Diodes Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 9, 2022

Key Takeaways

  • Positive Sentiment: Record 2021 results: full‐year revenue rose 47% to $1.81 B, gross profit grew 55.5% to $670 M, and GAAP EPS jumped 166% to $5.00.
  • Positive Sentiment: Margin expansion: Q4 gross margin increased to 39.7%, driven by product mix improvements, manufacturing efficiencies, and acquisition synergies from LC Semiconductor.
  • Positive Sentiment: Robust end‐market growth: automotive revenue surged 59% to 12% of sales, industrial up 46%, computing up 122%, with all segments hitting record quarters.
  • Positive Sentiment: Strong Q1 guidance: expects flat sequential revenue of $480 M ± 3% (outperforming typical –5% seasonality), 39.7% ± 1% gross margin, and non-GAAP opex around 21% ± 1% of revenue.
  • Neutral Sentiment: Supply chain and capacity: distributor inventories remain lean and Diodes’ internal (G FAB, AOSC) and external wafer fab ramps are expected to support continued demand.
AI Generated. May Contain Errors.
Earnings Conference Call
Diodes Q4 2021
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good afternoon, and welcome to Diodes Incorporated 4th Quarter and Fiscal 2021 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. As a reminder, this conference call is being recorded today, Wednesday, February 9, 2022. I would now like to turn the call over to Leanne Sievers of the Shelton Group Investor Relations.

Operator

Leanne, please go ahead.

Speaker 1

Good afternoon, and welcome to Diodes' 4th quarter and fiscal 2021 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations Joining us today are Diodes' Chairman, President and CEO, Doctor. Keh Shew Lu Chief Financial Officer, Brett Whitmire Senior Vice President of Worldwide Sales and Marketing, Emily Yang Senior Vice President of Business Group, Gary Yu and Director of Investor Relations, Ramit Dhaliwal. Before I turn the call over to Doctor. Lu, I'd 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.

Speaker 1

As such, these results are unaudited and subject to revision until the company files Form 10 ks for its 2021 fiscal year ending December 31, 2021. 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, 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, including Forms 10 ks and 10 Q. In addition, any projections as to the company's future performance represent management's estimates as of today, February 9, 2022.

Speaker 1

DAS assumes no obligation to update these projections in the future as market conditions may or may not change, except to the extent required by applicable law. Additionally, the company's press release and management statements during this 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 reconciliations of GAAP to non GAAP items, which provide additional details. Also throughout the company's press release and management statement listen to the entire call at this time, a recording will be available via webcast for 90 days in the Investor Relations section of Diodes' website at www.diodes.com. And now, I'll turn the call over to Daiwa's Chairman, President and CEO, Doctor.

Speaker 1

Kehsu Lu. Doctor. Lu, please go ahead.

Speaker 2

Thank you, Lianne. Welcome everyone and thank you for joining us today. Diodes had a record year in 2021, reflecting sustained execution that consists of 5 consecutive quarters of record revenue, as well as 7 consecutive quarters of adjusted earnings growth. In fact, full year revenue grew 47% and the gross profit grew 56% with GAAP Earnings per share expanding 166 percent and adjusted earnings per share expanding 120% demonstrates the significant operating leverage in our model. Additionally, gross margin expanded 610 basis points from the Q1 of 2021, the 1st full quarter after completing that NIOHM Semiconductor acquisition to the Q4 of 2021.

Speaker 2

This increase was driven by a combination of product mix improvement, manufacturing efficiency and improved loyalty. Also contributing to our ongoing margin expansion has been The achievement of 5 consecutive quarters of record Palcom revenue, 3 consecutive quarters of record industrial revenue as well as 6th consecutive quarter of record automotive revenue, which grew 59% in 2021 and reached a record 12% of total revenue for the full year. With full year revenue of 1,800,000,000 and the gross profit of $700,000,000 2021 represented A significant step toward our 2025 target of $1,000,000,000 in gross profit on $2,500,000,000 revenue and 40% gross margin. In addition to the manufacturing synergies provided by LC acquisition over these past years, We expect to realize expanded synergies across our product portfolio, Customers and end market in the coming year to drive additional revenue growth and the gross margin expansion. With that, let me now turn the call over to Brad to discuss our Q4 financial results and our Q1 2022 guidance in more detail.

