Earnings Call Transcript - DIOD Q3 2022

Operator, Operator

Good afternoon, and welcome to Diodes Incorporated Third Quarter 2022 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, Monday, November 7, 2022. I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead.

Leanne Sievers, President of Shelton Group

Good afternoon, and welcome to Diodes' third quarter 2022 financial results conference call. I’m Leanne Sievers, President of Shelton Group, Diodes Investor Relations firm. Joining us today from Taiwan are Diodes Chairman, President and CEO, 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-Q for its 2022 fiscal quarter ending September 30, 2022. 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, November 7, 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 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.

Keh-Shew Lu, Chairman, President and CEO

Thank you, Leanne. Welcome, everyone, and thank you for joining us today. I am very pleased to be reporting today our fifth consecutive quarter of record gross margin and the seventh consecutive quarter of record adjusted earnings per share and earnings. Our record results were driven by outstanding execution by the team, especially considering the COVID-related lockdowns and power outages in certain regions of China for part of the quarter. Also contributing to our strong performance was the achievement of greater revenue in our automotive and industrial end markets that together totaled 44% of product revenue, which is four percentage points above our 2025 target model and above 40% for the third consecutive quarter. Diodes’ automotive business represented 16% of product revenue for the first time, reflecting the ongoing success of our customer and content expansion initiative as well as share gains in these end markets. Over the past several quarters, Diodes has consistently proved its ability to execute during one of the most challenging supply chain environments that the industry has experienced, and was still able to deliver multiple consecutive quarters of greater results, expanded margins, and increased profitability. When looking back over the past two years, our revenue has grown 68%. Gross margin expanded 590 basis points, and adjusted earnings per share increased over 220%. These achievements underscore Diodes' consistency as an operator through diversified business and economic empowerment. We are on our way to our 2025 financial target of $2.5 billion in revenue and $1 billion in gross profit. With that, let me now turn the call over to Brett to discuss our third-quarter financial results and our fourth-quarter 2022 guidance in more detail.

