Diodes Inc /Del/ Q4 FY2021 Earnings Call

Good afternoon, and welcome to Diodes Incorporated Fourth Quarter and Fiscal 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of today’s conference call, instructions will be given for the question-and-answer session. As a reminder, this conference call is being recorded today, Wednesday, February 9, 2022. I would now like to turn the call over to Leanne Sievers of the Shelton Group, Investor Relations. Leanne, please go ahead.

Good afternoon and welcome to Diodes’ fourth quarter and fiscal 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, Gurmeet Dhaliwal. 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-K for its 2021 fiscal year ending December 31, 2021. In addition, the 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 question. Therefore, the company claims a 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, February 9, 2022. 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 you 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. Diodes had a record year in 2021, reflecting sustained execution that consisted of five consecutive quarters of record revenue, as well as seven consecutive quarters of adjusted earnings growth. In fact, full year revenue grew 47% and the gross profit grew 56% with GAAP earnings per share expanding 166% and adjusted earnings per share expanding 120%, demonstrating the significant operating leverage in our model. Additionally, gross margin expanded 610 basis points from the first quarter of 2021, the first full quarter after completing the LITE-ON Semiconductor acquisition, to the fourth quarter of 2021. This increase was driven by a combination of product mix improvements, manufacturing efficiencies, and improved loading. Also contributing to our ongoing margin expansion has been the achievement of five consecutive quarters of record Pericom revenue, three consecutive quarters of record industrial revenue as well as six consecutive quarters of record automotive revenue, which grew 59% in 2021 and reached a record 12% of total revenue for the full year. With the full year revenue of $1.8 billion and gross profit of $0.7 billion, 2021 represented a significant step toward our 2025 targets of $1 billion in gross profit on $2.5 billion revenue and 40% gross margin. In addition to the manufacturing synergies provided by LSC acquisition over the past year, we expect to realize expanded synergies across our product portfolio, customers and end markets in the coming year to drive additional revenue growth and gross margin expansion. With that, let me now turn the call over to Brett to discuss our fourth quarter financial results and our first quarter 2022 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 will refer you to our press release for a more detailed review of our results, as well as the year-over-year comparisons. Revenue for the fourth quarter 2021 was a record $480.2 million, an increase of 1.9% from $471.4 million in the third quarter 2021. For the full year 2021, revenue was a record $1.81 billion, an increase of 46.9% from $1.23 billion in the prior year. Gross profit for the fourth quarter was also a record at $190.7 million, or a record 39.7% of revenue increasing 5.2% or 130 basis points from $181.2 million or 38.4% of revenue in the third quarter 2021. For the full year, gross profit increased 55.5% to a record $670.4 million or 37.1% from $431.1 million or 35.1% in 2020. GAAP operating expenses for the fourth quarter 2021 were $104.7 million or 21.8% of revenue and on a non-GAAP basis were $100.1 million or 20.8% of revenue, which excludes $4.1 million of amortization of acquisition-related intangible asset expenses and $0.6 million of acquisition-related costs. This compares to non-GAAP operating expenses in the prior quarter of $99.6 million or 21.1% of revenue. GAAP operating expenses for the full year were $394.4 million or 21.8% of revenue compared to $296.8 million or 24.1% of revenue in 2020. Total other income amounted to approximately $22.8 million for the quarter, consisting of $13.2 million of unrealized gain on investments, $11.2 million of other income, $788,000 of interest income, $1.1 million in foreign currency losses, and $1.2 million in interest expense. Income before taxes and non-controlling interest in the fourth quarter 2021 was $108.8 million compared to $85.6 million in the previous quarter. Turning to income taxes. Our effective income tax rate for the fourth quarter was approximately 39.1%, which includes taxes related to non-GAAP items. On a non-GAAP basis, the tax rate for the fourth