Speaker 3

Thanks, Doctor. Liu and good afternoon everyone. As part of my financial review today, I will focus my comments on the sequential change for each of the line items and we will refer you to our press release for a more detailed review of our results as well as the year over year comparisons. Revenue for the Q4 2021 was a record $480,200,000 an increase of 1.9 percent from $471,400,000 in the Q3 2021. For the full year 2021, revenue was a record $1,810,000,000 an increase of 46.9 percent from $1,230,000,000 in the prior year.

Speaker 3

Gross profit for the 4th quarter was also a record at $190,700,000 or a record 39.7 percent of revenue, increasing 5.2% or 130 basis points from $181,200,000 or 38.4 percent of revenue in the Q3 2021. For the full year, gross profit increased 55.5 percent to a record $670,400,000 or 37.1 percent from $431,100,000 or 35.1 percent in 2020. GAAP operating expenses for the Q4 2021 were $104,700,000 or 21.8 percent of revenue and on a non GAAP basis were $100,100,000 or 20.8 percent of revenue, which excludes $4,100,000 of amortization of acquisition related intangible asset expenses and $600,000 of acquisition related costs. This compares to non GAAP operating expenses in the prior quarter of $99,600,000 or 21.1 percent of revenue. GAAP operating expenses for the full year were $394,400,000 or 21.8 percent of revenue, compared to $296,800,000 or 24.1 percent of revenue in 2020.

Speaker 3

Total other income amounted to approximately $22,800,000 for the quarter, consisting of 13 point $2,000,000 of unrealized gain on investments, dollars 11,200,000 of other income, dollars 788,000 of interest income, $1,100,000 in foreign currency losses and $1,200,000 in interest expense. Income before taxes and non controlling interest in the Q4 2021 was $108,800,000 compared to $85,600,000 in the previous quarter. Turning to income taxes, Our effective income tax rate for the 4th quarter was approximately 39.1%, which includes taxes related to non GAAP items. On a non GAAP basis, the tax rate for the 4th quarter was approximately 18.4%. GAAP net income for the Q4 2021 was $65,500,000 or $1.43 per diluted share compared to GAAP net income of $68,400,000 or $1.50 per diluted share in the Q3 of 2021.

Speaker 3

Net income per diluted share in the Q4 increased 142% year over year from the $0.59 per diluted share in the Q4 2020. The share count used to compute GAAP diluted EPS for the Q4 2021 was 45,900,000 shares. GAAP net income for the full year 2021 was a record $228,800,000 or $5 per diluted share, a 166% improvement compared to the $1.88 per diluted share or $98,100,000 in 2020. On a non GAAP adjusted net income in the Q4 was a record $73,300,000 or $1.60 per diluted share, which excluded net of tax $3,300,000 of acquisition related intangible asset costs, $400,000 of acquisition related costs, dollars 13,500,000 of costs related to certain LSC investments and a $9,400,000 gain on the sale of a manufacturing subsidiary. This represents an 8.8% improvement from the 3rd quarter 2021 of $1.47 per diluted share or $67,300,000 and a 116% improvement from $0.74 per diluted share or $37,300,000 in the Q4 2020.

Speaker 3

On a non GAAP adjusted net income for the full year 2021 was a record $237,200,000 or $5.18 per diluted share, a 120% improvement compared to $2.35 per diluted share or $122,700,000 in 2020. Excluding share based compensation expense of $6,500,000 for the 4th quarter And $26,200,000 for the full year 2021, both GAAP earnings per share and non GAAP adjusted EPS would have increased by $0.14 per diluted share for the 4th quarter and $0.57 for the full year. EBITDA for the Q4 was a record $139,000,000 or 28.9 percent of revenue compared to $114,500,000 or 24.3 percent of revenue in the prior quarter. On a year over year basis, EBITDA increased 107.2 percent from $67,100,000 in the Q4 2020, further highlighting our significant operating improvements over the past year. EBITDA for the full year 2021 increased 82.1 percent to a record $434,600,000 or 24.1 percent of revenue from 200 and $38,600,000 or 19.4 percent in 2020.

