Diodes Incorporated (DIOD) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon and welcome to Diodes Inc. First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session. As a reminder, this conference call is being recorded today, Thursday May 6th, 2021. I would now like to turn the call over to Leanne Sievers of Shelton Group, Investor Relations. Leanne, please go ahead.
Leanne Sievers: Good afternoon and welcome to Diodes' first quarter 2021 financial results conference call. I'm Leanne Sievers, President of Shelton Group Diodes' Investor Relations firm. Joining us today are Diodes Chairman President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Brett Whitmire; Senior Vice President of Worldwide Sales and Marketing, Emily Yang; Senior Vice President Business Groups Gary Yu; and Director of Investor Relations, Laura Mehrl. Before I turn the call over to Dr. Lu, I'd like to remind our listeners that the results announced today are preliminary as they are subject to the company finalizing its closing procedures and customary quarterly review by the company's independent registered public accounting firm. As such these results are unaudited and subject to revision until the company files its Form 10-Q for its first quarter 2021 ending March 31ST, 2021. In addition, management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission including Forms 10-K and 10-Q. In addition, any projections as to the company's future performance represent management's estimates as of today May 6th, 2021. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change except to the extent required by applicable law. Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP to non-GAAP items which provide additional details. Also, throughout the company's press release and management statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days in the Investor Relations section of Diodes website at www.diodes.com.
Keh-Shew Lu: Thank you, Leanne. Welcome everyone and thank you for joining us today. Revenue in the first quarter set a new record both organically and on a consolidated basis, increasing 18% sequentially and exceeding the high-end of our guidance range in what has historically been a seasonally down quarter for our business. Our growth was driven by record total POS revenue as a result of record in both Asia and Europe combined with strong growth in North America. We also achieved record in our computing end market driven by record telecom product revenue and the automotive market due to strong organic growth in Diodes' automotive business. Combined with our expense management and operating efficiencies we delivered the highest quarter of adjusted earnings per share which increased 25% sequentially. The integration of LSC is also progressing well and ahead of schedule as we have already began to harvest the benefit of manufacturing synergies from improving factory loading with both LSC's and Diodes' products. In fact, loading at the LSC facility has reached 70% in the quarter versus our original target of 50% resulting in meaning operationally breakeven at this facility two quarters ahead of plan. Overall, our global manufacturing footprint is serving as a key advantage at a time when the broader semiconductor industry is challenged by supply and capacity constraints. We have both internal and external capacity needed to support the increasing demand we are seeing for our products. As a result, we expect to deliver another quarter of sequential growth in the second quarter coupled with a continued expansion in bottom-line profitability. With that let me now turn the call over to Brett to discuss our first quarter financial results and our second quarter 2021 guidance in more detail.
Brett Whitmire: Thanks Dr. Lu and good afternoon everyone. As part of my financial review today, I will focus my comments on the sequential change for each of the line items and would refer you to our press release for a more detailed review of our results as well as the year-over-year comparisons. Revenue for the first quarter 2021 was a record $413.1 million which included the first full quarter of revenue from LSC an increase of 17.9% from the $350.4 million in fourth quarter 2020. Gross profit for the first quarter was also a record at $138.6 million or 33.6% of revenue on a consolidated basis and 36.3% for Diodes only. This compares to $122.7 million or 35% of revenue in the fourth quarter 2020.
Emily Yang: Thank you, Brad and good afternoon. The 17.9% sequential increase in the first quarter revenue was better than the high end of our guidance, driven by the record direct revenue increased more than 30% and record POS revenue up more than 10% lead by POS records in Asia and Europe combined with strong growth in North America. Distributor inventory in terms of weeks, decreased quarter-over-quarter and below our defined normal range of 11 to 14 weeks. Looking at the global sales in the first quarter. Asia represented 81% of the revenue; Europe 12%; and North America 7%. In terms of our end markets, computing represented 30% of the revenue; industrial, 22%; consumer, 19%; communication, 17%; and automotive, 12% of revenue. We achieved record revenue in automotive end market, which was strong across all regions and the computing market, driven by record Pericom revenue.
Operator: Our first question comes from the line of Matt Ramsay from Cowen. Your question please.
Matt Ramsay: Thank you very much, good afternoon everybody. Impressive results for sure. Dr. Lu I wonder if you might give us a bit of a more detailed status upgrade of the integration on the operations side with LSC? You I think mentioned in your brief prepared comments that you're now at 70% utilization in those facilities. It's certainly a good environment to have extra capacity given the tightness in the industry. So, if you could give us a little bit of an update there and how you see that utilization rate of those facilities trending in the next couple of quarters? Thanks.
Keh-Shew Lu: Yes. Let me get Gary. He is in charge for the LSC integration to answer your question.
Gary Yu: Yes. Hi, everybody, this is Gary. I'm new to this conference call. Okay. And to answer your question, yes, we do see the improvement by the facility usage increased a lot in the second quarter. And we will continue loading our factory in the next couple of quarters and we will see more realization in the third and the fourth quarter.
