Diodes Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 8, 2023

There are 11 speakers on the call.

Operator

Afternoon, and welcome to the Diodes Incorporated Second Quarter 2023 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, Tuesday, August 8, 2023. I would now like turn the call over to Leanne Sievers of Shelton Group Investor Relations.

Operator

Leanne, please go ahead.

Speaker 1

Good afternoon, and welcome to Dyode's I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today are Diodes' Chairman, President and CEO, Doctor. Keh Shew Lu Chief Operating Officer, Gary Yu Chief Financial Officer, Brett Whitmire Senior Vice President of Worldwide Sales and Marketing, Emily Yang and Director of Investor Relations, Kermit Daliwal. 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 Form 10 Q for its fiscal quarter ending June 30, 2023. 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.

Speaker 1

Therefore, the company claims the protection of the Safe including Forms 10 ks and 10 Q. In addition, any projections as to the company's future performance represent management's estimates as of today, August 8, 2023. 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.

Speaker 1

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 Doctor. Lu, Dow's Chairman, President and CEO. Doctor.

Speaker 1

Lu, please go ahead.

Speaker 2

Thank you, Lianne. Welcome everyone and thank you for joining us today. During the Q2, The recovery in the Asia market was slower than we expected, especially in China. But I'm pleased with our team's execution to deliver breaker gross margin. Additionally, Our achievement of breaker product revenue in the automotive and industrial markets, It is strong testament to the continued success of our total solution sales approach and content expansion initiatives.

Speaker 2

This quarter was 6th Consecutive quarter gross margin was above our target model of 40% and The 6th consecutive quarter automotive and industrial increased as a percent of the revenue. With that, let me turn it over to Gary Yu, Diodes' Chief Operating Officer, for some additional comments on the quarters.

Speaker 3

Thank you, Doctor. Lu. Revenue in the second quarter was 4 $7,200,000 with gross margin reaching a record 41.8 percent of revenue. The recovery in the consumer, Computing and the communications market was much slower than we had originally expected, whereas the trend In automotive market, we remain relatively strong. During the quarter, our automotive and industrial product revenue Reached a record 48% of total product revenue and enabled us to maintain revenue flat sequentially and in line with our guidance, while also delivering record gross margin.

Speaker 3

Also notable in the quarter, We continue to generate strong cash from operations of $92,600,000 that enable us to reduce our total debt by 34 $4,000,000 to $89,000,000 as of June 30. Looking forward, we have begun to see early indication of market improvement With inventory days decreasing in the 2nd quarter, coupled with an increase in worldwide POs revenue. Although we expect a further reduction in channel inventory into the 3rd quarter, Dow's ongoing strategy to improve sales and product mix, Including growing revenue contribution from the automotive and industrial markets, position us to continue achieving our long term growth and the margin targets. Let me now turn the call over to Brett to discuss our Q2 financial results and our Q3 guidance in more detail.

Speaker 4

Thanks, Gary, and good afternoon, everyone. Revenue for the Q2 2023 was $467,200,000 decreasing 6.8% from $501,000,000 in the second Gross profit for the Q2 was $195,400,000 or 41.8 percent of revenue Compared to $206,500,000 or 41.2 percent of revenue in the prior year quarter and $194,500,000 or 41.6 percent of revenue in the prior quarter. GAAP operating expenses for the Q2 were $105,800,000 or 22.7 percent of revenue On a non GAAP basis, we're $102,000,000 or 21.8 percent of revenue, which This compares to GAAP operating expenses in the Q2 2022 of $100,300,000 or 20 percent of revenue and $108,000,000 or 23.1 percent of revenue in the prior quarter. Non GAAP operating expenses in the prior quarter were $101,300,000 or 21.7 percent of revenue. Total other income amounted to approximately $11,400,000 for the quarter consisting of 12,200,000 Unrealized gain on investments, dollars 2,200,000 of interest income, dollars 1,400,000 of other income, $2,200,000 of interest expense and $2,200,000 of foreign currency loss.