Speaker 3

We have included in our earnings release A reconciliation of GAAP net income to non GAAP adjusted net income and GAAP net income to EBITDA, which provides additional details. Cash flow generated from operations was $77,600,000 for the Q4 2021 and $338,500,000 for the full year. Free cash flow was $22,500,000 for the 4th quarter, which included $55,000,000 for capital expenditures and $197,300,000 for the full year, which included $141,200,000 of capital expenditures or 7.8 percent of revenue. Net cash flow in the 4th quarter was a positive $82,000,000 and a positive $46,300,000 for the full year, which included a pay down of approximately $152,600,000 of long term debt during the year. Turning to the balance sheet, at the end of 4th quarter, cash, cash equivalents, restricted cash plus short term investments totaled approximately $373,000,000 Working capital was $717,000,000 And total debt including long term and short term was $301,000,000 In terms of inventory, at the end of the 4th quarter, Total inventory days increased to approximately 107 in the quarter as compared to 99 last quarter.

Speaker 3

Finished goods inventory days were 32 compared to 27 last quarter. Total inventory dollars increased 26 $500,000 to approximately $348,600,000 Total inventory in the quarter consisted of an $18,500,000 increase in finished goods, a $15,000,000 increase in raw materials and a $6,900,000 decrease in work in process. Capital expenditures on a cash basis for the Q4 2021 were $55,000,000 or 11.5 percent of revenue and 7.8% for the full year, which is within our target model of 5% to 9%. Now turning to our outlook. For the Q1 2022, We expect revenue to be approximately $480,000,000 plus or minus 3%, which at the midpoint is better than typical seasonality of down 5%.

Speaker 3

We expect GAAP gross margin on a consolidated basis to be 39.7 percent, plus or minus 1%. Non GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition related intangible assets are expected to be approximately 21% of revenue, plus or minus 1%. We expect net interest expense to be approximately $1,400,000 Our income tax rate is expected to be 18.4%, plus or minus 3% and shares used to calculate diluted EPS for the Q1 are anticipated to be approximately 46,300,000 shares. Please note that purchasing accounting adjustments of $3,300,000 after tax for previous acquisitions is not included in these non GAAP estimates. With that said, I will now turn the call over to Emily Yang.

Speaker 4

Thank you, Brett, and good afternoon. As Doctor. Lu and Brett mentioned, 4th quarter revenue increased 1.9 Quarter over quarter, which is better than the midpoint of our guidance due to the continued strong demand and record revenue across all the regions. Distributor inventory in the 4th quarter in terms of weeks increased slightly quarter over quarter, which is still below our defined normal range of 11 to 14 weeks. Looking at global sales in the Q4, Asia represented 78% of revenue Europe 13% and North America 9%.

Speaker 4

In terms of our end market, computing represented 29% of revenue industrial 24% Consumer, 19% communication, 16% and automotive, 12% of revenue. We achieved record revenue in the automotive, Industrial, Communications and Consumer segments. Now let me review the end markets in greater detail. In the automotive market, we continue to expand our strong growth momentum with revenue increasing 37% year over year and 59% for the full year to set new record. Since 2013, when we began our expansion initiative into the automotive market, We have achieved an 8 year compounded annual growth rate of 30%.

Speaker 4

One key to our success has been our content expansion initiatives and design win momentum that has continued across all target application areas, particularly in 3 focus areas of connected driving, Comfort Style and Safety and Powertrain. Automotive DCDC 32 volt and 40 volt box converters, LED switching drivers And SDRs continue to see strong demand for telematics, front and rear LED lighting, daylight running lights and ADAS applications. Similarly, linear mode LED driver product would be signed into 1st responders' emergency lighting system And high efficiency charge pump LED drivers has been seeing traction for indicator LED lights in the household EV plug in charging units. Newly released LDOs, current limit power switches and Pericom product line of level shifters, crystal oscillators, buffers and PCI Express clocks are seeing new design wins in ADAS, telematics, anomalous vehicle control units and infotainment system. We are also seeing great success from the high voltage latch, high voltage regulators and omni polar hot switching, including fans, Window lifters, motors, water pumps and door lock applications.

Speaker 4

Additionally, Transcend voltage suppressors, MOSFETs, gate driver ICs as well as automotive electric intelligent controllers. MOSFET design in momentum continues for automotive brushed and brushless electric motor applications, including power steering, fields, oil and ABS pumps, seats and mirrors. Our low capacitive ESD and surge protection devices are also being designed into applications for protection of in vehicle network and for the IO port protection of its Far Field cameras for advanced driving assistance. In the industrial market, revenue increased 43% year over year and 46% for the full year to also reach new records. We are continuing to see growth and adoption of DisplayPort HDMI switches and re drivers in the commercial display application.