quarter was approximately 18.4%. GAAP net income for the fourth quarter 2021 was $65.5 million or $1.43 per diluted share, compared to GAAP net income of $68.4 million or $1.50 per diluted share in the third quarter 2021. Net income per diluted share in the fourth quarter increased 142% year-over-year from $0.59 per diluted share in the fourth quarter 2020. The share count used to compute GAAP diluted EPS for the fourth quarter 2021 was 45.9 million shares. GAAP net income for the full year 2021 was a record $228.8 million or $5 per diluted share, a 166% improvement compared to $1.88 per diluted share or $98.1 million in 2020. On a non-GAAP adjusted net income in the fourth quarter was a record $73.3 million or $1.60 per diluted share, which excluded net of tax $3.3 million of acquisition-related intangible asset costs, $0.4 million of acquisition-related costs, $13.5 million of costs related to certain LSC investments, and a $9.4 million gain on the sale of a manufacturing subsidiary. This represents an 8.8% improvement from the third quarter 2021 of $1.47 per diluted share or $67.3 million and a 116% improvement from $0.74 per diluted share or $37.3 million in the fourth quarter 2020. On a non-GAAP adjusted net income for the full year 2021 was a record $237.2 million or $5.18 per diluted share, a 120% improvement compared to $2.35 per diluted share or $122.7 million in 2020. Excluding share-based compensation expense of $6.5 million for the fourth quarter and $26.2 million for the full year 2021 both GAAP earnings per share and non-GAAP adjusted EPS would have increased by $0.14 per diluted share for the fourth quarter and $0.57 for the full year. EBITDA for the fourth quarter was a record $139 million or 28.9% of revenue compared to $114.5 million or 24.3% of revenue in the prior quarter. On a year-over-year basis, EBITDA increased 107.2% from $67.1 million in the fourth quarter 2020, further highlighting our significant operating improvements over the past year. EBITDA for the full year 2021 increased 82.1% to a record $434.6 million or 24.1% of revenue from $238.6 million or 19.4% in 2020. We have included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income and GAAP net income to EBITDA, which provides additional details. Cash flow generated from operations was $77.6 million for the fourth quarter 2021 and $338.5 million for the full year. Free cash flow was $22.5 million for the fourth quarter, which included $55 million for capital expenditures and $197.3 million for the full year, which included $141.2 million of capital expenditures or 7.8% of revenue. Net cash flow in the fourth quarter was a positive $82 million and a positive $46.3 million for the full year, which included a pay-down of approximately $152.6 million of long-term debt during the year. Turning to the balance sheet. At the end of fourth quarter, cash, cash equivalents, restricted cash plus short-term investments totaled approximately $373 million. Working capital was $717 million and total debt, including long-term and short-term was $301 million. In terms of inventory, at the end of the fourth quarter, total inventory days increased to approximately 107 in the quarter as compared to 99 last quarter. Finished goods inventory days were 32 compared to 27 last quarter. Total inventory dollars increased $26.5 million to approximately $348.6 million. Total inventory in the quarter consisted of an $18.5 million increase in finished goods, a $15 million increase in raw materials, and a $6.9 million decrease in work-in-process. Capital expenditures on a cash basis for the fourth quarter 2021 were $55 million or 11.5% of revenue and 7.8% for the full year, which is within our target model of 5% to 9%. Now turning to our outlook. For the first quarter 2022, we expect revenue to be approximately $480 million plus or minus 3%, which at the midpoint is better than typical seasonality of down 5%. We expect GAAP gross margin on a consolidated basis to be 39.7% plus or minus 1%. Non-GAAP operating expenses, which are GAAP operating expenses, adjusted for amortization of acquisition-related intangible assets are expected to be approximately 21% of revenue, plus or minus 1%. We expect net interest expense to be approximately $1.4 million. Our income tax rate is expected to be 18.4% plus or minus 3% and shares used to calculate diluted EPS for the first quarter are anticipated to be approximately 46.3 million shares. Please note that purchasing accounting adjustments of $3.3 million after-tax for previous acquisitions are not included in these non-GAAP estimates.

