Diodes Q3 2023 Earnings Call Transcript

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November 8, 2023

There are 11 speakers on the call.

Operator

Welcome to Diodes Incorporated Third Quarter 2023 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. Call. As a reminder, this conference call is being recorded today, Wednesday, November 8, 2023.

Operator

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

Speaker 1

Good afternoon, and welcome to Diodes' Q3 2023 Financial Results Conference Call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today from Taiwan are Diodes' Chairman, President and CEO, Doctor. Keh Shue Liu Chief Operating Officer, Gary Yu Chief Financial Officer, Brett Whitmire Senior Vice President of Worldwide Sales and Marketing, Emily Yang And Director of Investor Relations, Karmic Dhaliwal. I'd like to remind our listeners that the results announced today are preliminary as they are subject to the company finalizing It's 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 its Form 10 Q for its fiscal quarter ending September 30, 2023. In addition, management's prepared remarks contain forward looking statements, which are subject to risks and uncertainties, and management may make additional forward looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission, 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, November 8, 2023.

Speaker 1

Doug 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's statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income.

Speaker 2

For those

Speaker 1

of you unable to 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 atwww.diodes.com. And now, I'll turn the call over to Doctor. Liu, Diodes' Chairman, President and CEO. Doctor. Liu, please go ahead.

Speaker 3

Thank you, Liang. Welcome, everyone, and thank you for joining us today. As announced earlier today, our 3rd quarter results reflected weaker than expected And customer demand in the computing, consumer and communication markets, as well as the overall Asian market. Our original assumption of a market recovery do not materialize throughout the quarter. However, our automotive product revenue in the 3rd quarter Remanded at a record 19% of revenue, contributing to our commanded automotive And industrial revenue means 45% of revenue and above our target model of 40%.

Speaker 3

Although the current environment presented challenges for our business in near term, I believe we remain well positioned for a return to growth as we continue to strive toward our Next call of $1,000,000,000 in gross profit. With that, Let me turn it over to Gary, Diodes' Chief Operating Officer for some additional insights

Speaker 4

Thank you, Doctor. Lu. Revenue in the quarter was $404,600,000 A 13.4% sequential decrease reflecting the weaker than expected demand in the 3 gs markets, especially in Asia, as Doctor. Lu mentioned. Although our original guidance contemplate a continued reduction in channel inventory, Global demand throughout the quarter did not support a significant decrease in these inventory levels.

Speaker 4

In addition to the delayed recovery in 3C market, in the Q4, we have also begun to see a more broad based slowdown globally in industrial, as well as softness in some areas of the automotive market. This is primarily related to the customer inventory adjustment as well as year end distributor inventory management, which is contributing to our much lower outlook than our typical seasonality. Though the general market is slow, there are certain areas where the demand is beginning to show signs of recovery, especially in computing market. That said, I want to reiterate that despite those weaker demand dynamics, We remain focused on the long term and our product mix improvement initiatives as we continue to invest in R and D For new product targeting expanded design wins in automotive and industrial markets. Additionally, We are further developing the process technology in our previous acquired fabs to build the capability in preparation Across all operations, these steps represent further enhancement to the actions we have taken over the past several years, We have consistently enabled us to deliver increasing growth and the profitability and will continue to do so for years to come.

Speaker 4

Let me now turn the call over to Brett to discuss our Q3 financial results and our Q4 guidance in more detail.

Speaker 5

Thanks, Gary, and good afternoon, everyone. Revenue for the Q3 2023 was $404,600,000 down 13 point 4 percent from $467,200,000 in the Q2 2023 and 22.4% from $521,300,000 in the Q3 2022. Gross profit for the 3rd quarter was $155,900,000 or 38.5 percent of revenue due to the impact of our wafer service agreements combined with higher facility underutilization costs due to the softer than expected demand in the quarter. This compares to $195,400,000 41.8 percent of revenue in the prior quarter and $217,800,000 or 41.8% revenue in the prior year quarter. GAAP operating expenses for the Q3 were $102,000,000 or 25.2 percent of revenue and on a non GAAP basis were $95,600,000 or 23.7 percent of revenue, which excludes $3,800,000 of amortization of acquisition related intangible asset expenses and $2,600,000 of restructuring costs.