Speaker 4

Our ultrafast recovery rectifier product and PCI Express Gen 3 Packet Switch are gaining traction in the artificial intelligence, video anesthetic 3 d sensing camera module and surveillance and security applications. We are also seeing strong demand for application specific multi chip circuits and standard recovering rectifier products driven by multiple applications such as diagnostic test system, brushless DC motor drivers, energy metering, Power supplies, smart lighting and electro medical applications, including automated blood and body flu analyzer. We have also been pleased with the strong design win momentum for the LION Semiconductor image sensor product line being used in document scanners, lottery bar scanners and PCB inspection applications. Additionally, our ultrafast recovery in inverter applications. Medium voltage DCDC LED drivers have been gaining design wins in smoke detectors And SVR products are expanding in GPS tracking applications, which enable real time location monitoring during the transportation.

Speaker 4

In the computing market, revenue was up 72% year over year and 122% for the full year. We are seeing strong traction for USB Type C Power Switches, TVS, high power density shockies, low voltage omni polar hot sensors, Dual output unit polar hot sensors, DC DC buck converters as well as HDMI 2.0 redrivers in the new compute platform, including gaming notebooks and workstations. Similarly, we are seeing increasing interest for DisplayPort, USB Type C, HDMI switches and re drivers in the docking stations, dongles, active cable and keyboard video MOS applications. We also continue to see strong demand for SSD mux, crystal and oscillator products in the enterprise SSD story modules including SSD storage, gaming, server, laptops and mobile devices. Additionally, LION Semiconductor In the consumer market, revenue increased 18% year over year and 12% for the full year to also set new record for the quarter year.

Speaker 4

Diodes continue to see strong revenue growth of standard recovery rectifier products and SBR in the consumer applications, including digital light projection, LED backlight modules and high efficiency vacuum cleaners. We also have new design wins for USB mux and bipolar transistors in LED TV and display panels as well as increasing demand for low power Class D audio amplifiers, SBRs and LED drivers utilize the monitor, Bluetooth speakers, LED lighting and smart doorbell applications. We also continue to see strong momentum for CFP and small DFM MOSFET for IoT and wearable devices as well as high power density products securing new design wins in the home exercise equipment. Mobile phone adapter generated strong demand for Lastly, in the communication market, revenue was also a record and grew 10% year over year and 13% for the The Siluhi momentum for the Pericom product line continues in this market for our USB Muxen ultrahighvoltage protection 5 gs CPE There has also been growing demand for USB redrivers, primarily driven by the USB Type C application. Additionally, our small size low saturated transistors continue with design wins across multiple applications From base stations, routers, network cameras to doorbells, we saw strong demand for our SBR chip scale package and design wins for high PSR LDO product family in smartphone applications.

Speaker 4

In summary, 2021 was an exceptional year for Diodes both operationally and financially. We achieved strong revenue growth and margin for our total solution sales approach and content expansion initiatives, especially in the automotive industrial end market as well as the We also successfully integrated LION Semiconductor acquisition and benefited from the manufacturing synergies with additional opportunities for the growth and expansion through the products, customers and end market synergies that we expect to realize over the coming quarters and years. With that, we now open the floor to questions. Operator?

Operator

Thank you. Please standby while we compile the Q and A roster. I show our first question comes from the line of Matt Ramsay from Cowen.

Speaker 5

Congrats on the great results, Doctor. Lu. I wonder if you might provide some commentary. Over the last, I don't know, year and a half or so, the industry has been very supply constrained and your company I was fortunate enough to acquire the capacity from Lydon and did an amazing job in executing and filling that capacity, and it's led to some Pretty remarkable growth. I wonder as you think about the next year or 2 in Diodes growth plan, Where do you have the opportunity to add more capacity?

Speaker 5

And how much of the growth are you thinking coming from pricing versus units versus additional

Speaker 2

Okay. So I just answered several of your questions, Okay. First, you are talking about how much is the growth coming from price increase And how much is coming from revenue growth, okay, or the capacity expansions. So we did not really separate that number very clearly, but we only Increase the price based on our wafer or our cost material increase. So we reflect the material increase to our customers only.

