Diodes Inc /Del/ Q1 FY2021 Earnings Call

Good afternoon and welcome to Diodes Inc. First Quarter 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, Thursday May 6th, 2021. I would now like to turn the call over to Leanne Sievers of Shelton Group, Investor Relations. Leanne, please go ahead.

Good afternoon and welcome to Diodes' first quarter 2021 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, Dr. Keh-Shew Lu; Chief Financial Officer, Brett Whitmire; Senior Vice President of Worldwide Sales and Marketing, Emily Yang; Senior Vice President of Business Groups, Gary Yu; and Director of Investor Relations, Laura Mehrl. Before I turn the call over to Dr. 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. As such these results are unaudited and subject to revision until the company files its Form 10-Q for its first quarter 2021 ending March 31st, 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 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-K and 10-Q. In addition, any projections as to the company's future performance represent management's estimates as of today, May 6th, 2021. 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 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 statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income. 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 Dr. Keh-Shew Lu. Dr. Lu please go ahead.

Thank you, Leanne. Welcome everyone and thank you for joining us today. Revenue in the first quarter set a new record both organically and on a consolidated basis, increasing 18% sequentially and exceeding the high-end of our guidance range in what has historically been a seasonally down quarter for our business. Our growth was driven by record total POS revenue as a result of record in both Asia and Europe combined with strong growth in North America. We also achieved a record in our computing end market driven by record telecom product revenue and the automotive market due to strong organic growth in Diodes' automotive business. Combined with our expense management and operating efficiencies we delivered the highest quarter of adjusted earnings per share which increased 25% sequentially. The integration of LSC is also progressing well and ahead of schedule as we have already begun to harvest the benefit of manufacturing synergies from improving factory loading with both LSC's and Diodes' products. In fact, loading at the LSC facility has reached 70% in the quarter versus our original target of 50%, resulting in operational breakeven at this facility two quarters ahead of plan. Overall, our global manufacturing footprint is serving as a key advantage at a time when the broader semiconductor industry is challenged by supply and capacity constraints. We have both internal and external capacity needed to support the increasing demand we are seeing for our products. As a result, we expect to deliver another quarter of sequential growth in the second quarter coupled with a continued expansion in bottom-line profitability. With that let me now turn the call over to Brett to discuss our first quarter financial results and our second quarter 2021 guidance in more detail.

