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| EX-99.2 - EX-99.2 - DIODES INC /DEL/ | d82315exv99w2.htm |
| EX-99.1 - EX-99.1 - DIODES INC /DEL/ | d82315exv99w1.htm |
Exhibit 99.3
DIODES 1Q11 EARNINGS CALL
QUESTION AND ANSWER
(Operator Instructions) Steve Smigie with Raymond James.
Great. Thanks a lot. Congratulations, guys, on another set of solid revenue and EPS numbers.
Along those lines, I appreciate the 2Q guidance. I’m just curious with the strength you’re seeing
here in terms of the design wins, any reason not to think that as we look out to September that we
wouldn’t also see at least a seasonal September, potentially maybe a little bit better, as well?
I don’t think it’s really that we really ever go out that far. I think we’re pretty consistent
that we thought 2011 would be a pretty solid year for growth but I think we would like to stay
focused in on Q2.
Okay, well I apologize, this is a Q3 question, as well. But on the gross margin, part of, I
think, what happened with the flat gross margin guidance here was you indicated that you didn’t
have quite the utilization levels that you’re anticipating due to the people not coming back after
Chinese New Year. Since you’ll probably have a full quarter of full utilized, or near full quarter
of full utilized, in Q2, would that suggest as we look out to Q3 that you might see a little bit
better gross margin in Q3 or are there other mix and other issues that offset that?
Steve, you know our strategy is we prefer growth over just GPM percent. So if we have
opportunity to grow, as soon as they’re within our model, you know our model is 35%. If we can get
above 35% we’ll go after the growth, because most important is that GPM is a gross profit GPM
dollar, not GPM percent. So we don’t really talking about third quarter yet, but if I have
opportunity to grow, I prefer growth.
Okay. Last question was just with regard to operating expenses. I would have thought R&D might
have jumped up to 4% or something like that, and it came up a little bit but it seems relatively
constrained. So are you guys doing, it seems like you’re doing a pretty good job of keeping costs
under control there, also on the SG&A line. Would we expect you guys to continue to have, as a
percentage, SG&A and R&D maybe flat to slightly down going forward as well?
Yes, that’s our business model anyway. You remember, I keep talking about we keep the R&D as
the same percentage as our revenue growth, but SG&A, we tried to control it to only allow probably
half of the growth of the revenue. Therefore, at the end, our operational expense, R&D plus SG&A as
a percentage, will continue going down. I’m very happy with 1Q because 1Q even our revenue going
down 1%, we are able to get our operational expense as a percentage continue going down.
Shawn Harrison with Longbow Research.
1
I wanted to just maybe get your commentary on the pricing environment, through the March
quarter and into the June quarter. It seems, the best way to describe it is somewhat benign but if
you could just talk about the pricing environment, if it’s less competitive than normal right now.
Yes, I would say it’s pretty benign, as you said. I think that the regular part of your focus
product still remain relatively competitive and I think we’ll see typical ASP declines. I think in
some of the standard products and the more commodity-based products I think pricing is quite
stable. And depending on the traction of the year might present some opportunities later in the
year to increase.
And as a follow-up to that, you may see a price increase later in the year just because of the
tightness on some of these products?
Yes, I think some of the commodities are going to be under pressure for some period of time,
but again, it all depends on how it goes. But I think that they’re pretty stable at this point.
Okay. And correct me if I’m wrong but last year, it seems as if Diodes went after market share
more than price and so that would be the expectation going forward if we were in that type of
environment, correct?
Yes, it depends on how much pressure there is on those commodity devices on where we stand,
but we generally are in a position, we put a high value on growth and a high value on capturing
share and expanding our business base with customers. So we generally like to have people move to
our price. We’re not always the lowest price guy out there. We would rather see the customer move
back up to our price and then accept more share than to be raising prices to our customers all the
time. Customers generally don’t enjoy that phenomenon too much.
That’s more than fair. And then my follow-up question, will Diodes be shipping out of
inventory again during the June quarter? Or will you have the packaging issues fixed early enough
during the quarter that you won’t have to ship out of inventory again?