Speaker 2

But we take this opportunity by better support customer to ask them to give us more design opportunity. So some of the areas our customers will not allow us to touch in the past. Now With this and a great support to our customer, we can demand or ask them to open up The design in opportunity for us. And so that is what we are doing today And using the capacity constraint to our advantage of open up More pitches opportunity. Now, you are talking about the future growth, then we have Our SFAB 2 8 inches we just From very low ramped up to fully loaded by December last year.

Speaker 2

If you listen to what we have been talking about, last year, the whole year, we ramped up the SVAT 2. So, this year, that will be fully loaded, okay. So, then another is our G fab. If you remember, we bought our G fab back to 2019 And we committed to the originally owner who support them for 5 years. And every year, they will reduce their loading to us 10%.

Speaker 2

And so, we gradually qualified our production or our technology Our product into the GFAB and so we actually I have additional capacity by original owner requirement deduced. And so we are able to take the opportunity to give us more capacity for the growth. And this will continue Because they're going to be this their demand going to go down and we continue ramping up. At the same time, if we still need more than that, we can, they still have In our capacity, we can bring that capacity or bring that volume even higher Because the time when we bought that, we said they are fully loaded, But in the wafer fab definition, when we say fully loaded, it's 80%. And if you look at Some of our wafer fab is already low up to 100% or 95%, right?

Speaker 2

So, we still have more room in the GFAB to give us additional growth. Then We are our supplier other external fabs with our relationship, We still can continue asking for a little bit more every quarters All here, there to get a little bit more. So, we still believe we have enough capacity to support our growth in this year or next year. And Then when the demand start to loosen up, we can take that opportunity To continue our growth pace.

Speaker 4

Right. And then on top of that, Matt, we also will continue to drive the product mix Improvement, so we want to focus to better utilize the available capacity to support better business as well.

Speaker 5

Got it. Thank you both for the commentary there. As my follow-up question, I guess I'd be remiss to not mention that you're bumping right up against your long term 40% Gross margin target, I think your run rate of revenue is slightly under $2,000,000,000 and you were planning to hit 40% at $2,500,000,000 in revenue. So if you could just kind of walk me through the puts and takes on gross margin, as we go forward. Is It's kind of a new floor of margin and sustainable, and what are the incremental margin drivers as you add that additional $500,000,000 in revenue towards the target model?

Speaker 5

Thank you.

Speaker 2

Well, really What we're looking for is $1,000,000,000 gross profit, okay? And when I said that It really is the goal, dollars 1,000,000,000 gross profit because that follows through to the EPS. So that is really the goal. Now, when I say $1,000,000,000 gross profit, then we say how do we make, Then we said $2,500,000,000 revenue, 40% GP to make up that $1,000,000,000 And if our gross margin can be better than 40%, we are not going to We just continue improve our gross margin and we get there without 2,500,000,000. So we'll achieve that goal earlier.

Speaker 2

Then after that, then we'll Start to get to our next target, but I'm not ready to announce that next target yet, But we are quite close to the target of $1,000,000,000 Gross

Speaker 5

profit. Got it. Thank you. I'll get back in the queue, but congratulations on the progress.

Speaker 2

Thank you.

Operator

Thank you. I show our next question comes from the line of William Stein from Truett Securities. Please go ahead.

Speaker 6

Great. Thanks for taking my question. I'll add my congratulations, especially to the outlook, but both the results and outlook are great. I have a question about the guidance by end market. Normally, Q1 is down a little bit And I think the end markets that tend to do that are the, I think what you call the 3 Cs, right?

Speaker 6

Consumer, Comms and Communications, I think those are typically down sequentially, while industrial and automotive are typically up a little bit. So if we think about the delta or the difference in this Q1, Is it more spread across all end markets that they're all going to do a little better than typically? Or is it more that you're going to see sequential growth a little bit in each of the end markets or some or is there some different explanation?

Speaker 4

Okay. Hi, this is Emily. So I think overall what we are seeing is actually strength across all the end markets. I think all in all, we have really strong demand. And if we look down to the specific segment, so for example, automotive, We actually have a full year growth of 59%.

Speaker 4

We see that momentum continues. And for the industrial, we're also Seeing a lot of growth like 46% for the full year. And again, a lot of design in pipeline continue to grow. On the computer side, right, we talk about the low end PC. There's definitely a little bit softness, but we're also seeing Strength on the cloud computing and server, so it's kind of balanced itself.