Thanks Dr. Lu 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 would 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 first quarter 2021 was a record $413.1 million which included the first full quarter of revenue from LSC, an increase of 17.9% from the $350.4 million in fourth quarter 2020. Gross profit for the first quarter was also a record at $138.6 million or 33.6% of revenue on a consolidated basis and 36.3% for Diodes only. This compares to $122.7 million or 35% of revenue in the fourth quarter 2020. GAAP operating expenses for the first quarter 2021 were $91.2 million or 22.1% of revenue and on a non-GAAP basis were $86.4 million or 20.9% of revenue which excludes $4 million of amortization of acquisition-related intangible asset expenses and $0.8 million of restructuring costs. This compares to non-GAAP operating expenses in the prior quarter of $75 million or 21.4% of revenue. Total other income amounted to approximately $2.6 million for the quarter, including $6 million of other income and $768,000 of interest income, partially offset by $2.9 million in interest expense and $1.3 million in foreign currency loss. Income before taxes and non-controlling interest in the first quarter 2021 was $50 million, compared to $36.1 million in the previous quarter. Turning to income taxes. Our effective income tax rate for the first quarter was approximately 18.9%. GAAP net income for the first quarter 2021 was $39.5 million or $0.87 per diluted share, compared to GAAP net income of $29.7 million or $0.59 per diluted share in the fourth quarter 2020. The share count used to compute GAAP diluted EPS for the first quarter 2021 was 45.2 million shares, which reflects a reduction in the weighted average share count due to the repurchase of approximately 7.8 million Diodes shares from LSC as part of the acquisition. Non-GAAP adjusted net income in the first quarter was $42 million or $0.93 per diluted share, which excluded net of tax $3.3 million of acquisition-related intangible asset costs, $1.5 million of acquisition-related costs, $0.7 million in restructuring costs and a $2.9 million gain in value of certain LSC investments. Non-GAAP adjusted net income in the fourth quarter 2020 was $37.3 million, or $0.74 per diluted share. Included in first quarter 2021, GAAP net income and non-GAAP adjusted net income was approximately $4.8 million net of tax of non-cash share-based compensation expense. Excluding share-based compensation expense, both GAAP earnings per share and non-GAAP adjusted EPS would have increased by $0.11 per diluted share for first quarter 2021 and $0.10 for the fourth quarter 2020. EBITDA for the first quarter was $81.7 million or 19.8% of revenue compared to $67.1 million or 19.1% 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 $68.2 million for the first quarter 2021. Free cash flow was $51 million for the first quarter, which included $17.2 million for capital expenditures. Net cash flow in the first quarter was a positive $10.6 million, which included a paydown of $37.4 million of long-term debt. Turning to the balance sheet. At the end of first quarter, cash, cash equivalents, restricted cash plus short-term investments totaled approximately $339 million. Working capital was $618 million and total debt including long-term and short term was $415 million. In terms of inventory, at the end of first quarter, total inventory days decreased to approximately 98 in the quarter on a consolidated basis, as compared to 115 last quarter. Finished goods inventory days also decreased to 27 from 31 in the fourth quarter 2020. Total inventory dollars decreased $17.1 million to approximately $290 million. Total inventory in the quarter consisted of an $18.2 million decrease in raw materials, a $3.5 million decrease in finished goods and a $4.6 million increase in work in process. Capital expenditures on a cash basis for the first quarter 2021 were $17.2 million or 4.2% of revenue. We expect to remain within our target model of 5% to 9% for the full year. Now, turning to our outlook. For the second quarter of 2021, we expect revenue to increase to approximately $434 million plus or minus 3%, which represents a record on both an organic and a consolidated basis for a combined increase of 5% sequentially at the midpoint. We expect GAAP gross margin on a consolidated basis to be 35.6% 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 20.5% of revenue plus or minus 1%. We expect net interest expense to be approximately $1.6 million. Our income tax rate is expected to be 19% plus or minus 3% and shares used to calculate diluted EPS for the second quarter are anticipated to be approximately 45.7 million. Please note that purchasing accounting adjustments of $3.3 million after-tax for Pericom and previous acquisitions is not included in these non-GAAP estimates. With that said, I will now turn the call over to Emily Yang.

