Good afternoon, and welcome to Diodes Incorporated's First Quarter 2024 Financial Results Conference Call. As a reminder, this conference call is being recorded today, Thursday, May 9, 2024. 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 Fiscal 2024 Financial Results Conference Call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today are Diodes' President, Gary Yu; Chief Financial Officer, Brett Whitmire; Senior Vice President of Worldwide Sales & Marketing, Emily Yang; and Director of Investor Relations, Gurmeet Dhaliwal. 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, 2024. 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 9, 2024. Diode 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' President, Gary Yu. Gary, please go ahead.

As reported earlier today, first quarter revenue reflects a slower-than-expected recovery in the consumer, computing and the communication market, coupled with the typical first quarter seasonality due to the Chinese New Year holiday. However, late in the quarter, we began to see some signs of demand improvement with distributor inventory levels starting to stabilize, supporting our belief that the first quarter should be the low point and are guiding for a return to seasonal growth in the second quarter. In the automotive and industrial end markets, first quarter combined product revenue remained above our target model of 40%, but continued to be affected by inventory adjustment and softness in certain areas. More broadly, the slower overall demand environment in the quarter contributed to reduced loading at our manufacturing facility, both internal production as well as from our manufacturing service agreement temporarily impacting gross margins. We expect gross margin to resume toward our target of 40% as we increase our factory loading by qualifying more products combined with increasing revenue growth for our higher-margin automotive and industrial market, consistent with our historical performance and our long-term growth strategy. In summary, with early evidence of recent pricing pressure subsiding, Diodes is well positioned with the size and scale to support a return to growth as global demand and distributor inventory improves across our end markets. We remain focused on operating our manufacturing facility at a high level of efficiency as demonstrated by the steps the company has taken over the past several quarters to further develop our process technology and capabilities while lowering manufacturing costs across our operations. With that, let me now turn the call over to Brett to discuss our first quarter financial results as well as our second quarter guidance in more detail.

Thanks, Gary, and good afternoon, everyone. Revenue for the first quarter of 2024 was $302 million compared to $322.7 million in the fourth quarter of 2023 and $467.2 million in the first quarter of 2023. Gross profit for the first quarter was $99.6 million or 33% of revenue, which reflects the reduced loading at our manufacturing facilities due to the lower revenue. This compares to $112.5 million or 34.9% of revenue in the prior quarter and $194.5 million or 41.6% of revenue in the prior year quarter. GAAP operating expenses for the first quarter were $86.6 million or 28.7% of revenue, and on a non-GAAP basis, were $87.6 million or 29% of revenue, which excludes $3.8 million of amortization of acquisition-related intangible asset expenses. This compares to GAAP operating expenses in the prior quarter of $91.8 million or 28.4% of revenue, and in the first quarter 2023 of $108 million or 23.1% of revenue. Non-GAAP operating expenses in the prior quarter were $89 million or 27.6% of revenue. Total other income amounted to approximately $5.9 million for the quarter, consisting of $4.6 million of interest income, $1 million of foreign currency gains, $0.4 million of other income, $0.4 million of unrealized gain on investments, and a $0.5 million in interest expense. Income before taxes and non-controlling interest in the first quarter 2024 was $18.8 million compared to $27.9 million in the previous quarter and $88.6 million in the prior year quarter. Turning to income taxes, our effective income tax rate for the first quarter was approximately 18.8%. GAAP net income for the first quarter was $14 million or $0.30 per diluted share compared to $25.3 million or $0.55 per diluted share last quarter and $71.2 million or $1.54 per diluted share in the prior year quarter. The share count used to compute GAAP diluted EPS in the first quarter was 46.3 million shares. Non-GAAP adjusted net income in the first quarter was $13 million or $0.28 per diluted share, which excluded net of tax, $3.1 million of acquisition-related intangible asset costs, a $0.3 million non-cash mark-to-market investment value adjustment, and a $3.8 million insurance recovery for a manufacturing facility. This compares to $23.4 million or $0.51 per diluted share in the prior quarter and $73.4 million or $1.59 per diluted share in the first quarter 2023. Excluding non-cash share-based compensation expense of $4 million, net of tax, for the first quarter, both GAAP earnings per share and non-GAAP adjusted EPS would have increased by $0.09 per diluted share, respectively. EBITDA for the first quarter was $48.3 million or 16% of revenue, compared to $58.4 million or 18.1% of revenue in the prior quarter and $121.8 million or 26.1% of revenue in the first quarter 2023. 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 used in operations was $31.1 million for the first quarter. Free cash flow was a negative $51.5 million, which included $20.4 million for capital expenditures. Net cash flow was a negative $47.9 million. Turning to the balance sheet. At the end of the first quarter, cash, cash equivalents, restricted cash plus short-term investments totaled approximately $280 million. Working capital was $824 million and total debt, including long-term and short-term was approximately $70 million. In terms of inventory, at the end of the first quarter, total inventory days were approximately 184 as compared to 160 last quarter. Finished goods inventory days were 67 compared to 49 last quarter. Total inventory dollars increased $39.6 million from the prior quarter to $429.4 million. Total inventory in the quarter consisted of a $40.2 million increase in finished goods, a $1.6 million increase in work-in-process, and a $2.1 million decrease in raw materials. Capital expenditures, on a cash basis, were $20.4 million for the first quarter or 6.7% of revenue and within our target range of 5% to 9%. Now turning to our outlook. For the second quarter 2024, we expect revenue to be approximately $316 million, plus or minus 3%, representing a 4.6% sequential increase at the midpoint and reflecting a return to typical seasonal growth. GAAP gross margin is expected to be 33.5%, plus or minus 1%, reflecting the lower mix of revenue from the automotive and industrial markets as the 3C markets recover. Non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition-related intangible assets, are expected to be approximately 28.5% of revenue, plus or minus 1%. We expect net interest income to be approximately $3 million. Our income tax rate is expected to be 18.5%, plus or minus 3%, and shares used to calculate EPS for the second quarter are anticipated to be approximately 46.5 million. Not included in these non-GAAP estimates is amortization of $3.1 million after tax for previous acquisitions. With that said, I will now turn the call over to Emily Yang.