Speaker 4

On the consumer side, you are right, absolutely Q1 usually is not a super Strong quarter and we definitely see a little bit softness, I would say more from the China consumer side. But again, we have a lot of overall other demands, Whether it's home care or some other consumer applications that we continue to see the strength, right? On the communication side, I think there's a lot of news about the smartphone softness a little bit in China. But since we are very well diversified into all the Tier 1 smartphone manufacturer that we're actually seeing not that much of the impact to the overall Diodes. So I would say all in all, 5 gs continue to drive a lot of momentum, not just on the base station, but 5 gs related applications.

Speaker 4

So yes, I would say all in all still very, very strong.

Speaker 6

My follow-up if I can. I think I saw an announcement recently about Diodes dipping its toe into silicon carbide Development, can you maybe clarify what you envision? Well, first, What capabilities you're developing and what market or opportunity you believe you'll be able to address? Thank you.

Speaker 7

Okay. This is Gary. And Weil, nice to talk to you. And actually, the silicon carbide development we've been starting for this Probably a year ago and we see that's a very strong trend from the market. And we have our design team in house and we do our wafer design and we use our You're using outside fabrication through the wafer.

Speaker 7

And particularly, the silicon carbide we are using is for the automotive related Part like the OPC onboard charger, like micro EV and inverter and especially, you can see the news we have for the diode set. That's the JE joint venture activity that we have with your silicon carbide MOS with the technology that we have Module go to the inverter and those inverter are going to the electronic vehicles motors. And that's the area we're kind of focused on.

Speaker 6

Any revenue to discuss in that area yet or is it all?

Speaker 7

No, not yet. Our engineering samples should be delivered by end of this year, and we are looking forward because automotive related probably 1 year or a little bit longer. And we're Looking for probably the first revenue going to come in probably the middle of next year.

Speaker 6

Great. Thank you. Congrats again.

Operator

No problem. Thank you. Our next question comes from the line of Gary Mobley from Wells Fargo Securities. Please go ahead.

Speaker 8

Good afternoon, everybody. Thanks for taking my question and congrats to the strong 2021 and a good start to the current calendar year. I wanted to ask about your manufacturing footprint in China. I realize the majority of your Employees are based in China. So have you seen any impact on your production facilities past or present or maybe in the future from China's COVID-nineteen policy?

Speaker 2

Well, let me answer this one. Actually, our wafer fab, majority of wafer fab internally is not in China, okay? We have external, but internal, we in the GFAB And OFAB in Europe and AOSC have the wafer fab in Taiwan. So today, in China, we only have expect 2, okay? So we don't have Majority is not there.

Speaker 2

Now for Exelmarie, yes, but virtually, We the 2 major sites is in Shanghai, which don't have that big problem On COVID-nineteen and Chengdu, again, in Sun's Park, the China government is very, very careful too. So we don't see the problem Due to COVID-nineteen, okay? And actually, it's helping us Because, for example, typically, every year, during the Chinese New Year, we're going to have Shut down and because a lot of workers are going to go home for the Chinese New Year. So, during the Chinese New Year, that month, our productivity or our production It's actually slowed down. That's why one of the reasons we have this is a scenario in 1Q, we cannot get enough Output.

Speaker 2

But this year, like last year, the China government actually encouraged The door call either take off or continue working, okay? So, because of that, This year, our output affected by Chinese New Year is not That's great. That's critical. And therefore, we are able to support Our demand, still not enough, but we are able to support. So therefore, we guide our 1Q revenue Fred, from 4Q, because our output is not really going to slow down that much.

Speaker 2

At the same time, we do view some inventory in 4Q, try to get support So overall, we do not really affect manufacturing wise By COVID-nineteen effect in China, but actually we are better than In the past, it's due to the order to not really go home.

Speaker 8

Got it. Appreciate the color there, Doctor. Lu. I have a couple of follow ups for Emily perhaps. Normally, Q1 is down 5%, But I presume that you're going to have a better than seasonal Q1 because perhaps you're having a getting an opportunity to replenish Distributor inventory and related to that, would you expect to be back up in the normal 11 to 13 week range?

Speaker 8

And is there any way to quantify the impact of your competitors, one in particular that is exiting a few $100,000,000 last year and the next year in some product categories that you directly compete in? Thank you.

Speaker 4

Right. So I think Gary, with the like Doctor. Mentioned better than Maybe a little bit better than expected output in Q1. That's the reason we provided a flight guidance, which you are absolutely like. This is usually about 5% down quarter, right.