Speaker 5

This compares to GAAP operating expenses in the prior quarter of $105,800,000 or 22.6 percent of revenue and in the Q3 of 2022 of $105,400,000 or 20.2 percent of revenue. Non GAAP operating expenses in the prior quarter were $102,000,000 or 21.8 percent of revenue. Total other income amounted to approximately $6,600,000 for the quarter consisting of $4,500,000 of interest income, $1,300,000 of other income, a $1,300,000 foreign currency gain and a $400,000 unrealized gain on investments and $900,000 in interest expense. Income from taxes and non controlling interest in the Q3 2020 3 was $60,500,000 compared to $101,000,000 in the previous quarter and $109,100,000 in the prior year quarter. Turning to income taxes, our effective income tax rate for the Q3 was approximately 17.6%.

Speaker 5

GAAP net income for the Q3 of 2023 was $48,700,000 or $1.05 per diluted share compared to $82,000,000 or $1.77 per diluted share in the Q2 2023 and $86,400,000 or $1.88 per diluted share in the Q3 of 2022. The share count used to compute GAAP diluted EPS for the Q3 2023 was 46,300,000 shares. Non GAAP adjusted net income for the 3rd quarter was $52,500,000 or $1.13 per diluted share, which excluded net of tax $3,100,000 of acquisition related intangible asset amortization, $1,900,000 in restructuring costs and a $900,000 gain on an equity investment. This compares to $73,300,000 or $1.59 per diluted share in the prior quarter and $92,200,000 or $2 per diluted share in the Q3 2022. Excluding non cash share based compensation expense of $4,700,000 net of tax For the Q3, both GAAP earnings per share and non GAAP adjusted EPS would have increased by $0.10 per diluted share.

Speaker 5

EBITDA for the 3rd quarter was $90,600,000 or 22.4 percent of revenue compared $133,500,000 or 28.6 percent of revenue in the prior quarter and $141,900,000 or 27.2 percent of revenue in the Q3 2022. 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 $50,100,000 for the 3rd quarter. Free cash flow was $11,600,000 which included $38,500,000 for capital expenditures. Net cash flow was a negative 27 point $1,000,000 including the pay down of $35,300,000 of total debt.

Speaker 5

Turning to the balance At the end of the Q3, cash, cash equivalents, restricted cash plus short term investments totaled approximately $308,000,000 Working capital was $768,000,000 and total debt including long term and short term was $53,000,000 In terms of inventory, at the end of the 3rd quarter, total inventory days were approximately 124 as compared to 112 last quarter. Finished goods inventory days were 34 compared to 30 last quarter. Total inventory dollars increased $18,000,000 dollars increase in raw materials, an $8,900,000 increase in finished goods and a $7,400,000 decrease in work in process. Capital expenditures on a cash basis were $38,500,000 for the 3rd quarter or 9.5% of revenue, which is at the high end of our target model of 5% to 9%. Now turning to our outlook.

Speaker 5

For the Q4 of 20 23, we expect revenue to be approximately $325,000,000 plus or minus 3%. We expect GAAP gross margin to be 35% plus or minus 1%, primarily due to higher underutilization costs On the lower expected revenue combined with less favorable product mix from a reduction on the contribution of automotive and industrial revenue. Non GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition related intangible assets Are expected to be approximately 26.5 percent of revenue, plus or minus 1%. We expect net interest to be approximately $2,000,000 Our income tax rate is expected to be 18% plus or minus 3% and shares used to calculate EPS For the Q4 are anticipated to be approximately $46,600,000 Not included in these non GAAP estimates is amortization The $3,100,000 after tax for previous acquisitions. With that said, I now turn the call over to Emily Yang.

Speaker 6

Thank you, Brett, and good afternoon. As Doctor. Lu and Gary mentioned, revenue in the Q3 was down 13.4% sequentially and below our original estimates. Our assumption of the market recovery in the quarter did not happen. Our global POS decrease in the quarter and our channel inventory increased slightly, remained above our defined normal range of 11 to 14 weeks.

Speaker 6

The automotive market remained relatively stable during the quarter. Looking at the global sales in the 3rd quarter, Asia represented 72% of revenue, Europe 18% and North America 10%. In terms of our end market, industrial was 26% of Diodes product revenue, automotive Made a record 19%, computing 25%, which has improved 3 percentage points compared to last quarter, with most of the improvement driven by AI server demand increase. Consumer represented 18% and communication 12% of product revenue, with smart demand, especially in Asia, still low during the quarter. Our automotive and industrial end market combined at 45% of the product Now let me review the end market in greater details.

