth will go inside. And that why it took us, if you remember, it took us until September, until end of third quarter last year for it to take almost one and three quarter to move in all the staff into our own factory. And we did not want to – because save the cost moving to ourselves and cause our customer some trouble. It takes time to qualify the product, it take time to get our customer to approve the conversion. Even we know our SKE [ph] capability and our quality is good, but we still need a customer approval before we can move. And since they are focused in the industrial and automotive, that approval process is longer than the consumer product, consumer customers. And so, all gradually move in, but we will not just make a big move. But for any new customer new design in, after we qualify SKE or get the product from SKE to support any new customer, new design wins. But existing customer will take time.

Steve Smigie – Raymond James

Okay, thank you. That's very helpful. On the currency impact on gross margin, as I look forward, I am certainly not a currency expert, but my understanding is that maybe over time the Chinese currency will become less tied to U.S. currencies and so it has been somewhat undervalued as it is. So, do you anticipate that continuing to be a problem in future quarters? And if so, is there any way to hedge that out?

Keh-Shew Lu

Well, from long-term point of view, if they gradually change, it won't cause us much problem because we have covered – typically cover those exchange rates by product mix, by new design, by new product, by the cost reduction. It only affect us is when you see a big drop in a very short period of time. And you remember, since (inaudible) tied to the U.S. and then they just at the (inaudible) last year to probably now, they make – the exchange rate start to free up and they start to see a significant change. And you look at it 1Q to 2Q on average, exchange rate is what, 7%?

Mark King

About 7% or 8%.

Keh-Shew Lu

About 7%, 8% just one quarter change. And that is why we cannot react to that kind of change because most our manufacturing is in China, and that causes us the problem. But if they change it gradually it should not affect us because we put and identify enough cost reduction effort and product mix effort, it is typically able to protect us from that kind of problem.

Steve Smigie – Raymond James

Okay, thanks. On the interest income, I think that some of those auction rate securities had a feature that if the auction process stopped, it would kick up the interest rate, which is I guess where you are seeing sort of 7% type interest rate. What caused it to go back down to the 2.5%?

Keh-Shew Lu

Well, the auction security rate, what happened is when the auction fail, they go to a higher interest rate by the contract. But then after that, then they go back by the contract again, go back to so-called contract rate. And that is just whenever the first time when they fail, which all our ARS start to fall in February 13 and we typically invest in that 28 days. So when you start to see that security, we have, how many, 67 different contracts. So when they start to – and remember, we stated in different time periods, so we try to make it as liquid as possible. So when they start to fail, they always go to very high interest rate. But then the second time when they fail again, then they will restate it into a much lower rate. And so, we get those good deals during the February and March time frame, and that is why if you remember our first quarter earnings, our interest income is actually higher than fourth quarter interest income because of where they fail and give us those credits. Now after they restated to the lower rate, we are going to start to see our interest income going to be much lower. So, I think we give a guidance is it will affect us the bottom line, the income after-tax, about $2 million.

Steve Smigie – Raymond James

Okay, great. Thanks a lot. I'll jump back in the queue. Thank you.

Operator

Your next question comes from the line of Shawn Harrison with Longbow Research. Please proceed.

Shawn Harrison – Longbow Research

Hi, good morning. Getting back to the wafer business, I know you have been transferring some of the production to six inch capacity. I was hoping you could update us on where we are at that right now and what that brings monthly unit capacity to at FabTech site?

Keh-Shew Lu

Okay. We buy equipment and start to set it up today, we do not have any six inch output yet. Our SBR need is we plan to use that six inch for our new SBR business, but currently we are able to support it by the five inch. And so we will concentrate to get on the five inch, because if you remember our foundry business went down so now we have got capacity to use this for ourselves. So, we do that [ph] today. We bought the equipment, we do the development, and under the development but we do not any production output from the six inch equipment yet.

Shawn Harrison – Longbow Research

Okay, so you will I guess – as you see maybe demand begin to build in the back half of the year, you could bring some of that on, if you can't fill it with the five inch? Okay. Secondly, maybe taking a different view of the end market, if we could maybe look at it on a year-over-year basis for next quarter and into the back half of the year, maybe which end market should we see the strongest year-over-year type of growth trends?