Speaker 4

So what we do, we feel aggressively working with all the customers closely And review all the opportunities in front of us, right. So if this is the right fit for the overall Diodes growth As fit into our overall strategy, we aggressively pursue. And like I mentioned earlier, anytime there's a strategic Change from my peers or merchant acquisition always created more opportunity for Diodes to pursue after, right. But again, we are not just blindly Going after every business, we really more focus on strategic good business that will continue to drive our product mix improvement As well as total solution sales strategy that we initiated few years ago, right.

Speaker 8

Got it. And the impact from one of your competitors exiting the market?

Speaker 4

I think it's really hard To really say how big or how small the impact, I also think one of my peer published a lot of statements, but there's also others Maybe didn't really that vocal, but also making changes. So again, we monitor all this very closely. As long as fit into our long term plan, as long as that's going to help us to achieve the $1,000,000,000 gross Profit, after Lu mentioned earlier, we're definitely aggressively going after it.

Speaker 8

Thanks, Emily.

Operator

Thank you. I show our next question comes from the line of Tristan Gerra from Baird. Please go ahead.

Speaker 9

Hi, guys. Quick question on the gross margin trajectory for the next few quarters for this year. What's going to be the mix component versus further fixed cost absorption? It Sounds like you have room to further expand utilization rates. So how should we put that in the mix in terms of margin expanding this year?

Speaker 4

Well, I think yes, so maybe let me make a comment and Doctor. Lu and some others maybe can add some more. I think the margin improvement really consists of a few things and they are all very important, right? One of the biggest one is product mix Improvement. And we've been talking about this for a while.

Speaker 4

So we will continue to drive. This is really more from the total solution sales, Replacing some of the legacy stuff with some of the newer product with better margin, better ASP as well. And we believe this is actually just the beginning of this whole initiative and that this is actually something we established probably about 2, 3 years ago And we continue to drive for improvement. I think manufacturing efficiency improvement has always been the strength for Diodes. And like Doctor.

Speaker 4

Lu mentioned, we continue to add additional capacities. This can be even Adding more equipment within existing lines or replacing some of the old equipment with a new one, Expanding to 4 inches to 6 inches stuff like that. So that will continue to drive some of the capacity improvements. And in result, that will continue to drive our manufacturing efficiencies and continue to improve our costs, right? And then we also have LION Semiconductor synergies that I talked about.

Speaker 4

So we start seeing the benefit of the manufacturing synergy, but there are still Customer synergy, end market synergy and product synergy that we can actually Continue to see benefit over the next few years. So I would say all in all, there's a few areas will continue to help us to drive the margin. And just like Doctor. Lu mentioned, we're definitely not going to stop at 39.7% or 40%. And this is Continue the direction and we definitely want to continue to deliver the results to you guys as well.

Speaker 9

Okay, great. And then for my follow-up, it's going to be about inventories in the channel. So you've mentioned that You mentioned the well advertised slowdown in China Smart firm, but that you're also very diversified. So Are you seeing any pockets of inventories in the supply chain outside of this stage that you could point out despite that Diversification. And then also, are you seeing inventory rebalancing because of the high level of work in process inventories?

Speaker 9

So are you seeing some customers basically choosing and picking what they're going to order because they can't close the box, so they're kind of Waiting for that last component.

Speaker 4

Yes. I think, Tristan, overall, we're still seeing the channel inventory very lean. So, Ethan, we see a very slightly increase in our channel inventory end of Q4. That's actually driven by some of the Support for the Chinese New Year customers and also the timing of the shipments. But all in all, still extremely lean.

Speaker 4

I think Gary asked the question, I probably didn't address It's actually do we expect back to the 11 to 13 weeks or 14 weeks that we define as the normal range. We don't really expect return to that normal range in a short period of time. So we believe that with all the visibility that we have, With all the customers that we actually have a direct communication with, so far no one have opportunity to build up a lot of Inventory on the shelf at this moment. So I believe that that will continue for a few quarters to come And we'll continue to monitor very closely. That's pretty much applied to all the Tier 1, Tier 2s that we have a direct contact.

Speaker 4

And then with the Tier 3, Tier 4 customers, we actually monitor very closely with each of our distributors partners And they also monitor very closely and so we definitely don't see that as an issue at this moment.

Speaker 9

Great. Thank you very much.