We really at this moment, we don’t know, okay? In the earlier quarter, we did some, but we
believe we will make it up in May, especially in June. So very difficult to, at this moment, to
tell you one way or the other.
If you make it up in May or June, shouldn’t you see maybe some better overhead absorption
because of that?
2
Yes, you’re more talking about GPM percent, correct?
Yes, just trying to get back to that but if you’re going to be making it up, you may see a
little bit better overhead absorption as you exit the quarter. Is that the potential?
Don’t forget at the same time, our cost is going up too. Our goal is start from 1400 at the
beginning of Q1 and now it’s going to 1580. And I really don’t know if we continue or going down.
So number one gold is the major cost to us. Number two, due to the labor shortage, we actually
raised the salary in China, and China, Shanghai, raised their minimum salary for operator in effect
in April 1. So again, our second quarter, our cost is going steadily up. At the same time, if you
look at the exchange rate, we know that it’s only one direction. So if you look at building
material, due to the Japan earthquake and the tsunami, a lot of building material start heading up.
So if you look at a lot of cost going up while we tried to maintain our GPM percent models. So
that’s why we give that kind of guidance.
Harsh Kumar with Morgan Keegan.
Congratulations on another fantastic quarter. A couple of simple questions. The biggest part
of your outperformance in the March quarter relative to your expectations, would you be able to
tell us what segment that was in?
The outperformance in? I wasn’t sure I understood the question.
Actually, in Europe, Europe is outperformed and Asia is not bad either.
I would say that we had upsides in some of our major key customers in Asia in Q1. And we had a
very strong Europe in Q1 that were a little bit more surprising. The Europe number, we were a
little concerned going in. Not concerned, but we didn’t think it would be quite as strong
throughout the quarter as it was. And that was quite a good thing. And we had some resurgence on
the key customer LED TV that was quite significant. And really maybe not even in unit volumes but
in content. So our content expansion in a few of our major customers helped the quarter
significantly.
And you’re talking about smartphone, you’re talking about tablets and you’re talking about LED
TV. All those give us a much better performance than what we expected in Q1.
3
Got you, thank you. And then, Dr. Lu, your Company is very well run as it is. I was surprised
to see OpEx coming down as a percentage of revenues in June a little bit. Where is that going to
come from? Any color that you want to give us would be very helpful.
You always – our business model is always do it that way. We are not going to be crazy to
hire in people so while our revenue is going up, we just carefully hide in the SG&A. Now, R&D, I do
not want to concern it because that’s important, that’s for the future, for the operation, we can
try to constrain it, the growth a little bit. That’s our business model and I’m glad we are able to
perform according to our business model.
Got it, thank you. Last question from me. You said a lot of new design wins, Dr. Lu and Mark.
What area of products are you seeing most traction in?
Yes, one of the most exciting areas that’s relatively new that we’re expanding our product
line in and that the customer base is very interested in is our MOSFET products. Everybody wants to
see the MOSFET, so I think that’s going to be a very very strong revenue driver going forward.
Seeing a lot of action, beginning action in our high volume logic. I think our USB switches, as I
mentioned, are going quite well. But I think it’s relatively broad-based. I think our position in
our customers is quite strong and they’re looking at our products across-the-board.
The key thing is we are able to grow the content of our customers applications.
Suji De Silva with ThinkEquity.
Hi guys. Nice job in the quarter. Following up on the last question, can you talk about the
second quarter and whether any end market you expect to grow stronger relative to your guidance and
maybe some that are a little slower perhaps?
4
I really don’t have that in front of me. I think it’s going to be hard. I think we’re going to
have continued momentum in pretty much the same areas. I think we’ll see some resurgence in Q2 in
North America and relative stability in Europe. And I think we might see a little bit of
improvement in notebook that might help the overall thing. But I think our general momentum is in
the same customer base. Our focus is there so that’s where we would expect to grow.
