Diodes Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 10 speakers on the call.

Operator

Good afternoon, everyone, and welcome to Diodes Incorporated's First 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. As a reminder, this conference call is being recorded today, Tuesday, May 9, 2023. I would now like to turn the floor over to Leanne Sievers of Shelton Group Investor Relations.

Operator

Leanne, please begin.

Speaker 1

Good afternoon, and welcome to Diodes' Q1 2023 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today are Diodes' Chairman, President and CEO, Doctor. Keh Shee Lu Chief Financial Officer, Brett Whitmire Senior Vice President of Worldwide Sales and Marketing, Emily Yang Chief Operating Officer, Gary Yu and Director of Investor Relations, Gamit Daliwal. Before I turn the call over to Doctor.

Speaker 1

Liu, 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. As such, these results are unaudited and subject to revision until the company files its Form 10 Q for its fiscal quarter ending March 31, 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.

Speaker 1

In addition, any projections as to the company's future performance Management's estimates as of today, May 9, 2023. Diodes 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 We'll 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 statements during this conference call, We refer to net income attributable to common stockholders as GAAP net income.

Speaker 1

For those 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 at www.diodes.com. And now, I'll turn the call over to Diodes' Chairman, President and CEO, Doctor. Keishi Liu. Doctor. Liu, please go ahead.

Speaker 2

Thank you, Diane. Welcome everyone Thank you for joining us today. Our first quarter results were highlighted The seasonally low revenue and economic slowdown in the consumer, Communication and Computing market. In fact, gross margin has remained Over 41% of the past 4 quarters and above our Target model of 40%, underscoring our execution on new product initiatives and the product mix improvements. A key contributor to our improved mix Has been our success expanding into the automotive and industrial markets, which together represented a record 47% of Total product revenue in the quarter.

Speaker 2

Another contributing factor to our consistent margin improvements It's our manufacturing cost reductions and operational efficiency, which has also allowed us to maintain healthy margins despite the COVID related disruptions and the Chinese New Year holiday during the quarter. Over the past several years, We have taken significant steps to transform our business as well as our customer And the market position based on our total solution sale approach, extensively Pipeline of new product introductions and the design wins. Today, Diodes has a diversified business across product groups, end market and applications As well as geographics that are further supported by a flexible manufacturing model And the team that is highly focused on consistent execution and a sustainable quarterly performance. Those fundamental factors position us well to Not only substandard our margin profile during an economic slowdown, but also Continue driving even higher profitability and cash flow in more favorable economic environment. With that, let me now turn the call over to Brett to discuss our Q1 financial results and our Q2 guidance in more detail.

Speaker 3

Thanks, Doctor. Lu, and good afternoon, everyone. Revenue for the Q1 2023 was $467,200,000 decreasing 3.1 percent from $482,100,000 in the Q1 2022 and down 5.8 percent from $496,200,000 in the Q4 of 2022. Gross profit for the Q1 was $194,500,000 or 41.6 percent of revenue compared to $196,700,000 or 40.8 percent of revenue in the prior year quarter and $206,200,000 or 41.6 percent of revenue in the prior quarter. GAAP operating expenses for the Q1 were $108,000,000 or 23.1 percent of revenue and on a non GAAP basis were $101,300,000 or 21.7 percent of revenue, which excludes $3,900,000 of amortization of acquisition related intangible asset expenses and $2,800,000 related to officer retirement.

Speaker 3

This compares to GAAP operating expenses in the Q1 2022 of $103,600,000 or 21.5 percent of revenue and in the Q4 or 22.1 percent of revenue. Non GAAP operating expenses in the prior quarter were $105,900,000 or 21.3 percent of revenue. Total other income amounted to approximately $2,200,000 for the quarter, Consisting of a $3,900,000 unrealized gain on investments, dollars 1,800,000 of interest income, $530,000 of other income, partially offset by $2,100,000 in interest expense and a $1,900,000 foreign currency loss. Income before taxes and non controlling interest in the Q1 2023 was $88,600,000 compared to $90,800,000 in the prior year quarter $94,800,000 in the previous quarter. Turning to income taxes.