Thank you, Brett, and good afternoon. Revenue in the first quarter was down 6% sequentially and slightly below the midpoint of our guidance due to a slower recovery in the 3C market than originally expected. Our first quarter global POS decreased slightly due to the Chinese New Year in Asia, but has recovered since March and continued to grow into the second quarter. This also drove channel inventory value to decrease even though it remains above our defined normal range of 11 to 14 weeks. As Gary mentioned, we are beginning to see improvement in demand going into the second quarter with a stronger book-to-bill ratio. In fact, this is the first time we've seen a positive book-to-bill ratio since the middle of 2022, further supporting our expectation of the first quarter being the low point in the cycle. Assuming no major macroeconomic change in the market, given the stronger backlog and better book-to-bill ratio and healthier inventory level in the 3C segment, we feel optimistic about second quarter revenue improvement and a stronger second half of the year than the first half. Looking at the global sales in the first quarter, Asia represented 75% of revenue; Europe, 16%; and North America, 9%. In terms of our end markets, industrial was 23% of Diodes' product revenue; automotive, 18%; computing, 25%; consumer 20%; and communication, 14% of product revenue. Our automotive industrial end market combined totaled 41% of the first quarter product revenue, representing the eighth consecutive quarter above our target model of 40%. Now, let me review the end markets in greater detail. Starting with the automotive market, revenue was 18% of our total product revenue, which was flat to last quarter on a percentage basis. The slowdown in demand, along with inventory rebalancing continued in the first quarter, and we expect this to continue into the second quarter. But our demand creation momentum continued with expanding design in and design win across multiple applications. Our focus on connected driving, comfort, style, safety, and electrification continued as we introduced 44 new automotive products in the first quarter with a focus on applications such as EV protection, high speed and high bandwidth automotive Ethernet network protection, battery management systems, Wi-Fi telecommunication, and infotainment. We're also expanding our solutions within electric and hybrid electric vehicle subsystems, including battery chargers, onboard chargers, high-efficiency DC/DC converters, motor drivers, and traction inverters. Additionally, the adoption of Diodes' USB Type C ReDrivers, display alternative active crossbar Muxes and MIPI switches have increased significantly in rear-seat entertainment, smart cockpit, ADAS, and camera monitor systems and our PCI Express Gen 6 Clock generators, crystal oscillators, and TVS products are being designed into various ADAS platforms. We also continue to see momentum in design wins for rectifiers, switchers, diodes, and DC-DC products in infotainment, ADAS, and telematics. Also within automotive, our linear LED drivers won designs in headlights and EV high-beam low-beam applications, while our TVS products are being designed in for power line protection in headlights, steering control modules, and daylight running lights. Our hall-effect switches and latches continue to gain design win and revenue growth momentum for cooling water pumps and window lift controls. In the industrial market, first quarter revenue represented 23% of the total product revenue, which was also flat to the last quarter but down in terms of revenue as inventory rebalancing continued during the quarter, and this may last into the second half of the year. Despite the slowdown, we continue to focus on expanding our design pipeline and application opportunities. Specifically, during the quarter, our LDOs continued to gain traction in fans, power tools, and e-meter applications while Rectifiers switch to Diodes' carbide power MOSFETs are being used in power tools, power storage, solar inverters, and high-efficiency LED backlighting. We also continue to win designs with our Piezo driver portfolio in smoke detectors and alarm applications. Also in the industrial market, we are seeing adoption of HDMI Muxes and DisplayPort HDMI ReDrivers and LED drivers in commercial display, highway signs, and conference TV applications. We're also seeing traction for silicon carbide products in HVAC, energy storage systems, power factor correction, and server power supplies. Additionally, our Contact Image Sensor had new design wins in automated optical inspection applications. In the computer market, like I mentioned earlier, inventory is healthy and we expect to see a gradual improvement in revenue, especially in the AI server area, with signs of stronger backlog in Asia. From a design momentum point of view, our signal integrity and connectivity products continue with increased adoption of HDMI, USB-C, MIPI, EDP ReDrivers, and switches along with USB-C power switches and TVS in applications including workstation, gaming, notebook, desktop, docking stations, and tablets. We also saw new design-ins and production ramping for PCI Express Gen 3 package switch, PCI Express clock buffers, TVS, rectifier, and switches diodes in server, artificial intelligence servers, and data center applications. We also secured design wins and revenue growth for hall-effect latched switches in DC fans, LED drivers in keyboard lighting, and contact image sensors for multifunction printers. Turning to the communication market. On the enterprise side, due to slower-than-expected demand, the inventory depletion rate has been slow, and we expect this may last into the second half before returning to healthy levels. On the smartphone side, even though inventory is clean, the recovery will likely be gradual over the coming quarters. For the design side, our camera fresh LED driver rectifiers, clock buffers, and LDOs with designing and ramping up in the smartphone and 5G equipment, while TVS products are being designed into smartphone battery protection applications. We have several design wins for crystal oscillators in optical transceiver modules and hall-effect switches and true wireless stereo technology for earbuds. And lastly, in the consumer market, similar to the PC market, inventory is relatively clean. Even though the overall demand is not as strong as we expected, we still expect some of the new designs will start to ramp in Q2 and peak in Q3. Our Buck converters, LED drivers, and MOSFETs are being designed into several smart home IoT and virtual reality projects, while our LDOs saw new design wins in smartwatches. Also, our rectifiers, switch diodes, and low switches and buck converters were designed in and ramping up during the quarter in televisions and monitors. We are also seeing traction for USB Type C DP retimers and USB Type-C active cable and docking station applications. In summary, as indicated by our second quarter guidance, we are expecting a return to seasonal growth based on the demand improvement and channel inventory stabilization that we began to see, specifically in the 3C markets. As the demand improves further across all our end markets, we expect gross margin to benefit from increased loading of our internal facilities as we qualify more products while also benefiting from our product mix improvement initiatives by expanding revenue contribution from our higher-margin automotive and industrial solutions as those markets recover and resume growth. With that, we now open the floor to questions, Operator?