Thank you, Brett and good afternoon. As Dr. Lu and Brett mentioned, fourth quarter revenue increased 1.9% quarter-over-quarter, which is better than the midpoint of our guidance due to the continued strong demand and record revenue across all the regions. Distributor inventory in the fourth quarter, in terms of weeks, increased slightly quarter-over-quarter, which is still below our defined normal range of 11 to 14 weeks. Looking at global sales in the fourth quarter, Asia represented 78% of revenue, Europe 13%, and North America 9%. In terms of our end markets, Computing represented 29% of revenue, Industrial 24%, Consumer 19%, Communication 16%, and Automotive 12% of revenue. We achieved record revenue in the Automotive, Industrial, Communications, and Consumer segments. Now, let me review the end markets in greater detail. In the automotive market, we continue to expand our strong growth momentum with revenue increasing 37% year-over-year and 59% for the full year to set new records. Since 2013, when we began our expansion initiative into the automotive market, we have achieved an eight-year compounded annual growth rate of 30%. One key to our success has been our content expansion initiatives and design win momentum that has continued across all target application areas, particularly in three focus areas of connected driving, comfort, style and safety, and Powertrain. Automotive DC-DC 32 Volt and 40 Volt converters, LED switching drivers, and SBRs continued to see strong demand for telematics, front and rear LED lighting, daytime running light, and ADAS applications. Similarly, linear mode LED driver products are being designed into first responders' emergency lighting systems and high-efficiency charge from LED drivers are seeing traction for indicator LED lighting for household EV charging units. Newly released LDOs, current limit power switches, and Pericom product lines of Level Shifters, crystal oscillators, buffers, and PCI Express clocks are seeing new design wins in ADAS, telematics, anomalous vehicle control units, and infotainment systems. We are also seeing great success from the high-voltage lens, high-voltage regulators, and omni-polar Hall switching, including fans, window lifters, motors, water pumps, and door lock applications. Additionally, trans and voltage suppressors, MOSFETs, gate driver ICs, and USB charging controller products are being designed into applications including battery management systems and wireless charger converters in-vehicle USB charging ports. Fast-recovering rectifiers were also well accepted in electric vehicle key exchanger applications as well as automotive electric intelligent controllers. MOSFET designs in motors continued for automotive brush and brushless electric motor applications including power steering, fuel, oil and ABS pumps, and seats and mirrors. Our load capacity ESD and surge protection devices are also being designed into applications for protection of in-vehicle networks and for the I/O core protections of far-view cameras for Advanced Driving Assistance. In the industrial market, revenue increased 43% year-over-year and 46% for the full year to also reach a new record. We are continuing to see growth and adoption of DisplayPort HDMI switches and ReDrivers in the commercial display applications. Our ultra-fast recovery rectified products and PCI Express Gen 3 packet switch are gaining traction in artificial intelligence, video analysis, and security applications. We are also seeing strong demand for application-specific multi-chip circuits and standard recovery rectified products driven by multiple applications such as diagnostic test systems, brushless DC motor drivers, energy metering, power supplies, smart lighting in electrico-medical applications including automated blood and body flow analyzers. We have also been pleased with the strong design win momentum for the Lite-On Semiconductor image sensor product line being used in document scanners, lottery bar scanners, and PCB inspection applications. Additionally, our ultra-fast recovery rectified products, bipolar transistors, synchronized controllers, and MOSFETs continue to gain momentum in power supplies and inverter applications. Medium voltage DC-DC LED drivers have been gaining design wins in smoke detectors, and SBR products are expanding in GPS tracking applications which enable real-time location monitoring during transportation. In the computing market, revenue was up 72% year-over-year and 122% for the full year. We're seeing strong traction for USB Type-C power switches, TVS, high power density Schottky, low voltage omni-polar Hall sensors, dual output unit holder hall sensors, DC-DC buck converters, as well as HDMI 2.0 ReDrivers in the new compute platforms including gaming notebooks and workstations. Similarly, we are seeing increasing interest for DisplayPort, USB Type-C, HDMI switches, and ReDrivers in docking stations, dongles, active cables, and keyboard video MOS applications. We also continue to see strong demand for SSD MUX, crystal and oscillator product in the enterprise SSD story modules and data center server applications. We have several design wins for the universal level shifter product family in various applications including SSD storage, gaming, server, laptop, and mobile devices. Additionally, Lite-On Semiconductor image sensor products continue to gain momentum with new design wins in scanners and coffee machines. In the consumer market, revenue increased 18% year-over-year and 12% for the full year to also set a new record for the quarter and year. Diodes continues to see strong revenue growth of standard recovery rectified products and SBRs in consumer applications including digital light projection, LED backlit modules, and high-efficiency vacuum cleaners. We also have new design wins for USB MUX and bipolar transistors in LED TVs and display panels, as well as increasing demand for low power Class C audio amplifiers, SBRs and LED drivers utilizing solar, Bluetooth speakers, LED lighting, and smart doorbell applications. We also continue to see strong momentum for CSP and small PSA MOSFETs for IoT and wearable devices, as well as high-power density products securing home exercise equipment. Mobile phone adapters generated a strong demand for Diodes' fast recovery rectifiers and AC-DC products continue to see growth from quick charging applications. Lastly, in the Communication market, revenue was also a record and grew 10% year-over-year and 13% for the full year. Design momentum for the Pericom product line continued in this market for our USB MUX and ultra-high voltage protection with 5G CPE applications. There has also been growing demand for USB ReDrivers, primarily driven by the USB Type-C applications. Additionally, our small size low saturated transistors continue to achieve design wins across multiple applications from base stations, routers, network cameras, to doorbells. We saw strong demand for our SBR chip scale package and design wins for high PSR LDO product family in smartphone applications. In summary, 2021 was an exceptional year for Diodes both operationally and financially. We achieved strong revenue growth and margin expansion for our total solution sales approach and content expansion initiatives, especially in the automotive and industrial end markets, as well as the Pericom product family. We also successfully integrated Lite-On Semiconductor acquisition and benefited from manufacturing synergies with additional opportunities for growth and expansion through product, customer, and end market synergies that we expect to realize over the coming quarters and years. With that, we now open the floor to questions.