Speaker 3

Our effective income tax rate for the Q1 was approximately 18.8%. GAAP net income for the Q1 of 2023 was $71,200,000 or $1.54 per diluted share compared to $72,700,000 or $1.59 per diluted share in the Q1 of 2022 and $92,100,000 or $2 per diluted share in the Q4 of 2022. The share count used to compute GAAP diluted EPS for the Q1 of 2023 was 46,200,000 shares. Non GAAP adjusted net income in the Q1 was $73,400,000 or $1.59 per diluted share, which excluded net of tax $3,100,000 of acquisition related intangible asset costs, dollars 2,300,000 in officer retirement expenses and a $3,100,000 gain related to an LSC investment. This compares to 80,300,000 or $1.75 per diluted share in the Q1 2022 and 79 point Non cash share based compensation expense of $7,700,000 net of tax for the Q1, both GAAP Earnings per share and non GAAP adjusted EPS would have increased by $0.17 per diluted share.

Speaker 3

EBITDA for the Q1 was $121,800,000 or 26.1 percent of revenue compared to $118,100,000 or 24.5 percent of revenue in the Q1 of 2022

Speaker 2

and $129,600,000

Speaker 3

or 26.1 percent of revenue in the prior quarter. 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 $99,800,000 for the Q1. Free cash flow was $51,800,000 which included $48,000,000 for capital expenditures. Net cash flow was a negative $15,200,000 including the pay down of $60,800,000 in total debt.

Speaker 3

Turning to the balance sheet. At the end of 1st quarter, cash, Cash equivalents, restricted cash plus short term investments totaled approximately $335,000,000 Working capital was $731,000,000 and total debt including long term and short term was $125,000,000 In terms of inventory at the end of Q1, total inventory days were approximately 116 compared to 117 last quarter. Finished goods inventory days were 31 compared to 33 last quarter. Total inventory dollars decreased $18,300,000 from the prior quarter to approximately $341,900,000 total inventory in the quarter consisted of a 13 point $7,000,000 decrease in raw materials, a $3,100,000 decrease in finished goods and a 1 point Capital expenditures on a cash basis were $48,000,000 for the Q1 or 10.3 percent of revenue. 1st quarter CapEx was higher than our target model due to the strategic expansion of our JK wafer fab in Hsinchu Science Park in Taiwan.

Speaker 3

Without this investment, we would have been within our target model of 5% to 9% and we expect to be in that range for the full year 2023. Now turning to our outlook. For the Q2 2023, we expect revenue to be approximately $467,000,000 plus or minus 3 percent. With a slower than expected recovery in the consumer, Computing and Communications markets. We are guiding flat sequentially at the midpoint to reduce 3C channel inventory.

Speaker 3

The automotive and industrial markets are expected to remain strong. We also expect continued driving our strategy of improved Product mix and are guiding GAAP gross margin to be a record 41.8%, 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 22% of revenue, plus or minus 1%. We expect net interest expense to be approximately $1,000,000 Our income tax rate is expected to be 20% plus or minus 3% As shares used to calculate EPS for the Q2 are anticipated to be approximately 46,500,000 Not included in these non GAAP estimates is amortization of $3,100,000 after tax for previous acquisitions. With that said, I will now turn the call over to Emily Yang.

Speaker 4

Thank you, Brett, and good In the Q1, revenue decreased 5.8% quarter over quarter due to typical seasonality related to the Chinese New Year holiday, combined with the slowdown in the 3C markets. Looking more closely at the Q1 revenue, POS was a record in Europe. Distributor inventory in terms of weeks increased sequentially and is higher than our defined normal range of 11 to 14 weeks. This increase is mainly due to slower than expected recovery in China and in the 3C market segment. The good news is that we started to see signs of recovery in the computing and consumer markets.