Speaker 6

In the automotive end market, revenue and demand We continue to focus on expanding our content in various applications by extending our design win momentum. During the quarter, we introduced 139 new automotive compliance products, which included low voltage MOSFET product for automotive battery management system, Wi Fi telecommunications and infotainment applications. As the content expansion continues to increase in the automotive market, the demand for managing sensor data, Control information, infotainment and power line and battery management is increasing dramatically. We introduced a series of power TVS products with a wide range of operating voltage ideal for protecting EVs and charging station applications. We're also seeing design wins for protection devices in domain control touch panel systems, transmission control units, PCI Express Gen 4 clock generators as well as crystal oscillators in ADAS infotainment and auto driving radar systems.

Speaker 6

Automotive compliance ideal diode controllers continue We have strong demand from ADAS, telematics and infotainment systems. We also secured design wins for USB Type C solutions, including USB power delivery controllers, MUX switches and redrivers for in vehicle infotainment systems. We are also seeing increased adoption of 3.3 volt USB C redrivers, USB C DisplayPort Alternate Crossbar Maxes and different video protocol switches in rear seat entertainment, smart caustic, ADAS and camera monitor systems. In the industrial market, we began to see broader weakness materialize with a more pronounced inventory rebas combined with year end distributor inventory controls expected in the Q4. Despite the general market weakness, Our team remains focused on furthering our design win momentum and new product introduction to support future growth.

Speaker 6

The industrial and automotive market remain our top focus for expanding our content and market share to continued product mix improvement and gross margin expansion over time. To highlight a few positives during the quarter, our HDMI Mux and Redrivers, USB Type C DisplayPort Alternative Redrivers and Mipi Redrivers Silicon carbide Schottky diodes continue to gain traction in power factor correction applications for industrial adapters and medical equipment, while the RASTER and SBR product gained momentum in power over Ethernet, surface and solar panel applications. We also continue to secure design wins for our linear LED drivers in handheld power tools and high voltage regulators in fan applications. NRPSO sound drivers continue to win new designs in security alarm, household smoke alarm and aftermarket dashboard alarms. In the computing Market, after many quarters of inventory adjustment, we are seeing some signs of recovery with particular strength in the AI server demand.

Speaker 6

We expect POS revenue to increase sequentially in the computing market with a further recovery in the first half of next year in this market. Our TVS protection product for USB C data line protection, USB C source power switches, low voltage MOSFETs and low There was also increased adoption of our connectivity and signal integrity products, including MUX switches and re drivers for HDMI, USB C, DisplayPort and MiP protocols in applications, including workstations, gaming, notebook, desktop, docking station and add in car applications. We're also seeing adoption of our 40 gigabit per second USB USB4 redrivers in long channel cases together with USB4 retimers and 20 gigabit per second USB Type C DisplayPort Redrivers in the next generation computing platform design. Our PCI Express 3.0 packet switches Are also viewing momentum by enabling high speed seamless connectivity in cloud server and data centers with multiple CPU system Support for cross domain endpoints to improve reliability, availability and serviceability. Also in the computing, our timing products continue to gain design in, design win momentum for server and storage applications, while our PCI Express Gen 5, Gen 6 clock generators and buffers will be signed into AI surfers.

Speaker 6

In the communication market, we continue to secure new design wins for our timing products, including clock buffers And crystal oscillators for smart NIC car and optical transceiver modules. Our LDO family, low voltage omni polar Sensors, low voltage MOSFETs and data line protection products saw solid demand and new design wins for camera, IO protection, smart cover and wireless earbud applications in the smartphone. Lastly, in the consumer market, Our bridge rectifier, hall latch switches and TVS products continue to gain traction in home appliance applications. Design momentum also continued for our LED drivers, SBR, PSO sound drivers and audio amplifier in VR headsets, TV, monitor, headphones and tracker applications and our LDOs Gained demand momentum from home monitoring camera system, while our HDMI passive active mux re drivers, Splitters and the DisplayPort Maxes saw increased adoption in keyboard, video, monitors and mouses. In summary, although the global demand environment remained weak and we are being impacted by inventory digestion across certain end markets.