Okay, great. And then switching to the events in Japan, did you have any impact in the first
quarter on your revenue, positive or negative? And then perhaps in the guidance from the events in
Japan or was it immaterial?
I don’t really think that we had. I think that we’ll see and I think the industry will see
some long term effects from Japan regarding cost. I think we’re going to see some cost issues. I
don’t think it will be isolated to us over a period of time. I do think there was some short-term
excitement that might have been run. Actually probably the Japanese semiconductor companies
actually got ran up the most because everybody bought out the stock that was there that they didn’t
have. I think it showed some opportunity for entry in certain customers that were heavily Japanese
based because they had some concerns long term but I don’t think any short-term. There was not
anything significant from a short-term perspective that affected the quarter.
And last question. With the labor shortages, Dr. Lu, are the lead times expanding there? And
are you having trouble keeping customers comfortable with the availability or is that a non-issue
despite the labor shortage? Thanks.
Again – I took this one from him too – but again, we look at led time as a decision. So we
use channel and we use some of our contract business to adjust for our key customers. So we might
not get enough product overall but, generally, we have the ability to keep our key customers happy
through these periods. So we move things around and we keep the inventories and the hubs tight and
we get through them as we go through to bring our units up.
Vijay Rakesh with Sterne, Agee.
Hi, guys. Just Dr. Lu, you mentioned the focus on gross profit operating dollars. So would you
still plan on keeping the gross profit at the 35% level or would you let it come down as you focus
on operating margin?
I think I would keep the same. I’m not really tried to just continue to bring the GPM percent
up, okay? In our business model is as long as GPM dollar, gross profit goes up, that’s what we are
going after. And at the end, that’s really the effect of earnings per share, not the GPM percent.
And therefore, if I see the opportunity to gain the market share to grow it, then we’ll take it.
Okay, got it. Also, it obviously looks like, when you look at the challenges, there’s a little
bit of concern there might be second quarter things slowing down. How is the usual point of sales
and point of purchases, how is that trending now in April and May now that you’re almost in May
here?
In our guidance we took that into consideration. We actually see the POS and the POP trending
positively in the second quarter, and I think it looks good. I think there might even, haven’t
really figured out where the inventory is going to be but I don’t think there’s going to be a
significant value change in the inventory in Q2.
Lastly, when you look at last question here, if you look at your revenues by PCs, handsets and
TVs, can you approximately give us what percentage runs into those markets?
5
No, really we focus on the major segments. So if you look at – I don’t have the exact figures
in front of me, I can look them up – but obviously our 2 biggest segments are computer and
consumer. We’ve never really reported by end equipment specifically and I don’t have that data and
I’m not sure. I’m trying to find the page. Okay, yes, so consumer represented roughly 31% in the
quarter, computing 28%, industrial was about 20%, communication 17%, and automotive actually
reached 4% in the quarter for the first time. So within those segments, we really don’t break it
out that closely.
John Vinh with Collins Stuart.
Hi. Congratulations on the nice quarter. First question, Mark, you mentioned that reaction to
some of the disruptions you’ve had at some of your customers or some of the DISTYS are reacting and
holding more inventory. Can you comment on what are your DISTYS at in terms of inventories and
where do they want to be at this point?
I mentioned in the script that we’re right at about 3 months globally. So I would say that I
think our DISTY inventory is clean around the world. I think we’re starting to see some interest in
bringing the inventory up a little bit in North America. I think Europe, I think, will balance for
a quarter. And Asia, depending on the strength of the POS could come down a little bit, could stay
flattish but I wouldn’t expect it to go up. So I think everybody is in pretty good shape there and
I think we’re happy. I don’t think that anybody is over inventoried at this point.
Okay, that’s helpful. And then just a follow-up question, I think you’d mentioned that near
term not a major impact either way on Japan on your business. What about over the longer term? Are
there design activities and opportunities for you to gain share over the longer term, because
obviously some of your competitors in Japan obviously had significant impacts over there.