Speaker 4

Income before taxes and non controlling interest in the Q2 2023 was $101,000,000 compared to $101,200,000 in the prior year quarter and $88,600,000 in the previous quarter. Turning to income taxes, our effective income tax rate for the 2nd quarter was approximately 17.1%. GAAP net income for the Q2 of 2023 was $82,000,000 or $1.77 per diluted share Compared to $80,200,000 or $1.75 per diluted share in the Q2 2022 and $71,200,000 or $1.54 per diluted share in the Q1 2023. Share count used to compute GAAP diluted EPS for the Q2 of 2023 was 46,200,000 shares. Non GAAP adjusted net income in the 2nd quarter was $73,300,000 or $1.59 per diluted share, which excluded net of tax $3,100,000 of acquisition related intangible asset amortization and $11,700,000 related to equity investments.

Speaker 4

This compares to $86,900,000 or $1.90 per diluted Share in the Q2 2022 $73,400,000 or $1.59 per diluted share in the prior quarter. Excluding non cash share based compensation expense of $6,000,000 net of tax For the Q2, both GAAP earnings per share and non GAAP adjusted EPS would have increased by $0.13 per diluted share. EBITDA for the Q2 was $133,500,000 or 28.6 percent of revenue Compared to $130,600,000 or 26.1 percent of revenue in the Q2 2022 and $121,800,000 or 26.1 percent of revenue in the prior quarter. We have included in our earnings release a reconciliation of GAAP net income to non GAAP adjusted net income and GAAP net income to EBITDA, which Free cash flow was $55,600,000 which included $37,000,000 for capital expenditures. Net cash flow was a negative $1,200,000 including the pay down of $34,400,000 of total debt.

Speaker 4

Turning to the balance sheet. At the end of the second quarter, cash, cash equivalents, restricted cash plus short term investments totaled approximately $334,000,000 Working capital was $747,000,000 and total debt including long term and short term was $89,000,000 In terms of inventory at the end of second quarter, total inventory days were approximately 112 As compared to 116 last quarter, finished good inventory days were 30 compared to 31 last quarter. Total inventory dollars decreased $16,200,000 from the prior quarter to approximately $325,700,000 Total inventory in the quarter consisted of a $7,200,000 decrease in finished goods, A $7,000,000 decrease in work in process and a $2,000,000 decrease in raw materials. Capital expenditures on a cash basis were $37,000,000 for the 2nd quarter or 7.9% of revenue and within our target model of 5% to 9%. Now turning to our outlook.

Speaker 4

For the Q3 of 2023, We expect revenue to be approximately $425,000,000 plus or minus 3%, As we expect to continue reducing channel inventory due to the slower recovery in the consumer, computing and communications markets, We expect GAAP gross margin to decrease sequentially to 40.0 percent, plus or minus 1%, primarily due to the impact of our manufacturing service agreements, but remains at our target model. Non GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition related intangible assets are expected to be approximately 23% of revenue plus or minus 1%. We expect net interest expense to be approximately $1,000,000 Our income tax rate is expected to be 20% plus or minus 3% And shares used to calculate EPS for the Q3 are anticipated to be approximately 46,700,000 Not included in these non GAAP estimates is amortization of $3,100,000 after tax for previous acquisitions. With that said, I will now turn the call over to Emily Yang.

Speaker 5

Thank you, Brett, and good afternoon. Revenue in the Q2 was flat quarter over quarter, reflecting the slower than expected recovery in China and the 3C market. As Gary mentioned, while the automotive industrial market reached a record 48% of the total product revenue, Looking more closely at this quarter's revenue. Revenue in Europe was a record. The sugar there inventory in terms of wheat decreased Sequentially, the good news is our worldwide POS revenue increased over the Q1 and the growth was mainly from Asia.

Speaker 5

Overall, our design pipeline continues to be very strong, especially in the automotive market, which is expected to serve as a key driver to our long term future outlook towards our 2025 operating goals. Looking at the global sales in the Q2, Asia represented 67% of revenue Europe 20% and North America 13 In terms of our end markets, industrial was 29% of Diodes product revenue, automotive was a record 19% Computing, 22% Consumer, 18% and Communications, 12% of product revenue. Our automotive industrial end market combined at 48% of product revenue represented the 5th consecutive quarter About 40% and 8 percentage points above our 2025 target. This achievement underscores the ongoing success of our contract expansion strategy and market share gains. Now let me review the end market in greater details.