Speaker 6

Our team remains focused on driving increased design wins and new product

Speaker 2

Thank you. We will now begin the question and answer session. Our first question comes from William Stein with Truist Securities. Please go ahead.

Speaker 7

Great. Thanks for taking my questions. The first is about your capital allocation strategy. There are several similar companies, let's say, Diversified companies with broad end markets, a lot of analog products, many of them have micros, I acknowledge you don't. But You're a very consistent generator of free cash flow and you've used that to continue to pay down debt For the last few quarters, I think the last maybe 8 or 10 quarters perhaps.

Speaker 7

And you now have A net cash balance, stocks down a lot from the peak. What is it going to take to see the company Resume a buyback and would you consider establishing a dividend?

Speaker 5

Yes. So Will, this is Brett. I think that as we've talked about before, we do view our capital strategy as essentially driving growth, Investment and growth, we've and we a key part of that is looking at M and A, a key part of that is investing back in the business that we've done. I think we've openly talked we've talked about our history. We have had some stock buyback programs.

Speaker 5

Back in 2015, we had a program and then we bought On semiconductor, it was a buyback. We continue to look at that. From a dividend perspective, that's not something that we view on the table right now, But we continue to contemplate the best use of our cash as we continue to be confident of our growth in cash generation. Yes, we just continue to consider it. Absolutely.

Speaker 7

Okay. As a follow-up, I'm hoping you can address sort of combined question about the quarter and the outlook. I think in the Press release and then also in the commentary in the call, you talked about a recovery that you expected to happen that didn't. I didn't Perhaps my recollection of my notes just isn't all that strong, but I don't recall Q3 3 being guided for a recovery. And so maybe you can just refresh my memory.

Speaker 7

What recovery were you expecting That didn't materialize. And then going forward, maybe talk about when you think things settle out and start to And when we can start thinking about revenue returning to growth? Thank you.

Speaker 6

Yes. So William, this is Emily. I think during the Q3 earnings call, we provided guidance, right? The guidance is actually based on A lot of assumptions for each of the market segments and some of the customers, I would say, overall situation. So looking back, right, we compared to what we assumed in the beginning of the quarter versus the end result, We still feel like that some assumptions didn't realize and we did actually Assume certain recovery area that should improve because of the channel inventory situation.

Speaker 6

So I think that's really referred back to our assumptions. And like I said, based on the assumptions, there are certain things that we In there, unfortunately, it didn't really materialize during the quarter, right? So I think your second question is really when And we're saying the business went back to the normal range, right? So I think that's really a crystal ball Question, it's really hard to predict at this moment. Market is extremely dynamic.

Speaker 6

But I think what we want to really assure is The market situation or demand decrease as well as the inventory adjustment should be short term. And we want to make sure, as a company, we continue to focus on the important areas that have been really helped us with the success in the past, right, which is really focused on the product mix improvement. This include by introducing more new products and continue to drive the automotive industrial content expansion, at the same time working on the manufacturing efficiency, right? So we cannot really control the market. But with all these right things in place, we're confident that this will continue to drive Revenue improvement as well as margin improvement over time.

Speaker 5

Thank you. This

Speaker 3

is Doctor. Lu. And as I mentioned in my speech, we will continue focus on R and D spend the money in R and D focus on new technology, new process and new product. And this is we still target of our vision of $1,000,000,000 of gross profit. And so shortening, yes, we have some inventory problem or not.

Speaker 3

This is inventory adjustment, but for us still need to focus on long term.

Speaker 7

Thank you.

Speaker 2

Our next question comes from David Williams with Benchmark. Please go ahead.

Speaker 8

Hey, good afternoon. Thanks for taking the question. I guess maybe firstly here, just It seems like there's been some mixed commentary out of the automotive segment and the puts and takes around just where the exposures are and whether it's good or bad. But just kind of wondering if you could help us kind of square some of your Carry on the automotive. Where you're seeing the weakness, particularly in terms of geographies and whether that's ICE or traditional, I saw or Eevi, anything that kind of helps us understand where the particular weakness is coming from would be helpful.

Speaker 6

Yes. So David, this is Emily. I think overall in the automotive market segment that we see in general the inventory level increase, Right. So we do expect some inventory rebalancing. Each customer situation can be different from the others And each program can be a little bit different as well as down to the part number level.