Thank you, Brett and good afternoon. The 17.9% sequential increase in the first quarter revenue was better than the high end of our guidance, driven by the record direct revenue increased more than 30% and record POS revenue up more than 10% led by POS records in Asia and Europe combined with strong growth in North America. Distributor inventory in terms of weeks decreased quarter-over-quarter and below our defined normal range of 11 to 14 weeks. Looking at the global sales in the first quarter. Asia represented 81% of the revenue; Europe 12%; and North America 7%. In terms of our end markets, computing represented 30% of the revenue; industrial 22%; consumer 19%; communication 17%; and automotive 12% of revenue. We achieved record revenue in the automotive end market, which was strong across all regions and the computing market, driven by record Pericom revenue. Now let me review the end market in greater detail. Starting with our automotive market. Our record revenue achieved in the quarter reflects an 18% sequential increase and 61% year-over-year increase to 12% of total revenue. This growth was driven by strong organic growth for Diodes' automotive products with minimal contribution from LSC, since this product has low exposure to this market. We also continue to gain traction with our expanded automotive portfolio of Pericom products, as we secured several new design-ins for our interface and frequency control product in the automotive applications, ranging from ADAS, infotainment, telematics, and dashboard systems. During the quarter we introduced several new automotive-grade products including USB switches, IO expanders, and 14 new frequency control products for the in-vehicle infotainment system, connected driving, lighting, and body control applications. We also introduced a 2-wire automotive LED hall sensor and over 20 DC-to-DC products with design-ins and design wins and multiple customers in the infotainment power supplies, lighting, instrument clusters, telematics, and ADAS applications. We also secured additional design wins for gate drivers, LED drivers, and voltage regulators with major car manufacturers in applications like wireless charging, lighting, and DC-DC for electric vehicles. Also during the quarter, we saw very strong demand for our protection devices in automotive fusible links, HDMI, LVDS, and data line protection. Higher voltage battery systems drove up the demand for our MOSFET product. We also released two new MOSFET in the tall package to help address the power efficiency demand. We also released three-channel linear LED drivers, seven new SBR products, and five-volt bipolar transistor automotive products during the quarter. SBR SKY product was designed in by a number of customers in the EV battery management system, car headlight, display, onboard computer, and portable power bank applications. In our industrial market, we also achieved very healthy revenue growth of 13% sequentially and 25% over the prior year. Similar to the automotive market revenue contribution from LSC is very minimal which highlights the strong growth and momentum Diodes has continued to achieve in the industrial market. During the quarter, we saw increasing demand for our wide range LDO product family for applications such as power tools, e-meters, IoT, and other industrial applications. We have also seen an increasing number of design-ins for linear voltage regulators in DC fans to support applications such as mining machines, communication, MCUs, and IT systems. Additionally, we saw more design-ins for SBR and Trench Schottky in applications like industrial routers, lighting, and heavy machinery. Diodes' MOSFET product continued to gain market share in lots of DC inverter applications and our success with LED driver chipset continues with new design-ins for commercial lighting projects. We also released our 8-port/8-Lane PCI Express 3.0 packet switch which is designed to meet the need of the industrial PC market to improve signal reliability and increase bandwidth performance. In the consumer market, we saw strong demand for our piezo sound driver due to tracker market growth. We also continue to expand our business for USB power delivery decoder in OEM-ODM quick charger applications. TV and monitor design wins also continue to represent a large opportunity for our BJT products and we have very good design win activities for very small transistors into robotic vacuum cleaners and doorbells. In addition, we continue to build traction for our products in IoT, smart home, and entertainment applications. For the communication market, we saw traction from several Schottky and SBR products in the satellite radio, 5G routers, access point routers, and power over Ethernet switches. Demand for our Pericom products remains strong as high-speed data processing drove the ramping of 200, 400, 800 gig connections. Pericom frequency control products, ultra-low jitter, small size crystal oscillator family have several design-ins into optical modules. We also released more than 11 new devices in frequency control product family for communication applications. Also during the quarter, our high PSRR LDO product family and omnipolar hall sensors continue to achieve design wins and design-ins in smartphones. Our low saturated high-voltage transistors are being designed into routers, IP cams, and optical network applications. Lastly in the computing market, revenue increased 54% quarter-over-quarter and 160% year-over-year to a quarterly record, primarily driven by record Pericom revenue combined with initial revenue contribution from LSC products. New design-in activity continues in the PC segment along with increased demand for our existing Pericom products driven by the growth across all platforms including consumer education and commercial PCs. In the quarter, we released three 1.8 volt ReDrivers surface to USB Type-C and display port for PCs and two additional HDMI gate drivers for high-speed media applications. Continuous demand for high-resolution displays propelled our HDMI DP redriver product to other unit volume peak. New USB power switch products for USB-A and USB-C ports achieved solid growth driven by strong market demand for notebooks. Our design-in momentum continues with unipolar hall sensor ESD total solutions for USB Type-C/LED driver and the Schottky product in the notebook, tablet, and storage application. Also during the quarter in the computing market, we released close to 100 new power TVS high search data line protection and power stage products for power line and new bus protection for notebooks, mobile phones, panels, and charger applications. In summary, we are very pleased with our strong start to the new year led by above seasonal growth resulting in record first quarter revenue. Additionally, record POS as well as low channel and internal inventory indicate a strong second quarter with continued growth and profitability.

Our first question comes from Matt Ramsay from Cowen. Please proceed with your question.

Thank you very much, good afternoon everybody. Impressive results for sure. Dr. Lu I wonder if you might give us a bit of a more detailed status upgrade of the integration on the operations side with LSC? You I think mentioned in your brief prepared comments that you're now at 70% utilization in those facilities. It's certainly a good environment to have extra capacity given the tightness in the industry. So, if you could give us a little bit of an update there and how you see that utilization rate of those facilities trending in the next couple of quarters? Thanks.

Yes. Let me get Gary. He is in charge of the LSC integration to answer your question.