Speaker 4

Our plan is to decrease some channel inventory in second quarter, which is reflected in our guidance. We believe our channel inventory position us strategically for the expectation of our continuous recovery so that we can address dynamic demand and fast term business. Automotive Industrial Markets M and R are expected to remain strong in the Q2. Looking at the global sales in the Q1, Asia represented 68% of revenue, Europe 17% and North America 15%. In terms of our end markets, industrial was a record 29% of Diodes' product revenue.

Speaker 4

Automotive was also a record at 18%, computing 22% consumer 18% and communication 13 percent of product revenue. Our automotive industrial end markets combined reached a record 47% of the product revenue, which is the 5th consecutive quarter above 40% and is 7 percentage points above our 2025 target. This achievement underscore the ongoing success of our contract expansion strategy and market share gain. Now let me review the end market in greater detail. Starting with our automotive end market.

Speaker 4

As I mentioned, Revenue reached a record 18% of product revenue and represented a growth of 33% year over year. In our first focus area of connected driving are PCI Express 3.0 packet switches, PCI Express clock generators, Call buffers, crystal oscillators, USB switches, USB power delivery controllers, voltage level shifters and IO expanders are being designed into ADAS, infotainment, telematics, domain control unit and electric control unit applications. We're also seeing strong demand for DC DC buck converters, LDOs, ideal diode controllers, bipolar transistors and TVS product in the same end application. In the comfort style and safety, we continue to gain traction Our solution selling approach is a key driver to this momentum. Additionally, we have been winning designs for our power delivery solution That includes power delivery protocol decoder along with our USB boxes, re drivers and TVS for the in vehicle USB charging devices.

Speaker 4

We're also seeing an increasing number of design wins in wireless chargers, fan, blower, thermal management system with our current monitor products, Regulator Transistors and SVR products and our linear LED drivers, ideal diode controllers, bipolar junction transistors And LDOs are being designed in several stoplight, taillight, headlight and cluster lighting systems. In the powertrain, which covers conventional hybrid electric vehicles, our switching diode product helps support conventional applications such as drivetrain electronics And towing, tolling and the cargo management system. SBR and Intellify products are also seeing traction in battery management system and in protection control application for battery electric vehicles as well as plug in hybrid electric vehicles. We also recently introduced a number of new automotive compliance, SVR, Intellisat MOSFET and NPN transistors that has been designed into battery management system. In the Q1, we introduced 68 new automotive compliant products.

Speaker 4

This is a good demonstration of our focus on various automotive applications and product mix improvement. In our industrial market, revenue grew 7% year over year to also reach a record percentage of total product revenue at 29%. Our buck converters, LDOs and sensors continue to see strong demand for applications such as DC fans, power tools, power supplies, Circuit breakers, e meters, embedded systems and precision control systems. Additionally, our newly released industrial latch switches are gaining traction from low voltage to high voltage applications required in the harsh environment. Our SBR product also being widely used in power over Ethernet and embedded applications, while our 36 channel linear LED drivers are being adopted in the robotic application.

Speaker 4

Our gate driver ICs have 1 new sockets in power supply units for surface And energy storage as well as in lighting for the digital addressable lighting interface control boards. Our high performance transistors And high voltage switching diodes have also won desizing solar inverters for green residential energy generation and transmission systems. Additionally, we're gaining increased traction for our switching diodes and functional array products that are utilized in numerous control system for applications, Including HVAC controls, LED lightings, digital printing press machines, printed circuit boards, assembly test systems and imaging circuits for medical and aviation security systems. Early in the Q1, we were pleased to release our first set of at 1200. We also released our 1st silicon carbide MOSFET to address the demand for high efficiency and High power density applications such as industrial motor drivers, solar inverters, data center and telecom power supplies, DC DC converters as well as electric vehicle battery chargers.