Brett Whitmire, Chief Financial Officer

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 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 third quarter 2022 was a record $521.3 million, an increase of 4.1% from $501 million in the second quarter 2022. Gross profit for the third quarter was also a record at $217.8 million, representing a record 41.8% of revenue, increasing 5.5% or 60 basis points from $206.5 million or 41.2% of revenue in the second quarter 2022. GAAP operating expenses for the third quarter 2022 were $105.4 million or 20.2% of revenue, and on a non-GAAP basis were $101.3 million or 19.4% of revenue, which excludes $3.9 million of amortization of acquisition-related intangible asset expenses and $0.1 million of acquisition-related costs. This compares to non-GAAP operating expenses in the prior quarter of $99.7 million or 19.9% of revenue. Total other expenses amounted to approximately $3.3 million for the quarter, consisting of $2.6 million of unrealized loss on investments, $2.7 million in interest expense, and a $1 million foreign currency loss, offset by $2.2 million of other income and $862,000 of interest income. Income before taxes and non-controlling interest in the third quarter 2022 was $109.1 million compared to $101.2 million in the previous quarter. Turning to income taxes, our effective income tax rate for the third quarter was approximately 18.5%. GAAP net income for the third quarter 2022 was a record $86.4 million or $1.88 per diluted share compared to GAAP net income of $80.2 million or $1.75 per diluted share in second quarter 2022. GAAP earnings per share in the quarter increased 25.3% year-over-year from $1.50 per diluted share in the third quarter 2021. The share count used to compute GAAP diluted EPS for the third quarter 2022 was 46 million shares. Non-GAAP adjusted net income in the third quarter was a record $92.2 million or $2 per diluted share which excluded net of tax $3.2 million of acquisition-related intangible asset costs, $2.1 million in non-cash marked-to-market investment adjustments, $0.1 million of acquisition-related costs, and a $0.4 million gain on the sale of investments. This represents a 5.3% improvement from last quarter of $1.90 per diluted share or $86.9 million and a 36.1% improvement from $1.47 per diluted share or $67.3 million in the third quarter 2021. Excluding non-cash share-based compensation expense of $8.1 million net of tax for third quarter, both GAAP earnings per share and non-GAAP adjusted EPS would have increased by $0.18 per diluted share for the third quarter. EBITDA for the third quarter was a record $141.9 million or 27.2% of revenue compared to $130.6 million or 26% of revenue in the prior quarter. On a year-over-year basis, EBITDA increased 23.9% from $114.5 million in the third quarter 2021 highlighting our continued improvements over the past year. 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 $132.2 million for the third quarter 2022. Free cash flow was $62.4 million, which included $69.8 million for capital expenditures. Net cash flow was a positive $78.3 million. Turning to the balance sheet at the end of third quarter, cash, cash equivalents, restricted cash plus short-term investments totaled approximately $393 million. Working capital was $765 million and total debt including long-term and short-term was $296 million. In terms of inventory at the end of the third quarter, total inventory days were approximately 113 as compared to 115 last quarter. Finished goods inventory days were 32, which was flat compared to 32 last quarter. Total inventory dollars increased $3.5 million from the prior quarter to approximately $374.8 million. Total inventory in the quarter consisted of an $8.3 million increase in finished goods, a $6.7 million increase in raw materials, and an $11.5 million decrease in work in progress. Capital expenditures on a cash basis were $69.8 million for the third quarter and for the first nine months approximately $148 million or 9.8% of revenue. The year-to-date CapEx is higher than our target model due to our assembly test and wafer fab capacity expansions. But we still expect to be within our target model of 5% to 9% for the full year. Now turning to our outlook. For the fourth quarter of 2022, we expect revenue to be approximately $494 million plus or minus 3% in line with typical seasonality. GAAP gross margin is expected to be 41.0% 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 21.0% of revenue plus or minus 1%. We expect net interest expense to be approximately $4 million, our income tax rate is expected to be 19% plus or minus 3%, and shares used to calculate EPS for the fourth quarter are anticipated to be approximately 46.5 million. Not included in these non-GAAP estimates is amortization of $3.2 million after tax for previous acquisitions. With that said, I will now turn the call over to Emily Yang.