Yes, I think there’s a lot of opportunity. I think there’s a lot of concern. Whenever there’s
a major disruption, people maybe even overreact. So clearly, where there was people that were sole
source on Japanese products, that became very obvious to them when they have a threat. And then a
purchasing organization gets hammered by their boss saying how could you ever put me in that
position, and then that opens up opportunity. And I think all of these, as much as I hate to say
that, Diodes, Inc. strength in the past has always been to capitalize on situations to help
customers through these issues and I think we’ll continue to do that going forward. In the short
run, it’s very hard to monetize that and but I expect to see continued opportunity as people review
their vendor base.
And is it fair to say we could start seeing some of that start to show up at the margin in
your revenues in the second half of the year at this point?
I would just stick with our traditional business models and work that way. I wouldn’t try to
over think that, okay? Hopefully we can get an extra boost and come up with some better guidance in
a later quarter or something but I don’t think you should try to monetize that at this point.
6
Christopher Longiaru with Sidoti & Company.
Hi guys, congratulations on the quarter and the guidance. So my question is, so you have all
these new products that you’re ramping. Are these going to start to contribute to revenue in the
typical time frame? When do you expect these to start to add? And then are these higher in terms of
gross profit and gross margin than some other products? Can you give us some idea of how that’s
going to affect your mix going forward?
I think that the ramp time for some of these products is very diverse. Some of these products,
we’re designing them in and shipping them 3 weeks later at some pretty major customers. And some of
our revenue in Q1 was at the sake of POP that we would have normally positioned certain products or
our assembly business so that we could ramp those products. I would say that traditionally our new
products are higher margin than our old products but the margin for Diodes, the manufacturing
margin is a major portion of our business, so it’s a little bit more complex to get down to that
margin percentage. Clearly, if we’re in a very prime mix and our operations are running at ultimate
efficiencies our margins are going to go up. So I think as we get through this period, I think you
make your own assumptions but I hope that answers the question.
The operation efficiency will be improved, we know that. The only problem I can not control is
the cost? Because just like you, I don’t think people can guess what will be the oil price and I
can not guess what will be the gold wire price, the gold price. Again, our vendors take opportunity
to raise wafer price, different price, more compound, they have a lot of stuff. Traditionally, you
going to expect going down every quarter due to the volume but this earthquake threw that curve
away, and so we really, very difficult to predict. My job is to try to keep it above our business
model as much as I can.
Steven Chin with UBS.
Yes, thanks for taking my questions and let me also add my congratulations on the strong
results and guidance. My first question is just to touch upon inventories one more time. I know a
lot of good discussion’s already happened there but I just wanted to see if there’s any additional
color you can offer on some different segments or different geographies, if there are any
(inaudible) product types, whether it’s discretes or analogs, that might be tighter in terms of the
balance between those two? And again I understand that overall your inventories are clean, but just
wondering if there’s any tightness or any excess of one type of product or the other in the 3 major
geographies.
I think there’s one area that’s really really tight and that’s SOT 23s. I think the industry
is short on SOT 23s. And it’s funny that price doesn’t really want to go up, but nobody can get
enough. So everybody is just getting enough. So I think in those areas, that’s an area where we’re
very very short everywhere. I think outside of that, everything is relatively balanced. If there’s
no market for it right now in a situation like that, then we build what there’s a market for. So I
don’t think we’re creating much inventory on items that are slow. I don’t think, in the industry,
the nice thing about our industry today is, is that packaging isn’t as abundant as it once was
because some of the broad liners don’t continue to invest in their packaging. So when business is
relatively good, packaging is tight. So I don’t think you’ll see a lot of people just building
stuff that’s not out there. So I don’t think there’s any way to isolate it but I would say SOT 23s,
there would be a shortage there.
7
And that’s the low GPM
And that’s the low GPM. So we consider that mostly a service business so we have a certain
amount of customers that we have to support on a certain amount of that to get them to work with us
on other product lines.
I understand. One other question for you Mark. In terms of the new design wins that you were
referencing to earlier, are those largely centered on new products that you’ve introduced over the
past year or two or is there a good amount of that also centered on more mature product lines, if
not commodities?