Speaker 6

So unfortunately, not everything equal. But in general, we're also seeing with the inventory rebalancing coupled with certain area of demand adjustment as well, right? So as a result of this too, and I also mentioned quarter end inventory control by some of the distributors. So we really believe that's really compounded area that we do expect automotive is going to be under a little bit challenge in a short term. And from the regional point of view, I think for automotive, Especially with strategic account, it's really a global approach, right?

Speaker 6

So it's really kind of difficult to point it out to a specific region. But in general, we're seeing more of the weakness from the North America and also Europe market. So that's really what we see.

Speaker 3

And if you look at, we're still able to accomplish record of the 19% of the revenue. So our automotive still continue growing, at the same time, we still continue improve Our content of the automotive, because that's the effort we are focused on and I think we still continue success Quality to increase the content.

Speaker 6

Yes. So I think I mentioned we actually introduced 139 Automotive compliance product just in 3rd Q. I believe second quarter is 100 and 13 in the previous quarter is actually other 79 or 80 numbers. So you can actually see The focus overall for the company on driving new product introduction as well as getting into a new market area,

Speaker 8

domestically, is that part of part of the issue going into the 4th quarter?

Speaker 5

Hey, David, can you repeat that? You really broke up on that question. Could you repeat that?

Speaker 8

Yes, my apologies. Was the UWA strike, was that any impact to you guys on the Q4?

Speaker 6

Yes. I mean, there's definitely indirect impact, but I think relatively it's not a big impact.

Speaker 4

Okay. All right. And then

Speaker 8

just lastly for me is on the gross margin. Can you kind of maybe give us the puts and takes there and just the guidance on the NASAD is down pretty further than we would have thought, but is it just volume or is this part of the service agreement that's also having impact? And any color there would be helpful. Thank you.

Speaker 6

Yes. So I think overall, right, when we look at this margin, I talked about the product mix Change a little bit. If you look at auto industrial percentage, definitely decreased a little, right? But mainly the reason is actually Due to the under loading situation, under realization, of course, that's coupled with different reasons, right? I think the long term agreement, I mean, the service agreement part of it, as well as the decrease in the Right.

Speaker 6

So, but again, right, this is the things that we really believe is a short term challenge that We will overcome, I think, the long term focus talking about the product mix improvement, auto industrial as well as introducing new products. And We are confident that in the longer term, we'll continue to drive the revenue improvement as well as the margin improvement.

Speaker 4

Right. And this is Jerry. I would like to put some comment on the line wafer service agreement here. And basically, there is really nothing we can control for our customer demand And they're loading here. But what we really can control is that we are aggressively loading our stuff and the cost of our processing technology in those 2 wafer fabs that we acquired a few years ago.

Speaker 4

And that's really the things we want to focus on and you're going to see the positive in the future, but it's more loading to resolve than underloading situation surely like that way.

Speaker 8

Thank you.

Speaker 2

The next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Speaker 9

Hi, everyone. I hope you're surviving the early morning wake up.

Speaker 8

Appreciate you going in this year's time

Speaker 7

in

Speaker 9

Taiwan, so probably what's on most people's mind is how 2024 looks and I'm sure you're Not going to go there, but maybe if you can give us a sense of maybe sort of the exaggerated seasonal patterns you might To start the year or maybe even different, some of the atypical seasonal patterns that might unfold during the year considering the inventory drain that has to take

Speaker 6

place. Yes. I think, Gary, with the market dynamics that's going on, I think it's hard to put picture anymore, right? Just looking at 2023, it is a little bit all over the map, right? So I think in general, we Still hopeful that the market demand situation as well as inventory readjustment is going to be over.

Speaker 6

So we still think that's going to be a short term issue. Again, right, Since it's short term, we want to continue to focus on the important things that can get Diodes to be more successful down the road, right? So that's what we really see. I think first half, it's definitely Visibility and challenge in front of us, so we definitely are hoping for a second half improvement.

Speaker 9

Okay. So I would assume that you're trying to maximize your manufacturing load, just like your competitors are in the soft macro environment. And so related to that, how is pricing holding up On a like for like product basis, given that maybe people are a little looking through the nooks and crannies for all types of business at this point in time?