Matt Ramsay: Got it. Thanks. Welcome to the call and thank you for the detail. As my follow-up question, I guess for the whole team, it's been some very impressive growth both consolidated inorganically, but no secret that there's a lot of different points of capacity tightness across the industry, Diodes happens to be in a position to have some extra foundry capacity which is great. But maybe you could calibrate us a little bit on how other things in the market may be affecting the upside that you can continue to deliver? I'm thinking about things like testing capacity, packaging, wafers, substrates and even limitations of supply of some of your peer companies that may sell into the same cars or end market devices. If there's anybody you could calibrate how the environment is out there versus the strength that your company is seeing that would be much appreciated. Thank you.
Keh-Shew Lu: Okay. The most constraint of the capacity is the wafer fab. And fortunately, half of our wafer fab requirements -- our wafer requirement is coming from our internal wafer fab support. And another advantage or another fortunately is because in 2019, we acquired the fab from Texas Instrument we call GFAB and that GFAB provide us a very big additional internal capacity. And the other one is we are ramping up, we call SFAB2, which is in Shanghai when we acquired BCD and that is the fab we are getting. And now we are ramping up for the 8-inch section of the SFAB2. So those two fabs is helping us a lot for the wafer requirement. Then in addition, when we purchased LSC and LSC fab is underloaded. If you remember we're just talking about that when we acquired is 50% loading. So we now like Gary talking about is in 1Q, it's already up to 70% then we'll continue to increase the capacity or the utilization for that LSC fab. So overall, we really have a good room to grow our revenue by in the ramp-up or utilize more of our internal fab. Then yes, since we are able to get more support from our external fabs, so overall we see some constraint, but it's not very severe to us. And you can see that our revenue growth continued revenue growth in 1Q and continue to 2Q and we are able to continue to support us in the future -- the rest of the year. Okay. And then the rest of it, since assembly again, majority is our own factory. So we do continue to expand our assembly capacities. So we don't really see a major limitation for our expansion for the revenues. And the rest of it is really a minor constraints. Therefore, I think Diodes has performed much better than our competitor due to we have a lot of our internal manufacturing capability.
Matt Ramsay: Thank you, Dr. Lu for that. The results speak for themselves. I'll jump in the queue.
Keh-Shew Lu: Thank you.
Operator: Our next question comes from the line of William Stein from Truist Securities. Your question, please.
William Stein: Great. Thanks for taking my question. Part of it was answered a moment ago, but I'm maybe looking for more -- maybe the word is a more forceful view. Everyone else is -- all the other companies are talking very clearly about capacity constraints. It sounds like they're not as problematic for you because of your internal capacity. Are you seeing lead times in aggregate stretch either because the company is having trouble delivering on some parts, or because customers are willing to place orders at longer lead time? Are you seeing that dynamic in your business? And if so maybe how far out in the future are we stretching today?
Emily Yang: Right. Hi, William. This is Emily. Let me answer the question. So we've definitely seen the overall market constraint, right? We have very, very strong book-to-bill ratio. We have extremely strong backlog across all the regions. And just like I reported, we have very, very strong POS result as well. So definitely, we've seen a little bit of the imbalance of supply and demand in the market. So I want to make sure we're seeing that as well. What we've been doing is actually we are overcoming different bottlenecks by working very closely with the customers to understand their true demand, right? So definitely we are seeing longer, I'll say bookings, right? People -- the lead time is stretching a little bit longer. But I've been emphasizing, it's not really about the lead time, it's really true demand understanding from the customer by working closely with them. So we're definitely seeing longer visibility for the backlog point of view. So, yes.
William Stein: One other if I can. An idea that's been sort of discussed in the semi industry for some years is competition from local China-based manufacturers. And there's I think a new JV announced in the last couple of days between Yageo and Foxconn to produce small ICs. Not necessarily about that potential future competitors specifically, but if you can characterize the competitive threats generally and specifically about sort of local new entrants in the market in China? Thank you.
Emily Yang: Right. So definitely. We -- I mean new competitors coming from China is nothing new. We haven't seen that I would say situation for a while already. Like I mentioned before, what we usually see this kind of competitors really more on the low end of the product or the technology. So over the years that Diodes has been implemented a strategy is actually walking away from this deep commodity market areas. So what we've been doing is actually continue to improve our technology and continue to drive the product mix to the higher end side, right? So I would say even having more competition in the low end area doesn't really have a big impact for the overall Diodes' business actually fitted better with our new strategy because that has been our direction for the last few years.
Keh-Shew Lu: Yeah. I would add few words is we -- what we -- another strategy we did is convert our sales from the commodity or individual sale to the content or total solution sales with the very big or very strong, very wide product portfolio. And through all the past history of M&A we are now -- our product portfolio is very completive and very wide range. And, therefore, it gives us an advantage when we go to the customer, when we approach to the total solution. And the new star company or China company typically they are not able to have a very wide range of a completed of the product portfolio. And so this -- we watch out for our competitor coming, but we apply our strength of the wide range product portfolio. I think this just gives the credit for our past history of the M&A and to enable us to now participate to the customer solution by using our wide range of product portfolio.