Speaker 4

Despite the softness in global computing market, Our design in momentum continues across our portfolio of products. This includes wins for our USB Type C charging detectors, high speed switches, ReDrivers, retimers, MOSFET, SBR and TVS product in the broad applications, including servers, desktops, Notebooks, graphic cards, add in cards and USB data line protection. New design win activities continue for our contact image sensors In multifunction printers and we saw adoption of HDMI 2.0, 12 gigabit per second vDrivers, EMMC Muxes in gaming consoles as well as 8.0 and 10 gigabits per second bidirectional retimers in active Cable, docking and dongle applications. In the communication market, we continue to win new designs in five applications for audio switches, IO expanders, USB switches, high PSRR LDOs and Shopee products. Additionally, our small signal diode product gained traction in the rapid growing field of industrial communication system and cybersecurity, while bipolar transistor gained new design wins in IP cameras, GPOM and router applications.

Speaker 4

Lastly, in the consumer market, we've been securing new design wins for USB switches, MOSFETs, current limit power switches, LED driver, piezo sounder drivers, USB power delivery SIM controllers, switching diodes and TVS product In the tracker applications, displays, wearable, personal care, healthcare devices and the health and safety monitor system as well as Inspire and Carbon Monoxide Sensors. In summary, Diodes' performance this quarter highlights The progress we have made increasing our content and market share gain in automotive industrial markets contributing to our overall product mix improvement. Our total solution sales approach and operating efficiency have been a key factor to our success as we continue to drive growth and sustainable margin performance. With that, we now open the floor to questions. Operator?

Operator

Our first question today comes from Matt Ramsay from Cowen. Please go ahead with your question.

Speaker 5

Yes. Thank you very much. Good afternoon, everybody. I think for the team, my first question, And obviously, there's a lot of moving parts here in the macro environment and great to hear about the Auto and Industrial strength and the momentum the business has there. But I guess I'm trying to get a gauge on how you guys are seeing The potential recovery in China, I mean, it's anybody's guess as to when that happens.

Speaker 5

But is a return to Year over year growth for your company sort of predicated on a recovery on sell in into a lot of these consumer markets in Asia? Or How do we think about that relative to the design win momentum and the content growth that you're seeing across the business? I'm just trying to gauge sort of expectations for the next Few quarters and the levers macro wise versus sort of secular content wise for your company. Thanks.

Speaker 4

Yes. Hi, Mayesh. This is Emily. Let me address your questions first. I think overall, like I mentioned earlier, right, we do start to see some recovery in the In the computing as well as communication area and also consumer.

Speaker 4

It's very, I would say, So lower than our expectation, but the good news is we started seeing signs of recovery. I mean, usually For Q3, it is the peak of all these market segments. So that's also part of our assumption as well.

Speaker 5

Got it. No, thank you, Emily. Thank you for that very much. As my follow-up question, I think Some of the longer term financial model metrics that you guys have shared are a bit older now and the company has done much, You've done much, much better than some of those metrics. And one of them is around getting the business mix to be 40% or more of revenue coming from auto industrial and you far passed that I think we're at 46%, 47% of the business You just put up a really, really strong gross margin quarter and then guided up sequentially.

Speaker 5

I'm just trying to figure out if The team thinks about this mix of business and this margin profile in sort of the 41%, 42% range. Is that Sort of the new way that we should be thinking about the business or if in fact the 3 Seas market come back at some point in the mix That the margin would move up or down with that, but great margins. I'm just trying to figure out if this is sort of the level we should think about for the foreseeable future. Thank you.

Speaker 2

Okay. Let me just answer number 1, the overall market situation, okay. We See some recovery on the 3C market, but industrial and automotive Still very strong. And therefore, we're hoping The second half of this year after the channel inventory Or as you said, our customer as building up And their inventory of the 3C product start to decrease, then The second half, the business should be come back stronger. That is In general, for this year, I believe first half versus second half could be More than fifty-fifty, it should be probably somewhere much higher Yes.