Speaker 5

In the automotive market, Our record revenue represented a growth of 22% year over year. We continue to ramp up design wins while maintaining ongoing design win momentum across multiple applications. Our SBR and bipolar junction transistors won a new design in both battery and plug in electric vehicles for battery management Crystal oscillators are being used in the EV for smart caustic and ADAS applications. We also saw design wins for TVS products for power line protection and EV charging plugs and data line protection within the domain control units. Our automotive USB C power delivery controllers and gate drivers are being designed into car chargers modules and wireless charging solutions.

Speaker 5

And our rectifier and Zener diodes continue to see growth in conventional inverter circuits, Wireless power circuits as well as body controllers. Additionally, our linear LED drivers and controllers Are seeing traction in infotainment and heads up displays, while our DC DC buck converters and transistors Continue to see solid demand from LED lighting, audiovideo navigation and instrument cluster systems. Also during the quarter, we introduced 110 new automotive compliance parts, including silicon carbide MOSFETs. This end channel MOSFETs are designed to address the growing demand for silicon carbide solutions in electric and hybrid vehicle subsystems Such as battery chargers, onboard chargers, high efficiency DC DC converters, motor drivers And traction inverters, along with a series of volumotage MOSFETs in battery management systems, WiFi Telecommunications and Infotainment Applications. In the industrial market, Our silicon carbide shock key diodes and MOSFETs, along with high current transistors, are seeing increasing tractions in the Power factor correction application, which helps improve voltage regulation as well as system capacity.

Speaker 5

Our products are also being used industrial motor drivers, solar inverters, power supplies as well as DC converters. Renewable Energy continued to be a key focus area for us with design wins for high current transistors, Bridge rectifiers and gate drivers ICs into wind energy, energy storage system. Our rectifier and Zener Diodes products also continue to see growth in applications ranging from smart energy metering We also saw strong growth during the quarter from rectifiers In the embedded computing modules for robotic consoles, building automations and point of sale terminals, our SVR power devices And Bridge has been adopted in power over Ethernet server applications, while our Intellify are being designed into Power generator control modules. The ever increasing data transmission rate and high frequency Swissmole power supplies Automated vehicle control system as well as connected home and smart factory automation control system. In the computing market, we continue to secure design wins for our PCI Express clock generators and buffers, I2C Muxes and Current Monitor products into data center and surfers, including AI surfers, While our low voltage talk sensors, short keys and TVS products are seeing demands in notebooks and combos, In fact, the computing end market is one area where we start seeing some recovering signs.

Speaker 5

Also experienced solid growth along with high efficiency brick products for high voltage server power application. Additionally, momentum for power switches continue in USB Type A and C power source applications in notebooks, Desktops and docking stations with our contact image sensor products saw new design wins in scanners and printer applications. In the communication market, our timing product, including clock buffers and differentiated crystal oscillators Our senior design wins for Noble interface cards and Ethernet switching applications, our FBR products are being designed into server and access point routers and are also seeing traction in low earth orbit or 5 gs application. Lastly, in the consumer market, our bridge rectifiers, hall latch switches and TVS product Our retrofitting diodes continue to see growth from fire and carbon monoxide sensors, LED lighting circuits for home appliances As well as 4 ks TV panels, while the momentum for our LED drivers, FVRs and PSO In summary, we have begun to see early indications of market improvement with inventory days decreasing in the 2nd quarter, Coupled with an increased worldwide POS revenue, our focus going into the Q3 continues to be on POS growth and depleting channel inventory. Diodes' ongoing strategy to improve sales and product mix, including growing revenue, Contribution from automotive and industrial markets positions us continue to achieve our long term growth and margin targets.

Speaker 5

With that, we now open the floor to questions. Operator?

Operator

At this time, we will take our first question, which will come from Gary Mobley with Wells Fargo Securities. Please go ahead.