Emily Yang, Senior Vice President of Worldwide Sales and Marketing

Thank you, Brett, and good afternoon. In the third quarter, revenue increased 4.1% sequentially reflecting our achievement of record revenue in the automotive and industrial end markets. That has also contributed to record revenue in North America and Europe. Additionally, our POS revenue with a record distributor inventory in terms of weeks increased slightly quarter-over-quarter and is within our defined normal range of 11 to 14 weeks. Overall demand and backlog remain strong across all regions. Looking at global sales in the third quarter, Asia represented 73% of revenue, Europe 15%, and North America 12%. In terms of our end markets, industrial represented 28% of Diodes' product revenue, computing 23%, consumer 18%, communication 15%, and our automotive end market reached a record 16% of product revenue. Our automotive and industrial end markets combined total 44% of product revenue, which is 4 percentage points above our 2025 target and above 40% for the third consecutive quarter. Now, let me review the end market in greater detail. Beginning with automotive, revenue increased 48% year-over-year and 17% sequentially to set another quarterly record, which is a nine consecutive quarters. Our consistent growth has been driven by our ongoing demand creation efforts as well as market share gains. In connected driving, which consists of ADAS, telematics, and infotainment systems, we continue to see increased interest for USB type C drivers in rear-seat entertainment and smart cockpit applications. Also, our video switches from EP, DisplayPort, and USB 3.0 and our USB signal and analog switches are also winning the sizing ADAS, infotainment, and smart card applications. Our DC/DC converters, CMOS LDOs, switching diodes, power switches, and diode controllers experienced strong demand as well. With comfort, style, and safety, we secured increasing designs for our DC/DC converters, bipolar transistors, and LED drivers for exterior LED lighting along with our booster controllers, LED drivers, and diodes for interior and exterior lighting, electrification, and mobility systems. During the quarter, our gateway ICs were designed into wireless chargers. While our low-voltage MOSFETs were designed for automotive USB car chargers and power source load switch applications. In addition, our operational amplifiers were designed into onboard chargers, DC/DC converters, battery management systems, pumps, airbags, position sensors, and occupancy detection systems. In powertrain, which covers conventional hybrid electric vehicles, we secured increasing designs for automotive IO extenders, EV central control units, as well as the designs for our bipolar power transistors and Zener diodes in the power modules of electrification systems. Additionally, our TVS devices experienced strong demand for EV battery protection, DC fan motor controllers, generators, and starter applications. We also saw solid demand in automatic transmission and power train applications as we added seven new automotive-grade products to our protection portfolio. In the industrial end market, revenue reached another record and grew approximately 30% year-over-year and 6% sequentially, representing a sixth consecutive quarter of growth. Our PCI Express 2.0 and 3.0 packet switches and SBR products were designed into multiple power over Ethernet adapters for security and civilian applications, which is an area where HDMI 6 gigabits per second and 12 gigabits per second read drivers also being used. We also saw healthy demand from our gate drive ICs, TVS diodes, Zener diodes, DC/DC Buck converters, LED drivers, linear regulators, and MOSFET products in various applications like energy storage, power distribution systems, DC fans, power supplies, air conditioners, and oil pump applications. Our products continue to enjoy solid demand from the power supply to energy meter applications. We also continue to see strong demand for application-specific multichip circuits, industrial lighting, and blood glucose monitoring systems. In the computing market, although the PC and mobile market was soft, we continue to focus on cloud servers, storage, and SSD applications. As I mentioned last quarter, our ability to quickly adjust our support from slowing markets to high-demand market segments is a strong testament to our team’s execution and has also been a contributor to our consistent growth. In terms of design wins during the quarter, we continue to secure designs for our USB single switches in the enterprise SSD application, as well as new wins for SM bus shifter families in cloud products. Our customized Zener diodes have also been used in cloud computing platforms. We also remain well-positioned to support cloud computing and data center customers with a complete timing offering, including crystal, oscillators, PCI Express clock generators, and PCI Express clock buffers. Also during the quarter, we continued to see adoption of our embedded DisplayPort read drivers, gaining traction in gaming and mobile applications. Our newly released PCI Express 5.0 now supports 6, 8, and 12 outputs. Lastly, our current limit power switches continue to see solid uptake from USB A and USB C power source applications, signaling both desktop and docking stations. In summary, with the achievement of our seventh consecutive quarter of record results, Diodes continues to prove our ability to consistently execute and quickly adjust our support from slowing end markets to high-demand market segments. Additionally, the ongoing success of our customer and content expansion initiatives, as well as share gains in both the automotive and industrial markets, has greatly increased our revenue contribution and mix, which has also contributed to our consistent margin improvement. We believe we’re well-positioned to continue driving future growth and expansion toward our 2025 targets of $2.5 billion in revenue and $1 billion in gross profit. With that, we now open the floor to questions. Operator?

Operator, Operator

We will now begin the question-and-answer session. Our first question will come from Matt Ramsay of Cowen. Please go ahead.

Matt Ramsay, Analyst

Thanks for taking my question. And congrats on the awesome results. I wanted to ask a little bit about your end markets. I mean, we’ve seen all through this earnings season consumer and computing from your peers has come in weaker and there are some signs of industrial softening, but your results don’t seem to indicate that on the industrial side. Can you just help us understand what you’re seeing in industrial and in particular, how good you feel about visibility into that market the next couple of quarters and what you’re seeing in the channel? Thank you.

Brett Whitmire, Chief Financial Officer

For industrial overall, the backlog and everything still seems to show a lot of strength overall. We do see some specific applications or specific devices that are adjusting a little bit forecasts here and there. But if you take the overall picture, it’s still strong. And from the visibility point of view, we still have pretty good backlog in place, and we are not definitely seeing a significant change overall.