I would say some of the best design wins we’ve had are either a reconfiguration of an older
product in a new package or in a new size, or maybe with a slightly different spec or a brand new
product. Some of those things, like when I talked about the 1006 MOSFET, those are relatively
simple products but have very very good specifications and a very very small package, and their
acceptance has been very very high, and the ramp on that. So I think that it’s a combination of
both but I would say it’s more towards the new product area.
Great. Last question, just looking at overall industrial and automotive demand trends, and
obviously that’s continuing to be quite healthy in the first half of this year. In looking at the
modest change in your overall sales mix with auto reaching 4%, I was wondering if your cost
structure behind those products that you sell into industrial and automotive, if they’re the long
lead time, long qualification and development cycle type product that’s typical of your
competitors. Or is this a different type or more of your traditional computing and consumer type
products but just happen to be selling into the automotive and industrial vertical? Thanks.
I would say both. Some of the product, we’re definitely an Asian-centric new product
developing company but we definitely look at how we can fit those and configure those for our other
markets in North America and Europe. The key difference is the design cycle for automotive is—
Very long.
Yes, very very long. And the design cycle for industrial is also quite long. But the life
cycle is also quite good too. So sometimes we have to show a little patience, and try to do that
thing. But if we see a good solid opportunity to develop product in the industrial cycle, we’re
doing that. And we’re seeing a lot with our SBR products in adapter and in power supply. Those are
very key opportunities for our product line that are maybe not so consumer based and so on.
And some of the Zetex products.
8
All of the Zetex products is very centered around industrial and automotive. And we as a
Company are going to try to expand our marketplace in auto over time. But it may never keep up with
our growth in the consumer and computer segments. It has been very hard to get to 4% and it may not
stay there. Europe was very very strong in the quarter, that’s probably why we drove to 4% in
automotive so it was a solid quarter in automotive because of Europe.
And overall, if you look at quarter after quarter, our industrial plus automotive is about
one-quarter of our revenue. Even we are grow very rapidly in the three C consumer, computer,
communication in Asia, but at the same time, our industrial and automotive, it’s growing at similar
rate.
Did that get it for you?
Yes. Thanks a lot for all of the color and congratulations once again.
Brian Piccioni with BMO Capital Markets.
Thank you, and congratulations on great results again. Of course, most of my questions would
have been asked and answered so I have a small amount of trivia. There’s an other amount of
$534,000 on the income statement, but that’s not taken out of your non-GAAP results. What is that
amount?
Rick, you might need to answer that.
Yes, I think that’s rate of exchange. That’s one of the non-GAAP things that we just leave in.
Okay, all right. And there’s a lot of questions, obviously, been asked about pricing of
various things. And, of course, you’ve been working to replace gold bonding wire. Recently I’ve
heard some companies make comments, and you might have been alluding to them a little bit earlier
with your SOT23 comments, but that lead frames are starting to reflect the increased price of the
materials that go into that. Are you seeing an impact from that or is it relatively modest relative
to the other things that you’re having to deal with?
Exactly, you hit the point. I think earlier, I said gold wire, I said wafer and another one I
do say is lead frame. Actually, lead frame, a lot of lead frame is supplied from Japan and due to
this earthquake, they sure take the opportunity to raise the price on the lead frame. So lead frame
is one. And that’s another thing we’re talking about
9
SOT23. Yes, we know there was a shortage and we want to spend a lot of capacity for that? No. I’m
not going to spend a lot of capacity for it. We use that to be able to support our key customer and
therefore, we can gain business from some other packaging. But you are right. Lead frame is one of
the key costs up.
Okay. And one of the things that’s been alluded to, as well, in prior conference calls is
there’s a risk that if we can imagine a hypothetical Korean TV manufacturer, for example, may have
a television that’s sitting and waiting for a single sourced component out of Japan. And as a
result, in this hypothetical scenario, because they can’t fill in the kit, begin to perhaps
postpone orders or whatever. Do you have any visibility in that regard or do you just think that’s
an unlikely scenario?