Speaker 6

Good afternoon, everybody. Thanks for taking my question. Emily, I presume that distribution inventory, While down sequentially, still above the targeted level. And I ask the question because I'm trying to get a sense of the seasonal headwinds that you'll face throughout the balance of the calendar year. Would you expect a normal seasonal decline in the 4th quarter or maybe something atypical one direction or the other?

Speaker 5

Yes. So Gary, I did mention, unfortunately, the China recovery, its 3C recovery is slower than our I think the good news is we start seeing some signs, especially in the Computing segment. As I reported earlier, Q2 QS increased and the channel inventory decreased and unfortunately still higher than our normal range, right? So we'll continue to drive the inventory depletion in the 3rd quarter. The key is really driving the POS revenue growth, right?

Speaker 5

Since the market is really dynamic at this moment and the inventory week It's really calculated based on the POS revenue. So I think, just I said, that will be our continued focus For the coming quarters and we'll definitely keep you posted when we see some updated information.

Speaker 6

Okay. Appreciate that color, Emily. Can you help me understand what you mean specifically by the Fab recently took over TI and ON specifically?

Speaker 3

Yes. Gary, this is Gary. I won't be able to disclose too see too about that, but however, we do have a manufacturing service agreement in place to supporting our OEM customer in both assembling, testing and a foundry service. Okay. And due to the soft loading from the Q3 this year by the contract and this really kind of have our impact for our net revenues to be percent slightly.

Operator

And our next question will come from Matt Ramsay with TD Cowen. Please go ahead.

Speaker 7

Yes. Thank you very much. Good afternoon. For my first question, I wanted to build on maybe the first question that Gary asked. And As we see some of these maybe trends that haven't recovered in China as you guys had hoped or expected that they would, It seems like the guide for the September quarter revenue contemplates some softness in the end markets, but also Some drawing down of channel inventory.

Speaker 7

Maybe you could if you guys could give a little color on where you think Your revenue trends are in the Q3 that you guided versus what sell through actually looks like in your end market. So do you feel like you're under Shipping sell through to bring down channel inventory and by how much?

Speaker 5

Yes, Matt. I think definitely, if you look at the POS is really the sell through revenue, right? So we reported by the end of Q2, we actually seen a POS growth Globally. And the majority of this growth is really coming from Asia, which give us a really good indicator of the actual market, right? Also because like I mentioned, even there are some signs of recovery, but the recovery is definitely slower than what we expected.

Speaker 5

So I would say the depleting of the channel inventory is slower than our expectation as well. That's the reason we guided a lower number for the Q3. So it shifts Through into distribution lower, at the same time increasing the POS revenue, right? But I mean, I also talked about the Actual business signs, right? So there are signs of recovery in the PC market.

Speaker 5

There are signs even in the smartphone, especially with The leading manufacturer from the U. S, so not everybody eco, we also talk about it. And so we continue to believe as the inventory or the Customers' inventory continue to deplete. As the actual business continue to recover, we are confident that our inventory position in the channel also help us to support the customer with a last minute or short So that's pretty much what we believe.

Speaker 7

Got it. Thank you for that, Emily. Guess my follow-up question I wanted to ask a couple not on revenue, but on the rest of the P and L. So you got it gross margin and discussed some of the obligations there that are affecting it. But how do you Like how should we think about margins recovering?

Speaker 7

I mean is there some rule of thumb on return to revenue growth that would drive a Margin recovery are some of these obligations things that are going to be there permanently as long as revenue is at a certain level. I just kind of like to understand that a little bit better. How would we model Margins recovering as we come out of this. And the second part is on OpEx. Maybe Brett, you could talk a little bit about What actions you guys might take given revenues come down or is this something that you're going to continue to invest through?

Speaker 7

I'm just trying to understand philosophically how you Control, OpEx with the revenue down, I don't know, close to 20% year over year? Thanks.

Speaker 5

Yes. So maybe let me answer the first part, right? So, I mean, when the market is a little bit soft, especially in 3C area, we do see a little bit more price pressure, but majority of the price pressure is really coming from the decommodity area. We also We mentioned strategically we try to walk away from there. And just like you said, right, in the Q3, the major margin impact is really due to Manufacturing surface agreement.