Mark King

I think it will be – in our present business, I think you will see our growth rates continue to be, maybe we will see some expansion in our growth due to our SBR products in the industrial market. But again, we are pretty tied. Our core business is pretty tied to the consumer and computer market, so I think you will continue to see our growth in that area. Now as we later integrate the Zetex acquisition, I think you will see more emphasis and more Diodes like growth in the industrial and automotive markets. And a little bit more overlap in the communications market. But I really can't speak for that because I am just really – I don't have a picture of that yet.

Keh-Shew Lu

We cannot.

Mark King

I think our business will pretty much continue to track the way it is tracking from a growth perspective.

Shawn Harrison – Longbow Research

Okay, maybe just focusing the question back on the consumer electronics business, it looked like kind of the basic math that it was flat on a year-over-year basis. Should we expect that to get kind of back to a more of a mid-single digit type of year-over-year growth number going forward or should it kind of stay in the low-single digits, potentially flat type of number?

Keh-Shew Lu

Well, you are talking about the general market growth? You are talking about Diodes market growth?

Shawn Harrison – Longbow Research

The Diodes market growth within consumer electronics. Based upon my math, it looked like it was essentially flattish on a year-over-year basis during the March quarter. Maybe just some better insight into where that number should be going forward.

Keh-Shew Lu

Number one, we do not really give the forecast other than the current – the second quarter. And like I mentioned, second quarter, other than the market recovery, general market recovery from first quarter, we do have announced a new product, new design win. And for example, our hall sensor, and we've been talking about we are going to get into the sales force, and we have started getting one customer to more customers, one platform to more platforms. So you can see we have a lot of good design win effort on the new product. So you don't depend us on just the general market growth. That is why we give $100 million to $106 million revenue for second quarter. We see much higher growth.

Shawn Harrison – Longbow Research

Okay. Then just maybe a follow-up for Carl here, the SG&A line, I know you've talked about it before, maybe holding relatively firm on a dollar basis throughout the year. If you could just provide an update on your thoughts on SG&A.

Keh-Shew Lu

For the SG&A, we do not see a significant – not our biggest model anyway. We get our revenue growth as much as possible and keep the – such that they can fall through the gross profit line and get R&D maybe keep that (inaudible) somewhere around that. That is why we say R&D is 3% to 4% of revenue and we will continue keeping that. And that our SG&A don't grow as fast as our revenue growth. So as a percent our SG&A will continue going down, and that way it will help us on our bottom line.

Shawn Harrison – Longbow Research

Okay.

Keh-Shew Lu

Now interest rate, I cannot forecast. We don't know. But that is really beyond our control, so I'm more focused on profit from operations. And I think our profit from operations will be able to continue to improve because of the growth of our revenue.

Shawn Harrison – Longbow Research

Okay. That's helpful. Thank you.

Keh-Shew Lu

Okay. Thank you.

Operator

Your next question comes from the line of Christopher Longiaru with Sidoti & Co. Please proceed.

Christopher Longiaru – Sidoti & Co.

Hi gentlemen, congratulations on the guidance.

Keh-Shew Lu

Thank you.

Christopher Longiaru – Sidoti & Co.

My first question is you talked about consumer, computer being weak in the first quarter and coming back a little bit. Can you tell me how that progressed? Was that kind of just progress over the course of the quarter, or did it just start to happen at the beginning of this quarter? What does that kind of look like?

Keh-Shew Lu

This quarter, we are one month past, so we already see that slightly up. Then we start working on the booking on the second month. You can see it gradually.

Christopher Longiaru – Sidoti & Co.

So, it was more at the beginning of this quarter than at the end of last quarter?

Keh-Shew Lu

Yes, correct.

Christopher Longiaru – Sidoti & Co.

I think I missed this number. But, last time, I think you did about 40% in the fourth quarter with respect to new products and analog sales. Did you give a number for this quarter?

Mark King

30%.

Christopher Longiaru – Sidoti & Co.

30%.

Mark King

Yes, we had some – obviously a lot of our new products are in the newest consumer products and so forth. So it was off a little bit, but we also had a significant chunk of our QFN product line matured. Although it is growing and the margins are holding steady, it is just not any longer a new product.