Speaker 2

In the second quarter second half, then first half. Okay, that's this year. Then after that, Now next year, we should we'll be a typical Growth year for the semiconductor business, because if you look at semiconductor business traditionally, When you go down, it probably won't go down more than 2 years. And since this down is already Start at second half of last year. So I think by end of this year will be 1.5 year, then I think next year, 2,004 should be a Growth year for the semiconductor total business point of view.

Speaker 4

Right. So let me maybe add One more comment related to the margin improvement that you just mentioned. So product mix improvement has been a big initiative for Diodes For the last few years, right? And we definitely would continue to focus and the Total solution sales approach as well as manufacturing efficiency. With combined Of all these 3, we are confident that we'll continue to drive the margin overall improvement.

Speaker 4

And if you look at the Q1 result, Auto plus Industrial, 47 total of our product revenue is a good demonstration of this result And as well as our guidance for Q2, 41.8%. So I think the focus will now change for the company and that will continue to be the direction. If we continue to execute all this initiative and focus, we believe the margin improvement will continue.

Speaker 2

Yes. First off, when you're talking about when the 3C market coming back up, We're able to sustain the gross margin improvement. And my answer is yes, because even The 2 things, the growth the automotive and industrial continue will grow, Okay. And so they are in the much better March. And even the consumer or 3C Mark, you come back.

Speaker 2

I think Emily mentioned about we are getting away from the commodity Multi type of product. So we are carefully to grow our 3C market more Concentrate on the high end PC, data center, IoT And the 5 gs type of communication product. Therefore, if you look at, we Intentionally get away from the commodity or deep commodity product and Compete the price competition and we grow in the area we do have we believe we have Differentiation, we have premium sales staff. So That is the way we have been able to continue to improve our gross margin In addition to operational accident, okay, so we are not that focused on The door in and the manufacturing door in to get us to the gross margin. We are more focused on

Speaker 5

Thank you very much for all the color, Doctor. Lu, Emily. I really do appreciate it. I'll jump back in the queue. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 6

Good afternoon, everybody. Thanks for taking my question. The comments by Doctor. Lu that the second half of the year should be better than the first half, I guess indicates that you're going to expect a normal seasonal uptick in the September quarter, correct me if I'm wrong there. And I wanted to Get my arms around the impact on the reduction in distribution inventory with the understanding that Presumably, you're above the normal 11 to 14 weeks and each week of distribution inventory is worth what, dollars 22,000,000 in revenue.

Speaker 6

So how many weeks of distribution inventory digestion or reduction are we talking about here that is influencing the sub seasonal guide for the June quarter?

Speaker 4

So Gary, let me answer that question. So we don't really disclose the detail about the number of weeks, but in my Speed, I did mention, is higher than our 11 to 14 weeks range that we define as normal. So Our goal is actually expect the POS channel would grow in 2nd quarter. And at the same time, We want to deplete some of the channel inventory. So we do believe the number of weeks will come down.

Speaker 4

So that's based on what we see based on the market And the information we have so far.

Speaker 2

Yes. And it is very difficult to just look at Overall inventory, okay. Our overall channel inventory weak, okay, because we The automotive industrial, they're still very strong. The channel inventory build up It's really due to the 3C business, which most is in Asia, okay? And We already see the sign and we guide flat on this quarter It's really intentionally to reduce the 3C channel inventory.

Speaker 2

We still Looking very strong on automotive industrial and that's the area we do not want to Reduce the channel inventory. But the 3C, that's the area we especially, I always said Those commodity to commodity, we don't want to compete And therefore, we intentionally want to decrease that area of the channel inventory.

Speaker 6

Thank you for that. My follow-up, I'd like to ask about your operations in China. During COVID, you were Operating for so many years in a closed loop environment, can you give us an update on whether that's still the case? And if not, whether there Any anticipated or already realized cost benefit from that?