Thank you. Our first question comes from the line of Matt Ramsay from Cowen. Please go ahead.

Thank you very much. Good afternoon, everyone. Congrats on the great results, Dr. Lu. I wonder if you might provide some commentary over the last year and a half or so, the industry has been very supply constrained and your company was fortunate enough to acquire the capacity from Lite-On and did an amazing job executing and filling that capacity and that's led to some pretty remarkable growth. I wonder as you think about the next year or two in Diodes’ growth plan where do you have the opportunity to add more capacity? And how much of the growth are you thinking coming from pricing versus units versus additional capacity? Thanks.

I have addressed several of your questions. Firstly, regarding the sources of growth from price increases versus revenue growth or capacity expansions, we have not clearly separated those numbers. Our price increases are based on the rise in our wafer or material costs, which we have relayed to our customers. Additionally, we are taking the opportunity to provide greater support to our customers, encouraging them to offer us more design opportunities that were previously unavailable. This support allows us to seek more design opportunities and use our capacity constraints to our advantage in expanding features. Looking at future growth, we have two 8-inch fabs that were fully loaded by December of last year. Throughout last year, we ramped them up, and they will be fully operational this year. Regarding the GFAB we purchased in 2019, we are committed to maintaining the original owner's load-in commitment for five years, receiving a 10% load-in each year. This has significantly enhanced both our production and technology capabilities at GFAB, providing us with additional capacity as the original owner's demand decreases while we ramp up our own. If we require more capacity, we can negotiate further load-ins, as their capacity allows for it. When we refer to “fully loaded,” we consider 80%, but some of our wafer fabs are already operating at 95% to 100%, indicating that GFAB still has room for further growth. Furthermore, we maintain strong relationships with our suppliers, enabling us to request more resources quarterly. We firmly believe we have sufficient capacity to support our growth this year and next, and as demand stabilizes, we will continue on our growth trajectory.