And our first question today will come from David from Benchmark.

It's actually David from Benchmark. So, I appreciate you taking the question here. I guess one of the things I wanted to ask about is just on the gross margin. I know last quarter, 34% was kind of what we thought it would be, and thought that'd be the bottom. And it felt like there was a healthy level of utilization charges that were baked into that, but it seems like we saw a little bit more pressure. So I guess if you were looking at the puts and takes there on the margin, how much of that was utilization versus pricing in the quarter?

Yes. So, Dave, this is Emily. I think in general, we've seen the pricing stabilize, right? So, the majority of the contribution of the challenge is really from the underloading pressure, both due to the decrease of revenue, so it naturally decreased some of the loadings to our own factory as well as manufacturing service agreements.

Okay. But you sound you're fairly confident in that returning to that 40% kind of target over time. I guess, can you talk about how quickly that can return and how much utilization will help you in the next quarter as we kind of think about that revenue beginning to grow.

Yes. So I think a couple of factors driving the margin improvements, right? So, obviously, driving the underloading utilization is one of the key initiatives. As the market starts returning, revenue will improve, that would naturally improve some of the loading. We're also talking about aggressively porting and qualifying some products into our own factory to really improve the overall loading, supporting our hybrid manufacturing model, right? So that is definitely ongoing on track. And so, we believe with all of this going on, right, it definitely would naturally improve the underloading situation. At the same time, product mix improvement has been a key initiative, right? There's a couple of ways to look at it. We talk about new product introduction. Just in 2023 alone, we introduced a lot of automotive products, and we want to continue to expand our portfolio, that would naturally continue to help us to support our market expansion, right? And also, content expansion. We also talk about analog and power discrete. That will continue to be the key focus. Of course, a lot of the new products also concentrated on this area. We also talk about Pericom Semiconductor products, that will continue to be a key focus for us. That's kind of part of the analog plus the power discrete focus. From a different area, we talk about auto industrial focus, right? So I also talk about it being 41% by the end of last quarter, which is the eighth consecutive quarter above the 40% model. When the auto industrial inventory rebalancing, getting improved, we strongly believe that with the momentum and the pipeline we have in place, that will continue to drive the percentage improvement in this area. So if we continue to do all this and plus the manufacturing efficiency improvement, including cost cuts and stuff like that, we are confident that the margin will be going back to the right momentum, right.

Just one quick last one, if I may. Are you seeing any demand impacts in the China region, specifically from some of the domestically sourced component quotas that they've initiated? Is that dampening down your demand? Are you seeing anything in that area yet?

So, Dave, can you repeat if you are referring to China quotas? I want to ensure I understand it correctly.

Yes, just the quota in terms of domestically sourced components. We're hearing that from a couple of other companies, I'm just curious if you're seeing that or if that is something that's impacted your business here at all yet.

Yes. I think we definitely discuss the competition from China, whether directly or indirectly related to the quota. Ultimately, if our product lacks strong differentiation and the necessary features, we will face numerous competitors from other regions, and those products and businesses will face ongoing challenges. Therefore, our strategy in China has concentrated on technology and product differentiation. I don't believe all American companies are affected; it really depends on the product and technology. I would say there are some impacts, but they are likely small in scale.

Right. Actually, as you know, the total revenue of China, especially local, does not really take a bigger percentage of Diodes' total revenue. So the impact is relatively small because we have a lot of customers in China, but they produce the product; it's really OEM or like international transfer business. So, I do believe and in this area we're pretty firm on our position.

And our next question will come from Gary Mobley with Wells Fargo.

I want to start out with a clarification request and then a related question. So, when you speak of the qualification of new products to become more vertically integrated, I assume you're talking about the qualification at the Portland fab, which you picked up from Onsemi and the Greenock facility you picked up from TI. Is that correct? And then related to the MSA that you have with those 2 particular parties, can you give us a sense of how those evolve over time? How you will slowly transition those facilities over to your own internal manufacturing and maybe what some of the minimums are with those parties and how those minimums go down over time?

Hi Gary. This is Gary. So, I think for the years, we have a manufacturing service agreement in place for our OEM customer in both at the foundry service. So not only limited on the foundry service, just want to make sure that we understand that. And their loading can be adjusted time to time by their end demand and other related factors. With that, we do see some impact on revenue and gross profit from the third quarter last year. But not much we can control that. I cannot disclose too much detail about that. Just in case you have any question related to that, kind of demand stop or not. However, while we're working very hard in the past couple of years, it's continued to offload our outside loading from our partner in the different foundry and continue qualifying internally and get all key customer approvals. But as you know, you're absolutely correct for those kind of SPFAB from Onsemi and GFAB from TI, and we are doing our best to qualify our technology and our products over there. But at the same time, we do need to have our customers approve our PCN to change the wafer fab. That takes a little bit longer time. Now especially after COVID and the demand softened at this moment, the customer’s willingness to change the PCN or change the different wafer fab on site will be much slower than the time we have a shortage in the area, okay? That's the way you need to understand. But so far, our progress, internal cooperation is very good, and we do see some projects ahead of our June schedule, as I can tell you at this point. So, just like Emily said, at this moment, we do see the loading risk on those two wafer fabs as well as some loading on our assembly side. But in the near future, I do believe and I do have great confidence if those new products can be qualified in both our site and our customer side, we can ramp up.