Operator

No, Ashley, Gary, this is Gary. And the operation in our China, no matter the fab or simply are normal right now, Okay. So that's why we will say, okay, the operation for China we want to drive is the cost reduction and more operational excellency. Okay. So there's no any special lockdown or closed loop operation at this moment.

Operator

Our next question comes from David Williams from Benchmark.

Speaker 7

Please go

Operator

ahead with your question.

Speaker 8

Hey, thanks so much and congrats on the execution and navigating this challenging backdrop. Guess one of my questions is, if you kind of think about the margin and you touched on this a bit earlier, But I guess I'm kind of curious how you think about that. If we saw automotive come down a bit, or maybe back off and you start to see 3Cs really improving. What would you expect to see from the margin impact? Do you think you'd see a significant or would that be moderate?

Speaker 8

And can you what leverage have there, I guess, to control that margin profile in an automotive environment that's maybe a little

Speaker 6

less strong?

Speaker 4

Yes. So with the automotive, we actually Still seeing pretty strong momentum in general, right? There is a little bit inventory adjustment, but if we look Overall growth, right? We actually have a record percentage of 18% at the end of Q1. That actually represented 33% year over year growth.

Speaker 4

So we continue to gain market share. So we're pretty confident with the pipeline that we have in place with all the With the 3 Cs, I think Doctor. Lu mentioned a little bit earlier, We really focus on the premium portion within the 3 Cs, right? We're definitely not chasing the deep commodity or commodity The business, we're really focusing on the higher end of the applications, the servers, the storage, the data center, whether it's 5 gs Or Yifeng with the consumer, we really focus more on the IoT block, the power block or the timing block. So with this focus And continue to drive the product mix improvement, we're actually confident that we'll continue to drive the improvement

Speaker 2

One more thing I want to add is because people start thinking Automotive business is very hard, but it's going to be slowed down. And are you able to continue maintain You will grow. And my answer is, since 2013, that is almost 10 years ago, We established automotive business focused. We still see aGR 30% a year of the growth. So we are not really counting on The market growth, we coming on additional to the market growth, we coming on the fact that Data value for each module and that is what our focus in the automotive business It's a module, data module grow.

Speaker 2

And because of that, we are able Do much better than automotive business growth. And therefore, I believe we will still continue increase our automotive revenue as a percent of Thio total business. Okay. You always Henry always say 18% in 1Q And you go back 2013, 3%. Okay.

Speaker 2

So that is How do we driving the automotive business is not just coming on volume growth.

Speaker 8

Okay. Excellent color. Thank you for that. And then maybe secondly, just Diodes has outperformed over the last several quarters, but Even and maybe even more so over the last couple of quarters relative to peers, what do you think has given you the improved Inventory dynamics, we're not seeing the same magnitude of digestion that we've heard from others. Is it more of the managing of the channel?

Speaker 8

Or is it just growth that you're still seeing, any color there around why you're outperforming the market would be very helpful, I think. Thank you.

Speaker 4

Well, I think, Doctor. Lu kind of mentioned Earlier, right? So each of the market segments, we actually focus really more on the compact expansion, right? So that's really the key, especially in the automotive area. I also think the total solution sales approach help us to really sell the value Including the product mix improvement initiatives, right?

Speaker 4

So, of course, manufacturing efficiency has always a sweet spot for us overall. So when you combine all this focus and initiatives and the direction overall, I think that's actually a good demonstration of the That we delivered to you so far, right? And then with the Q2 guidance on the 41.8% margin, I think that again is a different way

Speaker 9

of demonstrating our

Speaker 2

confidence of the

Speaker 4

overall margin dollar or Our confidence of the overall margin dollar or margin percentage improvement.

Speaker 2

Yes. Even The revenue is flat. It tell us we our margin is not just pure coming from The loading coming from the utilization, our coming is a big portion is Product mix, which is what we are focused on, okay. And another one is the new product in this. Okay.