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

Got it. Thank you both for the commentary there. As my follow-up question, I guess I'd be remiss to not mention that you're bumping right up against your long-term 40% gross margin target. I think your run rate of revenue is slightly under $2 billion and you were planning to hit 40% at that $2.5 billion in revenue. So if you could just walk me through the drivers of gross margin as we go forward. Is that kind of a new floor of margin and sustainable, and what are the incremental margin drivers as you add that additional $500 million in revenue towards the target model? Thank you.

Well, really what we are looking for is $1 billion gross profit. And when I said that is really the goal of $1 billion in gross profit because that falls through to the EPS so that is really our goal. Now, when I say $1 billion gross profit that we say, how do we make it, then we say $2.5 billion revenue, 40% GP to make up that $1 billion. And if our gross margin can be improved, we are not too focused on that. We will continue to improve our gross margin and we will achieve that $2.5 billion. So we will achieve that goal earlier. Then after that, we'll start to get to our next target, but I'm not ready to announce that next target yet, but we are quite close to the target of $1 billion gross profit.

Great. Thanks for taking my question. I'll add my congratulations, especially to the outlook, but both the results and outlook are great. I have a question about the guidance by end market. Normally, Q1 is down a little bit and I think the end markets are typically down sequentially. Well, industrial and automotive are typically up a little bit. So if we think about the delta or the difference in this Q1? Is it more spread across all end markets that they're all going to do a little better than typically or is it more that you're going to see sequential growth a little bit in each of the end markets or is there some different explanation?

Okay. William, hi. This is Emily. So I think overall what we are seeing is actually strength across all the end markets. I think all-in-all, we have really strong demand and, if we look down to the specific segments. For example, automotive we actually have a full-year growth of 59%. We see that momentum continue. For the industrial, we are also seeing a lot of growth like 46% for the full year. And again a lot of design in pipeline continue to grow. On the computer side where we talk about the low-end PC, there is definitely a little bit of softness. But we are also seeing strength in the cloud computing as that kind of balances itself. On the consumer side, you are right. Absolutely, Q1 usually is not a super strong quarter and we definitely see a little bit of softness, I would say more from the China consumer side, but again we have a lot of overall other demands, whether it's home care or some other consumer applications that we continue to see the strength. On the communication side, I think there is a lot of news about the smartphone softness a little bit in China, but since we have a very well diversified into all the Tier 1 smartphone manufacturers that we actually are seeing, not that much of the impact on the overall Diodes. So I would say all in all, 5G continue to drive a lot of momentum, not just on the base stations, but 5G related applications. So yeah, I would say all in all, still very, very strong.

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

Okay. This is Gary. It's great to speak with you. We've been working on this for about a year now, and we see it as a strong market trend. Our design team is in-house, and we handle our wafer design while utilizing outside fabrication for the wafers. Specifically, for silicon carbide, we are focusing on automotive-related components such as onboard chargers and inverters. This will be our primary area of focus. Additionally, we have joint venture activities utilizing this technology in a module that will be integrated into the inverters, which are going into the motors of electric vehicles.

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

No, not yet. Our engineering is simple and should be deliberate by the end of this year, and we are looking forward because automotive related, probably one year or a little bit longer and we are looking for probably the first revenue to come in probably the middle of next year.

Good afternoon, everybody. Thanks for taking my question and congrats to a strong 2021 and a good start to the current calendar year. I wanted to ask about your manufacturing footprint in China. I realize the majority of your employees are based in China. So, have you seen any impact on your production facilities past or present or maybe in the future from China's COVID-19 policy?

Let me respond to that. The majority of our wafer fabrication is not in China. We do have some external facilities, but overall, we have wafer fabrication operations in Europe and Taiwan. Currently, we expect to have only two sites in China. We don’t have a majority of our operations there. Regarding our external sites, the two major facilities in Shanghai are not significantly impacted by COVID-19, and the Chinese government is taking precautions. We aren't experiencing significant issues due to COVID-19, and, in fact, this situation is somewhat advantageous for us. Typically, during the Chinese New Year, we face shutdowns because many workers return home. However, this year, the government has encouraged people to either stay at work or pack up, resulting in minimal disruptions to our output during the holiday. Consequently, we've been able to maintain our operations adequately. Our revenue guidance for the first quarter is based on continuity in our output, and we also built up some inventory in the fourth quarter to help support our first-quarter needs. Overall, we are not heavily impacted by COVID-19 in China, and our operations are actually progressing better than expected due to the situation with the holiday travel restrictions.