William Stein: Okay, thank you. And congratulations on the excellent results.
Emily Yang: Thank you.
Keh-Shew Lu: Thank you.
Operator: Thank you. Our next question comes from the line of Tristan Gerra from Baird. Your question please.
Tristan Gerra: Hi. Thanks for asking the question. I think I heard that about 50% of your production is outsourced currency. And I think that's mostly on the analog side following the years ago Kansas City shutdown. Are you expecting to meaningfully change over the next few years and increased percentage of your manufacturing that's going to be in-source notably as you now have more capacity in-house between SFAB2, GFAB and Lite-On?
Gary Yu: Yes. And let me answer your question. But Dr. Lu mentioned about from years ago, we acquired BCD so we have a SFAB. And GFAB we acquired from TI we get a 6-inch and 8-inch wafer fab in Scotland. And also just recently, we merged with Lite-On semi and we have 6-inch wafer fab and 4-inch wafer fab in the Hsin Chu and Keelung in Taiwan. So we are still looking for the good candidate with a good capacity to increase internally in the future. So that probably in very soon and we will have newer capacity maybe okay. But definitely just our direction to increase our internal capacity and reduce the outside support for semicon.
Tristan Gerra: Okay. And then given the relative supply advantage you have versus peers and given some larger analog companies or deemphasizing certain products being supply constrained. Do you basically see market share gains as you're basically taking on products that some of your peers are either deemphasizing on purpose so not able to serve the market with?
Gary Yu: Yeah definitely. When the capacity is very high and demand is very strong and whoever the company has a capacity will win the business.
Emily Yang: Right. So let me just add a little bit on top of that. I think Tristan it's all about balancing right? So keep in mind, our strategy doesn't really change. What we've been focusing is content expansion, right? So, we want to continue to expand the product into the customer and continue to expand our customer base, right? So right, now it's an interesting dynamic of the market, but does not take away our long-term focus, as a company. So what our focus is continue with our total solution sales, continue to improve our product mix, right? So that is actually the reason, because we do have a very clear goal by 2025 that we want to achieve $2.5 billion, right? So I would say, yes, there's short-term I would say variations for the demand and supply in balance. But that does not take away our long-term strategy of the product mix improvement as well as content expansion.
Tristan Gerra: Okay, very useful color. Thank you.
Operator: Thank you. Our next question comes from the line of David Williams from Loop Capital. Your question please.
David Williams: Hey. Good afternoon and thanks for the question, and congrats on the solid progress. I guess I wanted to see maybe if you could help, size-up maybe your backlog or maybe any color around math of velocity of the orders through the quarter. Just kind of how you've seen orders tracking? And how you think about that, as we move through this quarter or maybe into the third quarter?
Emily Yang: Okay. Hi. David, let me answer your question. So we do actually continue to see strong book-to-bill ratio, much higher than one. And we -- like, I reported in the Q1 result right, we have seen very strong POS results and the record POS from Asia as well as for Europe. Even for North America, we're actually seeing very, very strong net momentum grow more than 20%. If I look at the direct POP business point of view, the OEM business, I also mentioned, we actually grow more than 30%, right? So, based on all this data and based on the strong backlog that we currently have on the book, so overall, I would say, the market is very, very strong across all the regions and also across all the segments. So within the segment, we're definitely seeing continued extra strong strength from the automotive. And we're also seeing very good momentum in the industrial continue to recover. And the computing will continue to be strong. I think even consumer communication, we are also seeing very strong backlog as well.
Keh-Shew Lu: Well, in addition, if you look at our -- the inventory from our distributor is very low. Okay. We're typically looking for, 11 weeks to 14 weeks of the distributor inventory and we are now even below the 11 week. So, in addition the POS, strong POS the inventory use or although inventory actually going to be indicate a very strong business in the future.
David Williams: Okay. All right. Thank you. And then, maybe just from your customers, do you get a sense that they are being fairly rational, in terms of their orders? Obviously, double bookings are a thing and may not mean much. But do you get a sense that maybe they're becoming, a little more rational in their ordering and understanding the lead times and placing orders that are in line with what the real dynamics are?
Emily Yang: Yeah. So I think like, I mentioned before, we work very closely with the Tier 1, Tier 2, customers to understand their true demand. What we see is, is very rational. But going through the distribution side, the Tier 3, Tier 4 is not something we have the bandwidth to work with each individual customer to understand it. So how we measure, it is actually, we look at the POS resell. We look at the channel inventory. So with all this data, I would say, overall the business seems really solid and strong overall.
David Williams: Great. Thanks so much.
Operator: Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.
Keh-Shew Lu: Thank you for your participation on today's call. Operator, you may now disconnect.
Operator: Thank you. And thank you ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