Yes. Hi, everybody, this is Gary. I'm new to this conference call. Okay. And to answer your question, yes, we do see the improvement by the facility usage increased a lot in the second quarter. And we will continue loading our factory in the next couple of quarters and we will see more realization in the third and the fourth quarter.

Got it. Thanks. Welcome to the call and thank you for the detail. As my follow-up question, I guess for the whole team, it's been some very impressive growth both consolidated inorganically, but no secret that there's a lot of different points of capacity tightness across the industry, Diodes happens to be in a position to have some extra foundry capacity which is great. But maybe you could calibrate us a little bit on how other things in the market may be affecting the upside that you can continue to deliver? I'm thinking about things like testing capacity, packaging, wafers, substrates and even limitations of supply of some of your peer companies that may sell into the same cars or end market devices. If there's anybody you could calibrate how the environment is out there versus the strength that your company is seeing that would be much appreciated. Thank you.

The main limitation in our capacity is the wafer fabrication. Fortunately, half of our wafer needs are met by our internal fabrication support. Additionally, we acquired the GFAB from Texas Instruments in 2019, providing us with substantial internal capacity. We are also ramping up the SFAB2 in Shanghai, acquired with BCD, and are now increasing output in the 8-inch section of this facility. Both fabs significantly support our wafer requirements. Furthermore, when we purchased LSC, it was operating at just 50% capacity, but as Gary mentioned in the first quarter, it's now up to 70%, and we plan to keep increasing utilization at that facility. Overall, we have ample room to grow our revenue by enhancing the use of our internal fabs. We have received additional support from external fabs, so while we notice some constraints, they are not severe. Our revenue growth has persisted into both the first and second quarters, and we expect this trend to continue throughout the year. Additionally, since the majority of our assembly is handled in-house, we are expanding our assembly capacities without major limitations on revenue growth, with only minor constraints remaining. As a result, Diodes has outperformed our competitors, largely thanks to our robust internal manufacturing capabilities.

Thank you, Dr. Lu for that. The results speak for themselves. I'll jump in the queue.

Our next question comes from the line of William Stein from Truist Securities. Your question, please.

Thank you for taking my question. Part of it was answered earlier, but I am looking for a more definitive perspective. Other companies are clearly discussing capacity constraints, but it seems less of an issue for you due to your internal capacity. Are you experiencing longer lead times overall, either because the company is struggling to fulfill certain orders, or because customers are more willing to place orders with extended lead times? Are you noticing that trend in your business? If so, how far out are we looking at today?

Hi, William. This is Emily. Let me answer your question. We have certainly observed overall market constraints. Our book-to-bill ratios remain very strong, and we have an exceptionally solid backlog across all regions. As I mentioned, our point-of-sale results are also very strong. We have noticed some imbalance between supply and demand in the market, and I want to acknowledge that as well. We are addressing various bottlenecks by collaborating closely with our customers to grasp their actual demand. We are experiencing longer booking times, with lead times extending a bit. However, I want to stress that the focus isn't solely on lead times; it's about truly understanding customer demand through close partnerships. This has led to longer visibility concerning our backlog.

One other if I can. An idea that's been sort of discussed in the semi industry for some years is competition from local China-based manufacturers. And there's I think a new JV announced in the last couple of days between Yageo and Foxconn to produce small ICs. Not necessarily about that potential future competitors specifically, but if you can characterize the competitive threats generally and specifically about sort of local new entrants in the market in China? Thank you.

Right. New competitors from China are not a new development. We haven't encountered this situation for a while. As I mentioned earlier, we typically see these competitors more in the lower end of the product or technology spectrum. Over the years, Diodes has been moving away from these low-margin markets. We have focused on improving our technology and shifting our product mix toward the higher end. Therefore, increased competition in the low-end sector doesn't significantly affect Diodes' overall business; in fact, it aligns well with our new strategy, which has been our focus for the past few years.

I would like to add a few points regarding our strategy. We have converted our sales approach from focusing on individual commodity sales to offering total solutions, leveraging our extensive and diverse product portfolio. Our history of mergers and acquisitions has resulted in a highly competitive and broad range of products. This gives us a significant advantage when engaging with customers, as we can present comprehensive solutions. New startups or companies from China often struggle to offer a complete product portfolio. While we keep an eye on competitors, we focus on leveraging our strengths from our wide-ranging product offerings. This evolution reflects our successful history in mergers and acquisitions, allowing us to participate effectively in customer solutions with our extensive product range.