Speaker 6

Yes. So I think in general, right, price is always driven by demand and supply, right? When the demand is a little bit weak and with a little bit more supply, there's definitely some shifts in that dynamic, but what we still see, majority of the price pressure is really coming from the decommodity area. And the advanced or differentiated unique product overall still Much, much better. So again, right, based on this, which is nothing new that we've been talking about, so we'll continue to focus On the new differentiated new products, right, which is referred back to the product mix initiative improvement that we have been focusing for the last number of years already, right?

Speaker 6

So that would continue to be the direction and focus overall for the company. Okay.

Speaker 9

If I could just sneak one more in.

Speaker 4

I would like to put some comment on that other than the cross country that we're facing on. And again, there's really So that we can Take advantage of those kind of setting activity initiatives to face those price issue and price pressure on the front market.

Speaker 9

Okay. Brad, if I can sneak one in. You're essentially guiding your OpEx to decrease roughly $10,000,000 sequentially. Is that anything structural or permanent? Or is it just lower bonus accruals and some other variable items?

Speaker 5

Yes. So basically, you have if you look at some of our trend across the year, as we start we start to see some of the revenue trend, you can see the actions that we're taking to bring our employee spend in line with that. We're also you can see some restructuring charges we took in 3rd quarter as we As we work through this cycle and continue to stay focused on kind of the when you look back a year ago when we were hitting 500 million, we were right on top of our model. And as we think about going forward, we're going to tighten the belt during this cycle to be stronger and then get in a better position as we go forward and continue to work to enable ourselves to grow back into that.

Speaker 4

Thank you.

Speaker 2

Our next question comes from Tristan Gerra with Baird. Please go ahead.

Speaker 10

Hi, this is Tyler Bomba on for Tristan. Thanks for taking the questions. You touched on some of the near term dynamics on pricing. Could you talk about maybe what your expectations for pricing are into next year?

Speaker 6

Yes. So I think Tristan, I think pricing is dynamic, right? There's different The categories, there are different competitors that we are facing and each of the area can be a little bit different versus the other. I think the end market also a key factor. So in general, you're seeing more of this kind of price pressure coming from the maybe consumer mode.

Speaker 6

More on the computing area because the volume is demand driven, right? So I think in general, right, we believe With the new product introduction and with the focus of the content expansion in auto and industrial and together with the manufacturing efficiency Can help us to weather better from the price pressure and with the long term margin improvement, right? So I think in general, what we see, overall in the market.

Speaker 10

Great. And then before this current quarter that you just Supported. When was the last time that you had underutilization charges? And what does that tell us about where we're at in the cycle?

Speaker 8

Yes. Ashley,

Speaker 4

we do not disclose too much information about those kind of We do see that underutilization situation happening since like Q3. And then we again, emphasizing the previous question here, so we really cannot control the demand on our plan, okay? But what we can do here is try To continue to driving our process and the product qualification in that particular wafer fab that we can load it up and to avoid the kind of liquidization situation happening again and

Speaker 3

Well, if you are looking at under loaded program or under loaded, I need to separate From 2 aspects. 1 is under loaded due to our service agreement, Okay. Due to when we do the acquisition for the operation, then We have service equipment and that what we are doing is our own technology and porting our own product to continually speed up The underwriting effect, okay? So that's one direction. The other direction Due to the underloading, it's our own manufacturing and due to our on buildings.

Speaker 3

Then we slow down the capacity expansion. So you can see that's why the CapEx For the manufacturing capability or capacity was reduced, That tension extension was reduced. That's the way that's why Brad mentioned we cut down Our CapEx and but at the same time, I think, choking the price May now be at this a good solution because if the market slowdown And you cannot just drop the price and try to gain more loadings, Okay. So most important is the product mix and new product. So if you can Focus on new product and bring the product mix, then maybe short termly we don't solve it.

Speaker 3

For long term strategy, this is what we need to do to get it for Independent to the market. So if you are going to the differentiated product and the tech automotive, You cannot be easily depressed or get shared loose by other people. So the whole thing will be the capacity utilization due to the customer demand, Not due to the dosing the shields. Okay. So this is the strategically direction we are focused on It's more new product, more automotive, industrial, more Differentiate type of product to resolve the capacity issues.

Speaker 3

By dropping the power line, our price will not be a good solution.

Speaker 10

Great. Thanks for all the color there.

Speaker 2

As we have no further questions, this concludes our question and answer session. I would like to turn the conference back over to Doctor. Lu for any closing remarks.

Speaker 3

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

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