Operator

Thank you. I show our next question comes from the line of David Williams from Benchmark. Please go ahead.

Speaker 10

Hey, good afternoon and thanks for letting me ask the question. So and I apologize, I jumped on a little bit late. But, Doctor. Liu, I wanted to ask, You've been through a lot of these cycles and we've talked about it in the past. But just kind of curious how you're seeing the landscape today and how do you think maybe the It seems like that the channel inventory still remains extremely lean, but it always tends to be that we've got excess through the supply chain.

Speaker 10

Do you Do you feel pretty comfortable today that there really isn't maybe some excesses that are kind of building up within that channel that just maybe aren't Being seen or aren't as visible? And do you think there's even an opportunity for that to have happened, I guess kind of given the demand and where

Speaker 2

Well, yes, you are right. I have been in semiconductor business for a long time And I go through 1970, 80, 90 90 up and down cycles. So I'm familiar with that, but if I'm going to say this year, this cycle It's really different from the previous cycles, okay. In previous always, demand continue And expansion for the capacity behind and then all of a sudden you get a shortage. Then people the people wait until they cannot stand, Then they go to exit the capacity.

Speaker 2

Then the problem is the de time of the equipment take a long time. So the time they get capacity there, everybody get it at the same time that all of a sudden You get overcapacity, then everything goes down, then go to the down cycle. So, if you look at it's a timing issue of the capacity improvement. And that's why if you remember several years ago, Well, we our strategy is putting capacity ahead of the demand. So, during the downtime, you actually exit the capacity because the lead time each equipment lead time issue.

Speaker 2

Now, this time, that's what we're able To grow this year or 2021 much better than 2020 is because We ramped up SFAB 2 at that time. We get AOC I had the time and then we get GFAB even 1 or 2 years before the shortage. So we prepare for all this one and all this shortage and that's why we are able to Take advantage of this. But now if you're talking about move forward, I think the move forward still have shown because you don't see the many of People eating capacity that crazy, okay? Everybody very close To add in the capacity.

Speaker 2

So, I don't I think this shortage will be Continue this year. Now, you're going to start to do set up But electronics demand actually continue to increase I had more than in the past and so on. I would see that Demand is going to continue very strong and then the capacity increase

Speaker 10

And then maybe one other one here for Emily, but you've had some really nice growth in the automotive side And that's been a fairly diversified, I guess, application area across the different areas of the vehicle. But when you think about your Maybe ICE or traditional vehicle versus the EV, how do you think that split looks like maybe this year and or even in 2021? Are you seeing much adoption within the EV space now or is that primarily still driven by the traditional? And then how do you think that mix kind of shakes out as we go into maybe the 12 months to 18 months, do you see the demand in EV and kind of that pull through? And does this happen fairly quickly for you all in terms of seeing that reflected within your revenue

Speaker 4

Right. So I think the EV volume increase is definitely real, right? I think there's a lot of data in public company that we can refer to Their output unit increase and expectations for 2020 growth 2022 growth as well as 2023. So there's also a lot of new start up or any of the Tier 1 traditional manufacturing are all working on some sort of So we think that's real. There's a lot of opportunity for Diodes continuing to expand and continue to grow in this area.

Speaker 4

So this is actually volume increase as well as Content expansion increased for us. On the traditional side, what we really focus on, there's also a lot of comfort, Style and safety, we're talking about the number of lightings, the number of cameras. I talk about brushless DC motors And all of this is additional contract expansion for us to go after. So we're really growing, I would say, both from Traditional vehicles as well as the EV vehicles, right? So if you remember the three areas we focus on is electrification that EV, the hybrids, right, or the battery management system.

Speaker 4

And then we also talk about the comfort, safety and style As well as connectivity, this is actually for the ADAS, the telematic and info payment system. So I would say all in all applies to both. And the good news for Diodes is we continue to have a lot of momentum and continue to have a lot of opportunity in front of us. And with our new product introduction, we are very confident that we'll continue to drive a very strong momentum in the automotive growth, which should be and we have been demonstrated stronger than the overall market, right. So if we look at the track record From 2013 till 2021, we actually have a compounded annual growth rate of 30% and that will continue to be the focus

Operator

Thank you. I'm showing no further questions in the queue. At this time, I'd like to turn the call back over to Doctor. Lu for any closing remarks.

Speaker 2

Thank you for your participation on today's call. Operator, you may now disconnect.

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