Okay, thank you. And congratulations on the excellent results.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Tristan Gerra from Baird. Your question please.

Hi. Thanks for asking the question. I think I heard that about 50% of your production is outsourced currently. And I think that's mostly on the analog side following the years ago Kansas City shutdown. Are you expecting to meaningfully change over the next few years and increase the percentage of your manufacturing that's going to be in-source notably as you now have more capacity in-house between SFAB2, GFAB, and Lite-On?

Yes. And let me answer your question. But Dr. Lu mentioned about from years ago, we acquired BCD, so we have a SFAB. And GFAB we acquired from TI gives us a 6-inch and 8-inch wafer fab in Scotland. And also just recently, we merged with Lite-On semi and we have 6-inch wafer fab and 4-inch wafer fab in the Hsin Chu and Keelung in Taiwan. So we are still looking for good candidates with good capacity to increase internally in the future. So that probably in very soon and we will have newer capacity. But definitely just our direction to increase our internal capacity and reduce the outside support for semiconductor.

Okay. And then given the relative supply advantage you have versus peers and given some larger analog companies or deemphasizing certain products being supply constrained. Do you basically see market share gains as you're basically taking on products that some of your peers are either deemphasizing on purpose so not able to serve the market with?

Yeah definitely. When the capacity is very high and demand is very strong and whoever the company has a capacity will win the business.

Right. So let me just add a little bit on top of that. I think Tristan, it's all about balancing right? So keep in mind, our strategy doesn't really change. What we've been focusing on is content expansion, right? So, we want to continue to expand the product into the customer and continue to expand our customer base, right? So right now it's an interesting dynamic of the market, but does not take away our long-term focus, as a company. So what our focus is continue with our total solution sales, continue to improve our product mix, right? So that is actually the reason, because we do have very clear goals by 2025 that we want to achieve $2.5 billion, right? So I would say, yes, there's short-term variations for the demand and supply balance. But that does not take away our long-term strategy of the product mix improvement as well as content expansion.

Okay, very useful color. Thank you.

Thank you. Our next question comes from David Williams from Loop Capital. Please go ahead with your question.

Hey. Good afternoon and thanks for the question, and congrats on the solid progress. I guess I wanted to see maybe if you could help size up maybe your backlog or maybe any color around the math of velocity of the orders through the quarter. Just kind of how you've seen orders tracking? And how you think about that, as we move through this quarter or maybe into the third quarter?

We continue to see strong book-to-bill ratios well above one. As I reported in the Q1 results, we have achieved very impressive point-of-sale results, with records in Asia and Europe. In North America, our net momentum has grown more than 20%. Looking at the direct point-of-purchase business, the OEM business has also grown over 30%. Given this data and our strong backlog, I can confidently say that the market is robust across all regions and segments. Within those segments, we observe particularly strong performance from automotive, a continued recovery in industrial, and sustained strength in computing. The consumer communication segment is also showing a strong backlog.

In addition, our distributor inventory is very low. We typically aim for 11 to 14 weeks of inventory, and we are currently below the 11-week mark. Along with the strong point of sale performance and inventory usage, this low inventory suggests a very strong business outlook for the future.

Okay. All right. Thank you. And then, maybe just from your customers, do you get a sense that they are being fairly rational, in terms of their orders? Obviously, double bookings are a thing and may not mean much. But do you get a sense that maybe they're becoming a little more rational in their ordering and understanding the lead times and placing orders that are in line with what the real dynamics are?

Yeah. So I think, like, I mentioned before, we work very closely with the Tier 1, Tier 2, customers to understand their true demand. What we see is, is very rational. But going through the distribution side, the Tier 3, Tier 4 is not something we have the bandwidth to work with each individual customer to understand it. So how we measure, it is actually, we look at the POS resell. We look at the channel inventory. So with all this data, I would say, overall the business seems really solid and strong overall.

Great. Thanks so much.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

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

Thank you. And thank you ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.