I think that that is the worst scenario that people start to think about when they think about
the situation in Japan. So far, we haven’t seen that occur. I think there’s been a significant
amount of scrambling by the world, by customers, to make sure that it didn’t happen. And I think
that there’s been a lot of resolution to some of these problems on raw materials and so forth.
Actually, the response in Japan to key chemicals and key raw materials has been quite good. And the
companies that had total losses came to agreements to work with other companies in Japan outside of
that area very quickly. So I think actually the industry has responded quite well and I think that
we don’t see signs that that’s going to occur.
Ramesh Misra with Briggatine Advisors.
Good afternoon, folks. Good job in the quarter. First question for you, Rick. Were there any
key issues altering the accounts receivable in the quarter that jumped up pretty significantly?
No. The basic reason it jumped up was that because of the Chinese New Year, the January and
February numbers were down, the revenue was down, and so we did a big March and so it just hadn’t
been collected yet. But no big issues there.
Okay. And the CapEx guidance that you issued, you excluded Chengdu. How should we be thinking
of Chengdu expenditure? And did you have a number for the Chengdu CapEx in Q1?
Yes, but the number was less than $1 million for Chengdu. It was small because we just put
together a workshop over there. Going forward, the reason we’ve taken it out is that there’s no
revenue out of Chengdu yet. And so to have our model at 10% to 12% comparable to what we’re
actually spending on the rest of the business that’s generating revenue, that’s the reason we’ve
taken it out. Now, I would assume that in the second half, we’ll start getting revenue and we will
start looking at including some Chengdu CapEx. The issue is that we’re going to have to spend some
amount of money on site development, building the first set of buildings and you’re not going to
get any output out of that for 12 to 18 months. So we’re trying to make the numbers that we’re
showing the public comparable from a time period to time period standpoint.
10
Okay. Then Mark or Dr. Lu, there has been some concern about disruptions in the automotive
market. What are your thoughts going forward over there? Do you anticipate any of that impacting
you or do you feel you’re pretty immune to it based upon your customer exposure?
I don’t think we’re qualified to make a big judgment on that as a percentage of revenue. It
looks like our customer forecasts are still coming in pretty good. Most of the people’s problems
are in raw materials, and ours is mostly European based so they’re European cars. So, again it’s
one of those things where we just really haven’t seen a big sign that that’s going to occur yet but
I know there’s going to be some issues on the Japanese cars. I just haven’t seen where that
impacted us as of yet. It’s a good thing that it’s not 20% of our business.
Gary Mobley, with The Benchmark Company.
Hi, guys. I’ll sneak my questions in. Regarding the gross margin, you mentioned some labor
shortages. Did that lead to a greater percentage of your revenue coming from products that are
resold from other suppliers such as Lite-On? And then, as well, second part to the question, how
much of an increase in wages are we talking about here for some of your employees based at your
China packaging facility?
Okay, let’s talking about the wage first. Actually, we are talking about the minimum wage, so
not majority. Well, not the high pay employee. We are more talking about the lower end of our
operator. But when you raise the lower end operator, then you still need to raise some on the high
end of the operator. So the delta between each range would shrink, but you still need to relatively
move everybody up. It just the low end move more, the high end move less. And for us, I think we
actually take action in February 1, so half of the first quarter get affected, and then 100% of the
second quarter will be affected. And so that is already reflected in our GPM guidance. Yes,
Shanghai raised the minimum salary, but fortunately we raised more so we are able to cover to meet
their minimum requirement. And that way, we can keep the good people and keep our workers there.
And what’s the other question?
Percentage of your revenue derived from resold products in this quarter and as well, looking
into your second quarter.
I don’t think it was any different than any other quarter, and I don’t think we’ve really
reported that.
At this time, I’d like to turn the call back over to Dr. Lu for closing remarks.
Thank you for all your participation today and that will be the end of the conference call
today. Operator, you may now disconnect.
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