Keh-Shew Lu

And one key thing is this. When we do – the analog is actually coming from Anachip acquisition, so when we took over Anachip acquisition, Anachip is not that old a company, so a lot of the revenue coming from the Anachip product are now we already at two-year.

Christopher Longiaru – Sidoti & Co.

You included all that in Anachip, all the Anachip revenues included as new?

Keh-Shew Lu

Majority of Anachip was as the new product but now some of the Anachip product will be already aged out three years.

Mark King

Yes, we took all the standard stuff out, but a lot of the newer products were brand-new because they were really only a three-year-old company, and most of their revenue was coming from stuff that was designed in that year when they really started to grow. So, yes, it is also starting to mature.

Christopher Longiaru – Sidoti & Co.

But, the analogs stuff in general has higher margins anyway, so that should help, right?

Mark King

Right.

Christopher Longiaru – Sidoti & Co.

Okay. The last question is inventories grew a little bit in the quarter. I just wanted to get an idea of where that was and what you expect going forward.

Keh-Shew Lu

There were several reasons that caused the inventory to grow. Number one, we always when our fab capacity a little bit soft, we try to build some ready for the upturns. And number two, we need to build inventory, and you can – $100 million to $106 million growth – you have a lot of units. The unit growth will be much higher.

Christopher Longiaru – Sidoti & Co.

Got it.

Keh-Shew Lu

And therefore, you need to build up the inventory for that. And number three is building material, that since we took in about a lot of let's say gold, we use a gold wire and you know gold is going up.

Christopher Longiaru – Sidoti & Co.

Right, okay.

Keh-Shew Lu

And a lot of stuff is going up and we need to use the same inventory, the same quantity of the inventory, them inventory though they are going up. So there are so many reasons caused the inventory up, but I am not really concerned because don't forget it is the lower revenue, based on the lower revenue. If when the revenues start to go up, your inventory days will go down.

Christopher Longiaru – Sidoti & Co.

Okay.

Keh-Shew Lu

At least the average inventory days will go down.

Christopher Longiaru – Sidoti & Co.

Okay. And the last thing was I think missed this, I am sure you said it, Carl, but did you give a tax rate for next quarter and a share count?

Carl Wertz

The tax rate?

Christopher Longiaru – Sidoti & Co.

Yes.

Carl Wertz

In the guidance, we indicated for the full year we expect to be in the 13% to 15% range.

Christopher Longiaru – Sidoti & Co.

Okay.

Carl Wertz

The share count we did not, but it is in the 43 million range.

Christopher Longiaru – Sidoti & Co.

Okay, that's all I've got. Thanks, guys.

Carl Wertz

Thank you.

Operator

Your next question comes from the line of Harsh Kumar with Morgan Keegan. Please proceed

Harsh Kumar – Morgan, Keegan

Hey guys. A couple more questions. It is pretty intuitive. But, Dr. Keh-Shew, because Zetex is not in consumer and computing, can we assume that once you acquire them that the March seasonality will be somewhat – you will be better off for March seasonality because of that acquisition next time around?

Keh-Shew Lu

Definitely. That is the reason, one of the reasons we said we want to do it. It gives us a best seasonality effect. But, it will reduce some, but won't become completely rid of it. That is because they are revenue base still not as big, but compared with Diodes. So we are going to get FX, but the (inaudible) will be reduced because of seasonality. That is why we really want to spend more – by this acquisition, we can get in more on the European market, automotive market and industrial market. All those will help us to deduce the similarities.

Harsh Kumar – Morgan, Keegan

That's fair, and then maybe a question for Mark. Mark, is there a big learning curve for your sales force for Zetex's products?

Mark King

No, really they are just on a higher end of the product range we sell. Basically, they fit into the same portfolios that we are already selling. We might have to teach them a little discipline on price because they are dealing with more proprietary products rather than some more commodity products. So I think that we are going to have to teach them a little bit more patience than we generally show in the marketplace. But I think in reality the overlap is quite good. As well as the Zetex people are quite familiar with our product and I think a lot of them, Zetex used to sell all this product several years back. And I think one of their weaknesses was the ability to offer enough to the customer.