Matt Ramsay, Analyst

And I just want to ask about geopolitics a little bit. I know you guys have a pretty material footprint over in China and your products, and your manufacturing shouldn't fall under any of the restrictions as they’re written now, but I guess, are you anticipating any future potential disruptions? Or, I guess, how are you thinking about potential risks, because we’ve seen some ancillary disruptions across the supply chain, as there’s been more of a crackdown in China and whatnot? Thank you.

Keh-Shew Lu, Chairman, President and CEO

Actually, we have been doing well during this year. When China had different areas go into lockdown, we knew how to handle it. And so far, you can see our operation. In the second quarter, in the Shanghai area, they had a lockdown for two months, and we saw okay results. Even in the third quarter, we had the COVID-19 shutdown issue, but we were still able to move some operations to Shanghai to support the CNT for almost one month of the shutdown. So we know how to handle these various locations during operational shutdowns; we call it closed-loop operation. And we are able to move around our operations from center to Shanghai or reverse or even move to some other areas. So I really do not put too much concern in this area.

Operator, Operator

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

Gary Mobley, Analyst

Hello, everybody. Thanks for taking my question. I want to double click on your response, Dr. Lu, related to how your business operates in China amidst a backdrop of a bunch of COVID lockdowns. I understand that you’re able to operate those facilities in Chengdu and Shanghai using that closed-loop working environment. That seems to be, from what we’re hearing over here in the U.S., there seems to be a bit of employee backlash at least in some parts of the country. So I’m curious to know how you’re managing that. And, well, let’s just start with that.

Emily Yang, Senior Vice President of Worldwide Sales and Marketing

Well, maybe Gary, let me make a comment first. When and what is going to happen next is something hard to predict. The market overall, the situation in China is still pretty dynamic, right? I think Dr. Lu’s point is with our experience and expertise in the manufacturing side and how to operate during the crisis gives us confidence that no matter what’s going to happen next, we’ll be able to adjust our strategy and our solutions to best support our customers. So I think that’s our overall standpoint. Even if we don’t know what’s going to happen next, I believe we’re ready for whatever is going to happen.

Gary Mobley, Analyst

Emily. Just a couple of follow-up questions. Any notable change in customer order lead times, whether that be overall or by market where they’re still long? And then as well, I wanted to ask, how truly fungible is your manufacturing capacity whereby you can reallocate manufacturing for end markets and still remain strong? Is that truly possible in end markets like automotive where you need automotive-grade qualification or whatnot? That’s it for me. Thank you.

Emily Yang, Senior Vice President of Worldwide Sales and Marketing

So I think, let me answer the first question about the lead time. Overall there are really no significant changes in lead time. All along even during the last two years, we’ve been focusing on understanding the true customers’ demand and making adjustments accordingly. I think the second part of your question is really about our ability to quickly adjust our capacity and support from one market to another. I think the Q3 result is a good testament of our ability. So we did actually quickly adjust from the slow demand markets, like the low NPC consumers or smartphones, to the automotive and industrial customer base. So all our factories are automotive qualified, and that gives us the capability to quickly adjust. So not only in Q3 but also in the second quarter, I think we talked about the same thing as well. So I hope that will give you confidence that we do have the capability and flexibility to quickly adjust our support.

Operator, Operator

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

David Williams, Analyst

Hey, good afternoon, and congratulations on the really solid results here, especially in this macro. Emily, just first, maybe you could share your thoughts on the automotive growth. You’re clearly seeing a lot of traction. And you’ve had this initiative to really drive content and share gains there. Just kind of wondering, it seems like you’ve had really solid growth over the last several quarters and in this quarter particularly, but just are you seeing anything maybe being pulled in? Or is this really just because of the demand that you’re seeing and the new design wins? Was there anything there that we should be thinking about in terms of maybe slowing later on the automotive side?