Okay. As a follow-up, I do have another clarification question. With respect to the green shoots of improving demand, should I assume that's primarily on the 3C side of the market as inventories have been normalized there? And given that those businesses are your most seasonally sensitive businesses and you're seeing green shoots of demand, would you expect this normal second half seasonal patterns where the third quarter is up maybe high single-digit percent sequentially, the fourth quarter down mid-single-digit percent sequentially?

Yes, this is Emily. Let me answer your question. I believe I mentioned this earlier. We are observing that automotive inventory rebalancing will likely continue into the second quarter, as it varies significantly by customer, part, and program. It's not going to be uniform. Changes will occur gradually. In the industrial sector, which is broader, the correction is expected to extend into the second half of the year. Regarding computing, the inventory is in good shape, and we anticipate that both the second quarter and the second half will be stronger than the first half. Overall demand in the consumer segment is slower than we expected, but we anticipate that some new programs will begin to ramp up in the second quarter and peak in the third quarter. The holiday builds in the fourth quarter may only benefit this market segment for half a month to a month. In terms of communication, the demand for networking and telecom is on the slower side, leading to a more gradual inventory correction that will likely extend into the second half of the year, depending on customer conditions. For smartphones, demand is a key driver, and overall demand remains slower than expected. However, we strongly believe that the second quarter will be stronger than the first quarter. This is why we guided for a 4.6% increase. We also expect the second half of this year to perform better than the first half. Based on our backlog, the book-to-bill ratio, and various other factors, I can confirm that the second half will be stronger than the first half. While I cannot specify the percentage of improvement due to market uncertainties, it is clear that the second half will outperform the first half.

Our next question will come from Tristan Gerra with Baird. The second half of this year will be better than the first half. Based on our backlog and the book-to-bill ratio, as well as other factors, I can confirm that the second half will show stronger performance. However, we are not specifying the percentage of improvement due to ongoing market uncertainties. Overall, we can certainly expect the second half to outperform the first half.

Are you able to quantify the percentage of the product that you're migrating to internal manufacturing on the front end? What is the percentage that you're currently outsourcing, what that percentage will be as you qualify more product internally? And is that mostly for your analog product as opposed to discrete?

Tristan, I believe what you'll notice is that we're integrating both our analog and discrete manufacturing. Our goal is to optimize the technology nodes that operate at significant volumes while ensuring we maintain flexibility both internally and externally. Historically, we've aimed to insource between 50% to 60% of our production. During downturns, we prefer to increase that percentage, relying on SPFAB and the Greenock fab to manage the bulk of that production since they serve as our foundational fabs across our two platforms. The initiative focuses on minimizing dispersion and instead integrating more closely with these factories to enhance leverage in terms of cost and scale, which will help us create both revenue and cost-saving opportunities over time. That summarizes our perspective.

Right. And also, I want to clarify Tristan, is that not 100% from those two fabs have transferred from outside to inside. We do have a new technology really tape-out in those two wafer fabs starting from 0. So that's really good news for us. So when we say that, it does not mean 100% we are loading from the outside foundry factory. So we do have our internal technology and product tape-out releasing in these two particular wafer fabs.

Great. That's very useful. Following up on the commentary about inventories, do you expect to increase your stock levels in your Q2 guidance? Or do you believe that by lowering your utilization rates this quarter, you are now aligning inventory with actual end demand? Additionally, could you share what point of sale for distributors is included in your Q2 revenue guidance?

Yes, I'll make a couple of comments, Tristan, and then let Emily run with some others, is that what I'd say on the inventory front is that we basically have done some things in the first quarter that address needing to make sure we have availability in place, addressing uncertain order patterns, addressing the fact that the Chinese New Year came in February, which is a much more difficult time to manage that across the quarter and have availability in place. And as we look out in the second quarter, what we expect is essentially to be running at a level of what we expect demand to be. I don't expect to be building inventory internally, and we certainly don't expect to be building inventory externally. We continue to expect to make progress there, and we continue to see good activity from a POS perspective. And maybe I'll see if Emily wants to extend that comment at all.