Speaker 2

We do and Emily already mentioned just for automotive, we announced 68 Yes. New product in 1Q. So you can see we're driving a lot of focus On new product in listing, we even measure the revenue generated by the new product And that is the one we believe we can continue improve our gross margin.

Operator

Our next question comes from Tristan Gerra from Baird. Please go ahead with your question. Hi, thank you.

Speaker 9

Maybe a little tweak on Gary's question earlier on this call. Is it fair to assume that without the reduction of inventories in the channel that you're implementing in Q2, there's maybe a 3 Impact on revenue, if I look at kind of normal seasonality, your top line normally will be up about 3% sequentially. Is that in the ballpark? And do you expect that inventory reduction dynamic to It'd be a 1 quarter issue or do you expect this to linger into Q3? And finally, what's the delta with The over shipping that you previously expected into this piece in Q2 in anticipation of a China recovery?

Speaker 4

Well, I think Tristan, we did mention the good news is We started seeing some of the signs, right, in especially in computing and consumer markets. So that's the good news. We also mentioned that Slower than expected recovery in China and also the 3C market segment kind of causing the channel inventory higher than our expectation, Right. So we definitely plan to deplete some channel inventory in the Q2, but unfortunately, we don't Really provide guidance, how many weeks or anything like that, but we're confident that with the guidance that you see a flat with the Expectation of improvement in the POS in the second quarter, you will see the channel inventory start depleting some. So that's pretty much what we can share at this moment.

Speaker 9

Okay. And then from a capacity stand Notably last year. Do you think that your peers are still supply constrained? Obviously, I can ask them the question, but just interested in your view on the whole industry supply Demand dynamic and whether you think that at some point we get in the supply demand equilibrium in analog and What does that mean for you guys in terms of capacity management, particularly if end demand trends were to weaken further?

Speaker 2

Okay. Tristan, when you're talking about capacity, we do have enough capacity if Want to grow?

Operator

Yes.

Speaker 2

Okay. And the key thing's capacity It's really cannot just say, oh, I can use it for anything. Okay. Automotive capacity versus Consumer capacity sometimes is the same, but most of the time is different. Then you need to spend effort to convert and from strategic point of view, We already decided we are getting away from commodity or deep commodity 3C type of product, then we graduate When we need it, we convert our capacity from 3C for Industrial and Automotive, okay.

Speaker 2

And so I'm looking at The market, look at the demand and we will spend the money and gradually Convert to the need, okay. We will not just get the capacity sitting there idle waiting for The 3C business come back. We intentionally convert to support long term strategy, Higher gross margin business and our focus business, which is automotive and Industrial. And now let's say 3 d, we are 3 d area. We are focused on then we will And we try to get away from the competition very strong, especially The China supplier, we are getting away from that.

Speaker 2

So you can continue to see Our gross margin will continue to improve even the 3C business come back.

Speaker 4

Yes. I think from the supply point of view, not everything is at this moment. All in all, I think it's still a little bit There's still a lot of pockets of shortage versus we mentioned deep commodities, there's more supplies, right, which is not Focus and area that we're chasing after. So I would say not everything equal at this moment, still pretty dynamic.

Speaker 9

Great. Thank you very much.

Operator

Our next question comes from William Stein from Truist Securities. Please go ahead with your question.

Speaker 7

Great. Thank you. I had a question about your inventory management. You've done certainly very well on your own balance sheet, but you've taken it seems to be a different approach from what many others have taken in this regard. What we've seen in most of semis in the last couple of quarters is pretty significant balance sheet inventory builds And real restraint at shipping anything into the channel.

Speaker 7

And Diode seems to have done I don't know if it's exactly the opposite, but You've managed on balance sheet very conservatively, but you've built in the channel. Certainly, I recall last quarter that was a change and I think this quarter it sounds like you built a little bit again. I'm sure there's a great reason for this approach, but I'm hoping you can explain it to us a

Speaker 9

little bit. Thank you.