Emily Yang, Senior Vice President of Worldwide Sales and Marketing

Yes. So David, if we look at the results: for Q3, we actually achieved 16%, which is definitely a record for automotive. If we compare year-over-year, that’s a 48% growth, and even quarter-over-quarter, that’s a 17% growth. But I want to also direct your attention, not just for the third quarter. So we’d be openly talking about from 2013 to 2021, we actually have a compound annual growth rate of 30%. This is not just a one quarter or a few quarters, but consistently over many years. We established automotive focus years back. What we see is actually a significant change from the topology and design structure point of view. I’ve been talking about the excitement as we start seeing a lot of new protocols extended into different areas. One good example is our Pericom product family. We are starting to see PCI Express and Gigabit Ethernet being adopted. And this adoption is just the beginning. That gives us a lot of confidence about growth in the future. We also look at our design pipeline, which continues to grow significantly. This is the reason to support our ongoing growth on a quarter-over-quarter and year-over-year basis.

Keh-Shew Lu, Chairman, President and CEO

Yes David. We implement a policy that mandates all new products, if possible, need to be automotive-grade qualified, which we refer to as the two-part policy. So, most of our new products, when we visit, we focus on this automotive qualification and therefore we have allowed the design win and the automotive products to ramp up much slower than consumer or other market signals. It takes almost two years for a new product to be rendered. If you look, we have been consistently increasing our revenue percentage year-over-year and quarter-over-quarter, and that’s another key measurement we implement. The automotive segment as a percentage of total revenue is increasing. Now we are getting to 16% of our revenue from the automotive segment. This is not a very short-term gain; this is long-term driven. I can see that growth may be a little variable, but it will not go in the other direction. Thus, we will continue to grow as a percentage of revenue.

David Williams, Analyst

Okay. Fantastic. Thanks, Dr. Lu for the color there. And then maybe last one for me, just a broader question. But was there anything maybe in the quarter that surprised you, either from demand shifting or maybe things that are stronger than you would have anticipated? Anything that you should be thinking about in terms of the next few quarters where we could see some shifting around or any caution?

Emily Yang, Senior Vice President of Worldwide Sales and Marketing

Yes, I would say definitely, the demand from automotive sides feels very, very strong. That’s really positive news. It gave us an opportunity to balance out some of the other slow demand markets. I think the second surprise was really the power constraint in Chengdu, but again, we demonstrated our strong capability to manage through this crisis as well.

Keh-Shew Lu, Chairman, President and CEO

If you’re asking me for any surprises, we still meet our guidance. Therefore, we can see much clearer projections about what may come up in two to three quarters later, but indeed in the third quarter, when we make the guidance for the third quarter, we see much clearer results now for the fourth quarter.

Operator, Operator

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

Tristan Gerra, Analyst

Hi, good afternoon, or good morning. Given the commentary about automotive sitting pockets of weakness in some other end markets, which has been well advertised through this earnings season, how sustainable is the pricing environment? Would you expect there have been a lot of non-cancelable orders across your peers? Would you expect those non-cancelable orders to be in place in the first half of next year, or are we going to see the normalization of how contracts are made with customers?

Emily Yang, Senior Vice President of Worldwide Sales and Marketing

Yes. Hi, Tristan. Overall, the pricing trend is still unstable. So, we don’t expect any significant change in the coming short term. And as for non-cancelable orders, we are also not making any significant changes. We implemented that a few quarters back. Again, we don’t expect that to change significantly overall for the first half or the second half of the year.

Tristan Gerra, Analyst

And then as a follow-up question. We know China’s weak, but there were also some Q3 specific items in terms of the lockdown and the power constraints. How would we quantify the non-recurring portion of that weakness that happened in Q3 even as China continues to be weak in Q4 and in other quarters? How much of a potential recovery can we expect assuming there are no additional lockdowns versus what happened in Q3?

Emily Yang, Senior Vice President of Worldwide Sales and Marketing

Well, I think, Tristan, overall, the market is still extremely dynamic. It’s difficult for us to predict exactly what is going to happen or the recovery, but one thing we have done is look at all different factors and gather backlog information, alongside the record POS resell by the end of Q3, and we incorporated everything into our Q4 guidance. It’s tricky for us to really predict when the recovery will happen in China.