Got it. Appreciate the color there, Dr. Lu. And I have a couple of follow-ups for Emily perhaps. Normally Q1 is down 5%, but I presume that you're going to have a better than seasonal Q1 because perhaps you're having, getting an opportunity to replenish distributor inventory. In relation to that, would you expect to be back up in the normal 11 to 13-week range? And is there any way to quantify the impact of your competitors, one in particular that is exiting a few hundred million dollars last year and the next year in some product categories that you directly compete in? Thank you.

All right. I think Gary, with like Dr. mentioned better than maybe a little bit better than expected output in Q1 that's the reason we provided a slight guidance which you are absolutely right. This is usually about 5% down the quarter. So what we do, we feel aggressively working with all the customers closely and review all the opportunities in front of us. So if this is the right fit for the overall Diodes growth and further into our overall strategy, we aggressively pursue. And like I mentioned earlier, any time there are some strategic changes from my peers or mergers and acquisitions, it always creates more opportunities for Diodes to pursue. But again we are not just likely going after every business, we are really more focused on strategic good business that will continue to drive our product mix improvement as well as total solution sales strategy that we initiated a few years ago.

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

I think it's really hard to say how big or how small the impact will be. I also think, one of my peers published a lot of statements, but there's also others that may not have been as vocal, but also making changes. So again we monitor all this very closely as long as it fits into our long-term plan. As long as that's going to help us achieve the $1 billion in gross profit that Dr. Lu mentioned earlier, we will definitely aggressively go after it.

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

I think the margin improvement is really consists of a few things and they are all very important. One of the biggest ones is product mix improvement and we've been talking about this for a while. So we will continue to drive. This is really more from the total solution sales, replacing some of the legacy products with some of the newer products with better margins and better ASP as well. We believe this is actually just the beginning of this whole initiative. This is actually something we established probably about two to three years ago and we continue to drive for improvement. I think manufacturing efficiency improvement has always been the strength for Diodes. And like, Dr. Lu mentioned, we'll continue to add additional capacities. This can be even adding more equipment within the existing life or replacing some of the old equipment with a new one, expanding to 4-inch to 6-inch or stuff like that. So that will continue to drive some of the capacity improvements. And as a result, that will continue to drive our manufacturing costs and continue to improve our cost. And then we also have Lite-On Semiconductor synergies that I talked about. So we start seeing the benefit of manufacturing synergy, but there are still customer synergy, end market synergy, and product synergy that we can actually continue to see benefit over the next few years. So I would say all in all this is a few areas that will continue to help us drive the margin. Just like Dr. Lu mentioned, we are definitely not going to stop at 39.7% or 40% and this is a continued direction, and we definitely want to continue to deliver the results to you as well.

Okay. Great. And then from a follow-up, it's going to be about inventories in the channel. So you've mentioned that you, you mentioned the well-advertised slowdown in China that you're also very diversified. So, are you seeing any pockets of inventories in the supply chain outside of this that you could point out despite that diversification? And then also, are you seeing inventory rebalancing because of the high level of work in process inventories? Are you seeing some customers basically choosing and picking what they're going to order because they can close the books, so you're kind of waiting for that last component?