Harsh Kumar – Morgan, Keegan

Okay, and then last question. How much would you say you are booked for this guidance as of now?

Keh-Shew Lu

For this guidance, the one we give to you, is 100% Diodes only.

Harsh Kumar – Morgan, Keegan

Right, but how much (inaudible)

Mark King

Our backlog is traditional – going into the quarter was traditional, what it always is, I think right around 50%.

Harsh Kumar – Morgan, Keegan

Got it. Okay, fair enough. Thank you, guys.

Keh-Shew Lu

Okay.

Operator

Your next question comes from the line of Steve Smigie with Raymond James. Please proceed.

Steve Smigie – Raymond James

Thanks. Just to draw on a earlier question a little bit more specifically, for 2Q SG&A, would I expect that to be up a few hundred thousand dollars sequentially?

Carl Wertz

That is a reasonable estimate, Steve.

Steve Smigie – Raymond James

Okay. Maybe a couple hundred thousand dollars sequentially on the R&D side?

Keh-Shew Lu

Probably so.

Steve Smigie – Raymond James

Okay. How can I think about gross margins for the back half? I know you only guide for one quarter, but you've got potential currency impact, but you've also got a higher mix of analog coming in. So is it more likely that it is sort of flattish in the back half or could we even –you've moved most of the Anachip stuff in-house. But, are there more efficiencies you can get there, so maybe (inaudible) a little bit of expansion in gross margin in the back half percent wise? I know the dollar wise is more important, but I am just for modeling purposes trying to understand what could happen there.

Keh-Shew Lu

I think the best way just comparable because we typically get first the exchange rate won't be changing that much. It will probably continue to get worse, but won't be like what we see in the first quarter recently. I think it will start to slow down that change. Number two, in our cost reduction, our new product in analog like you say, you should offset the ASP reduction, and if the market is really good you can get ASP from them, you can better gross margin. But if the market is still weak, then ASP pressure will get worse. So, at this moment, without knowing what would be happening in the second half, that most safe way just comparable, flat or comparable.

Steve Smigie – Raymond James

Okay. Any customers over 10% other than distributors?

Keh-Shew Lu

I don't know, do we have any one now more than 10%? Other than –

Mark King

I haven't looked.

Keh-Shew Lu

No, we don't know.

Mark King

I don't think so.

Carl Wertz

Actually our distributors aren't greater than 10% individually either.

Steve Smigie – Raymond James

Okay. And then, some pretty exciting design wins on the mobile handset side. Will that follow fall into the consumer category, or are you going to classify it as under communications? And how long is it until that is 1%, 2% of revenue?

Mark King

I don't know how long until it is 1% of revenue, but it is definitely consumer.

Steve Smigie – Raymond James

Definitely consumer.

Keh-Shew Lu

Yes, we classify that in the consumer category.

Steve Smigie – Raymond James

Okay. Yes, (inaudible) the 1%, 2% question. But, could you at least give a little color on what customer reaction has been to your products on the handset side? You released some new products. What could that look like?

Mark King

I think it has been very positive. Predominately our lead into the handset has been on the hall sensor side. We think everybody that uses the hall sensor is very interested on our product. And now that we've got some solid design wins and some production behind some of our new products, more people are becoming interested fast.

Steve Smigie – Raymond James

Okay, great. Congratulations again. Thanks a lot.

Keh-Shew Lu

Thank you.

Operator

(Operator instructions) I show no further questions in the queue. I'd like to turn the call over for any closing remarks.

Keh-Shew Lu

Okay, thank you for everybody. I'd like to make one additional comment before we conclude. We'll be holding our this year's annual meeting, annual meeting for the stockholders on May 29 at 10 am Central time at the Marriott Clarion Hotel in Dallas. So I am looking forward to seeing you all there. Thank you for your participation today. We appreciate your time and consideration. As we enter into the second quarter, I am very excited about the improvement of the market and especially the expansion of our performance, our revenue growth. I am very excited about it and so I'll see you, I'll talk to you three months from now. All, thank you.

Operator

This concludes the presentation and you may all now disconnect. Good day.

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Source: Diodes Inc. Q1 2008 Earnings Call Transcript
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