Yes. So, Tristan, to answer your question, when we provide the Q2 guidance, we do consider the point of sales forecast as well as the channel inventory situation. So, and then that coupled with the backlog and then some other things that we're seeing. So, yes, it is included in our estimate.

Okay. And then if I could slip maybe a quick third and last question, otherwise, I'll go back in the queue. But can you say where your utilization rates are currently at the front end? And what type of internal inventory days you need to see on your book before you start ramping utilization rates again?

We haven't been communicating our utilization rates, but we aim for our assembly tests to run in the mid-90s and our fabs in the mid-80s, and we are currently below both of those targets. We believe that as demand increases and we see more strength, being able to load our factories will benefit us. We haven't maintained our utilization rates over the past year due to a decline in demand. Moving forward, our strategy will be to keep utilization aligned with demand. We feel our availability is in a good position and we plan to be opportunistic. That is the approach we are taking regarding our factories.

And our next question will come from William Stein with Truist Securities.

Great. First, perhaps I'll take another whack at the inventory question. There was a big build, again, sequentially dollars and days. Can you remind us what the long-term inventory target is and when you'd expect to get there approximately?

On inventory, we are focused on our portfolio of 50,000 parts and the need for availability and mix. We have struggled to achieve broad availability, particularly for some of our critical and premium products, which has constrained access to our best offerings in the short term. Over the past couple of quarters, as we sense improvement, we are working to ensure that within 6 to 8 weeks, we can provide a reasonable variety of products from our shelves. This is an active effort, including collaboration with our distributors. We have seen progress in this area. Regarding inventory levels of finished goods, we are not planning to increase those strategically. Instead, as conditions improve, our aim is to maintain utilization in line with demand and gain an advantage in availability. We believe that our service will provide a competitive edge over time, and if we can enhance availability, it will create opportunities for market share growth and momentum as demand rises.

Yes, we are noticing an increasing number of short lead time purchase orders coming in, particularly following the demand we observed at the end of the first quarter. By properly managing our inventory, we enhance our ability to fulfill these urgent orders.

Before I move on to my next question, I want to clarify what you're saying. You're currently at about 190 days of inventory. This seems somewhat unusual for a company at this point in the cycle to want to maintain that level of inventory, but it could be a smart strategy. Can you confirm my understanding? Or are you referring to inventory in terms of dollars, where the days would decrease significantly if revenue increased?

What we're conveying, Will, is that if you examine the distribution by finish level over time, the dollar investment in raw materials has remained relatively stable. This supports our factory operations and our outsourcing efforts. From the work-in-process standpoint, we've made some adjustments based on demand. Strategically, we've aimed to ensure that we have a good mix of finished goods available. As demand increases, we anticipate that this may change at some point. However, for the time being, we intend to maintain an average of 6 to 8 weeks of finished goods availability. This isn't uniform across all parts, but we're working with a large and diverse portfolio, which reflects our efforts. When I say we are trying to maintain this, I mean we believe that having strong availability will benefit our growth with some of our key accounts and high-demand products.

Yes, we are noticing an increase in short lead time purchase orders reflecting the demand that began at the end of the first quarter. By ensuring we have the right mix of inventory on hand, we can significantly enhance our ability to fulfill these rush orders.

Yes. Let me answer the question. Direct and distribution is 39% compared to 61%. We're typically using a rough estimate of two-thirds versus one-third, although some quarters have varied slightly. Specifically, for Q1, the 61% distribution is also reflected in my earlier discussion that we've seen a decrease in channel inventory value by the end of Q1. From a year-over-year perspective, the weighted average selling price dropped by slightly more than 25%. There’s definitely a mix change involved as well. For example, the percentage decrease in auto industrial directly impacts the weighted average price. When looking at the mix-independent aspect, we built in a cost degradation of 1.5% to 2% per quarter. What we observed is that the change in mix-independent ASP is relatively small and remains within our estimates. Balancing that is crucial, as it contributes to driving some costs down, aided by the manufacturing efficiency I mentioned earlier.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Gary Yu for any closing remarks.

Thank you, everyone, for participating in today's call. We look forward to reporting our progress on next quarter's conference call. Operator, you may now disconnect.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.