Yeah. I think Tristan, overall, we are still seeing the channel inventory very lean. So either we see a very slightly increase in our channel inventory end of Q4, that's actually driven by some of the support for the Chinese New Year customers and also the timing of the shipments. But all in all, still extremely lean. I think, Gary asked the question, I probably didn't address it, it is actually do we expect to return to the 11 to the 13 weeks or 14 weeks that we define as a normal range. We don't really expect a return to that normal range in a short period of time. So we believe that with all the visibility that we have, with all the customers that we actually have direct communication with. So far no one has an opportunity to build up a lot of inventory on the shelf at this moment. So I believe that will continue for a few quarters to come, and we'll continue to monitor it very closely. That pretty much applies to all the Tier 1 Tier 2 as that we have direct contact with. And then with the Tier 3 Tier 4 customers, we actually monitor very closely with each of our distributors and partners, and they also monitor very closely and so we definitely don't see that as an issue at this moment.

Hey. Good afternoon and thanks. Let me ask the question. So, I apologize I jumped on a little bit late, but Dr. Lu, I wanted to ask you've been through a lot of these cycles and we've talked about in the past, but just kind of curious how you're seeing the landscape today and how you think maybe the, it seems like that the channel inventory still remain extremely lean but always tends to be that we've got excess through the supply chain. Do you think, do you feel pretty comfortable today that there really isn't maybe some excesses that are kind of building up within that channel that just maybe aren't being seen aren't as visible? And do you think there is even an opportunity for that to happen I guess kind of given the demand and where that the level that’s been?

Yes. You are right, I have been in this industry for a long time and I go through the cycles of the 1970s, ‘80s, 1990s, and up and down cycles. I'm familiar with that. But if I'm going to say, this year this cycle is really different from the previous cycles. In previous cycles, the demand continued to exceed the capacity behind, and then orders that you get shortage. Then people wait until they cannot stand it and they go to exceed the capacity. The problem is the lead time of the equipment takes a long time. So by the time they get capacity there and everybody gets it at the same time, all of a sudden you get overcapacity. Then everything goes down and then goes into the down cycle. So if you took it, it's a timing issue of the capacity improvement and that's why, if you remember several years ago, our strategies put in capacity ahead of the demand. We built in the downtime you actually exceed the capacity because the downtime is unavoidable. Now this time that's what we're able to grow this year or 2021 much better than 2020 is because we ramped up SFAB2 at the right time. We got LSC ahead of time and then we got GFAB even one or two years before the shortage. So we prepared for all this one and all these shortages and that's what we are able to take the advantage of deals. Moving forward, I think the movement still has shown because you don't see many of the people adding capacity that aggressively. Everybody is still attempting to hit that capacity number. So I don’t think this shortage will cease this year. Now you are going to start to see some overcapacity increase, but the demand actually continues to increase ahead more than in the past. I'm optimistic that this growth momentum will be sustained.

Right, so I think we have been very successful at integrating and seeing a lot of benefits.

Okay. Good. Definitely, great to know. I certainly appreciate it. And then maybe one other question here for Emily. But you've had some really nice growth in the automotive side and that's been a fairly diversified application area across the different areas of the vehicle. But when you think about your maybe sort of traditional vehicle versus the EV, how does that split look this year and even in 2021? Are you seeing much adoption within the EV space now or is that primarily still driven by the traditional? And then how do you think that mix kind of shakes as we go into the next 12 to 18 months or do you see demand in EV and kind of the pull-through and not happening fairly quickly for you all in terms of seeing that reflected within your revenue base.

Right. So I think the EV volume increases definitely real right. I think there is a lot of data and public companies that we can refer to for their ARPU unit increase and expected growth for 2022 as well as 2023. A lot of new startups or any of the Tier 1 traditional manufacturers are all working on some sort of EV applications. So we think that's real; there are a lot of opportunities for Diodes to continue to expand and grow in this area. So this is actually volume increase as well as content expansion increase for us. On the traditional side, what we really focus on there is also a lot of comfort style safety. We are talking about the number of lightings, number of cameras. I talk about brushless DC motors and all these additional content expansion for us to go after. So we are really growing. I would say both from traditional and EV vehicles, right. So if you remember the three areas, we focus on is electrification including EVs, high breaks, and the other battery management system as well as connectivity, particularly ADAS, Telematics, and infotainment systems. So I would say all in all, we are absolutely positioned to capitalize on this growing demand.

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