Speaker 4

Yes. So I think last quarter we mentioned the reason we start building more channel inventory is the expectation Of the China recovery, also the expectation of the 3C market segment recovery. I think we Estimated the recovery speed, so that's actually what we start seeing channel inventory getting increased a little this quarter as well. That's also the reason we strategically decided to really deplete some of the channel inventory in the Q2. We still believe The channel inventory position overall for Diodes is actually in a very good position.

Speaker 4

We do actually have the good product on the shelf and we So believe the recovery is going to happen. It just matters the speed. So once the recovery happens, we are confident that the channel We'll be depleted and also keep in mind the market is still really dynamic. We believe having the right product on the shelf is actually positioned us better To support the dynamic demand as well as the fast term business, right?

Speaker 2

Yes. But in addition, What Emily talking about, we actually intentionally to doing that, right? And I think One of the reasons I look at it, okay, is we want to maintain our operation very smoothly Because if you are way under loaded your cost, your gross margin going to be get hit Quite a bit. But if you build it and then build another inventory, Internal inventory, then again, your cost, inventory cost It's a day of 2. And therefore, our best way is building Consistently, you don't get the revenue up, down so much.

Speaker 2

You get your manufacturing smoothly produce intentionally the number And you get your gross margin?

Speaker 9

What?

Speaker 2

Okay. Because you don't want to be they are the people. You don't want to be spend so much time over time and you don't want to have depreciation It's in your gross margin. Therefore, we carefully Manage the operation. That's why I keep to say operation exceeded our execution Because that way, we have a very smooth margin or very smooth Remini, don't get up and down so much.

Speaker 2

At the same time, we are able to maintain Our gross margin, the 4th quarter above 41%. And even this quarter, we guide We have manufacturing, but we still have the record gross margin. Okay. So this is really Excellent operational control to make it output The door in very smoothly such that you had the best cost reduction Balance the cost from the manufacturing of our cost to the inventory cost. You try to balance that cost to get the best gross margin.

Speaker 2

And we continue to do that.

Speaker 7

Yes. Both of those were very helpful in clarifying. I appreciate it. If I could follow-up with 1, I think There have been a few questions about this. I just want to make sure I understand what's going on.

Speaker 7

Historically, I think we've sort of been, trained to think about 2 major drivers of the margin well, maybe 3 drivers of the margin improvement. Operational excellence, I'll Knowledge is one of them, but I think the 2 that we've been more focused on is end market mix, shifting more towards industrial and automotive And then product mix, which is a lot harder for us to measure, but we know that you're leaning into more unique specialized Higher end, however you want to describe it, products and less in what Emily calls deep commodity. It sounds like on this call what you're Trying to communicate is that the end market mix will matter less going forward because operational excellence Continues and there's more room to go and perhaps the product mix is maybe a bigger driver. Am I over interpreting what you're saying or is that

Speaker 2

Yes, you are over interpret. I'm trying to explain is The last 4 quarters, plus the 2nd quarter this year guidance, you can see it go through Up and down in the revenue, but we are able to maintain Very steady and even a record of the gross margin. And so that It's coming from product mix and operational excellency. It's coming both. So when the revenue go down, we have maintained.

Speaker 2

That is probably product mix Give us, okay. But when we have the beta loading, which is going up and like we say now, okay, I assume when 3C started going up, we are able to continue Maintain or improve, then it's coming from operation. And so I think What we want to do is focus on how to continue Improve the gross margin regardless of the market up and down. And we proved we can do that due to start we already know the first two quarters of last year, which is good, very good. Then second half of last year, which has started to slow down.

Speaker 2

Even this year, Q1 In Q2, this is a slowdown, but we are able to continue maintain the gross margin even setting I read you Rick. It tells us that's the right thing for us to do. And that's what we are doing.

Speaker 5

Thank you.

Operator

And ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor 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.

Operator

Ladies and gentlemen, with that, we'll conclude today's conference We thank you for joining today's call and presentation. Please have a great

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Earnings Conference Call
Diodes Q1 2023
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