Keh-Shew Lu, Chairman, President and CEO

Even in the context of the China situation, we still move along seasonal trends. Typically, in the fourth quarter, we typically go down significantly by approximately 5%. In a good scenario, we might be a bit better than that. Even this year, we expect some market difficulties, guiding our first quarter to be somewhere around a 5% decrease. The market is indeed very dynamic and unstable, but we are still able to guide based on typical seasonal multiples.

Emily Yang, Senior Vice President of Worldwide Sales and Marketing

I think one more thing I want to add is that the local consumer business in China is actually a very small portion of Diodes' overall business.

Operator, Operator

Our next question will come from William Stein of Truist Securities. Please go ahead.

William Stein, Analyst

Great, thanks for taking my question. And I want to add my congratulations on the very good results and outlook. I think I want to sort of distill this to what I think is the big point of contention between investors and many companies right now. We’re seeing, we’ve already seen some of these consumer and computing markets weaken pretty significantly. We’ve seen that in your model for the last couple quarters even. And I think the consensus among investors is that this is a downturn, and it’s just rolling across end markets from one to the next. When we think about industrial and automotive, it’s just a matter of time. What we’re hearing from some companies is that it’s not really right; the downturn is really just in a couple of bad end markets. And you have automotive and industrial holding up pretty well. We don’t think they’re going to move. I wonder which of those scenarios Diodes sees as likely to play out in the next few quarters? Are you expecting automotive and industrial to take their punishment, just like the other end markets have? Or do you anticipate these will remain strong? Thank you.

Emily Yang, Senior Vice President of Worldwide Sales and Marketing

Well, first of all, we don’t really forecast more than a quarter and provide guidance. I think what maybe I’ll just share my personal view over this. I think consumer computing and communications are definitely seeing a bigger adjustment. What I’m seeing is really more an inventory rebalancing. So over the quarters, the buildup of certain inventory needs adjustment and resetting. We’ve been seeing some adjustments already in industrial and automotive; it’s not like we haven’t seen, but the scale is a little bit different. I would definitely let Dr. Lu make more comments, that’s what I see.

Keh-Shew Lu, Chairman, President and CEO

Actually, it’s much more important that the short-term market be stable. For example, the automotive sector is experiencing growth in content rather than decline. The editorial content of the automotive industry is increasing, not going down. Therefore, from a broader perspective, this area continues to grow quarter-to-quarter. Our strategy involves how we participate in market softness. We’ll continue to see strong performance in the marketplace. Even consumer communication can adopt a similar approach. For example, we focus more on computing and high-end PCs, several servers, and data centers. That allows us to maintain balance even if the PC area slows down. In high-end PC or servers, it could pick up. That’s how we balance our approach while still meeting our guidance; we are confident in our growth in consumer IoT and communication sectors, including 5G.

William Stein, Analyst

I appreciate that. If I can ask one follow-up, I’m hoping you might give us an update on how the South Portland fab is progressing under your ownership. I forget if you’re already manufacturing and selling products out of this facility or if that's more of a future plan, and any other update you can offer us would be helpful. Thank you.

Keh-Shew Lu, Chairman, President and CEO

Well, the SP fab we just acquired in June this year. We have the contract to support their demand. We also see this opportunity to develop our own processes and qualify our products. But it takes time. To process more than one year, it may take one year to implement and then qualify the products before we can ramp up. Yes, we might face some challenges, but fortunately, we have been supporting our existing needs.

Emily Yang, Senior Vice President of Worldwide Sales and Marketing

Yes, everything is on track based on our plan, and it’s progressing well.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference over to Dr. Keh-Shew Lu for any closing remarks.

Keh-Shew Lu, Chairman, President and CEO

Thank you for your participation in today’s call. Operator, you may now disconnect.

Operator, Operator

The conference is now concluded. Thank you for attending today’s presentation, and you may now disconnect.