Speaker 5

So as we continue to, I would say, ramp up our internal capacity or internal Diodes product At the same time, that's going to continue to improve. But keep in mind that the key margin improvement initiative from Diodes It's actually focused on the product mix improvement, right? So we believe that with the product mix initiative, including a lot of new Product introduction and that will continue to offset some of the price pressure and that will continue to help us to drive the margin improvement in the longer term. Brad, you want to cover the

Speaker 4

Yes. I think, Matt, the way to think about OpEx is what we would expect us to continue to do. And I think what you see is our R and D area we continue to invest in, in terms of our new products, new processes and that from an SG and A perspective, we continue to manage that very tightly and work within Our model and I think as we go forward, you would expect that to kind of step back into the model that we advertise more broadly.

Speaker 7

Thank you very much for the detail. Appreciate it.

Operator

And our next question will come from Tristan Gerra with Baird. Please go ahead.

Speaker 8

Hi, good afternoon. Just wanted to go a little bit some follow-up questions on gross margin in terms of How much of the decline embedded in the Q3 guidance is due to the service agreements that You've referenced versus lower utilization rates on your core business. Could you give us a sense of what gross margin will be if you had shipped in line with end demand? And also, is that headwind from Service agreements and presumably foundry customers kind of renegotiating lower volume, how long that can last? Will it linger for the next few quarters?

Speaker 5

Yes. So Tristan, let me try to answer the question, right? So I think Like Brett mentioned in the guidance, majority of the margin impact is due to the service agreement, right? So As we continue to ramp up our internal products, the utilization will continue to improve. So we do expect this is going to be a short period of It's not going to be an ongoing issue, right?

Speaker 5

And then related how long it's going to take is really depends on some of the Internal qualifications and progress, I think overall, we're progressing really well.

Speaker 2

Yes. If you want to talk about timing, I think we noticed this the market was slow down Such that our service agreement caused us the underwrote the issue. So we are aggressively working on bringing our own product into Our manufacturing to occupy that capacity and it takes time To qualify and to ramp, but we are not talking about year to year. We can start to ramp it up in probably 6 months. Yes.

Speaker 2

And Then from there, we can start to occupy that capacity Due to our service agreement, our partner or Competitors are here. No, our peers. Okay. Our OEM customer, our foundry customer, they actually Underloaded due to the market situation, but we're working toward To take in that capacity, so I don't think it's a long term problem. It is Probably 6 months or shorter, kind of how do we ramp and how do we PCN that product notification that our customer accepted.

Speaker 3

Yes.

Speaker 8

Great. That's very useful. Thank you. And then for my follow-up question, you've mentioned some Pricing pressure in the more commoditized segment of your business that obviously you're deemphasizing, Is that purely a function of supply demand and lead time contracting? Or is it a function of higher Competitive level from China based supplier and if that's the case, trying to understand the overlap from Those emerging analog competitors in China relative to your product portfolio and Presumably, if that trend continues, what does that mean in terms of your mix, which continues to evolve toward higher margin products.

Speaker 8

Thanks.

Speaker 5

Yes. So let me address the question. I think the pricing pressure It's really more on the demand supply side. And then also it's more on the inventory rebalancing, right? So we talked about a lot of customers with the high inventory on hand, mainly in the 3 The market, right, the computing consumer and communication, especially on the smartphone area.

Speaker 5

So that's what we see. We Don't really, I would say, interact a lot with the Chinese based supplier, which is also our strategy, right, walk away from this area. We've really seen more the top tier suppliers, not China based that we are really playing with. So we believe that once the demand overall situation improves And we're also going to see improvement in this area. For the very deep commodity, we also talk about walking away.

Speaker 5

So that's really, I would say a lot of area you might see some Chinese based supplier, but since it's really not our interest, so that's really not impacting Diodes that much.

Speaker 2

Well, if you look at in the past several years, we have focused our new product From the differentiated technology driven type of new product, so that is the evidence For us to get away from the China commodity comparators. Therefore, Our current situation is not due to China compared It's due to the market situation, okay. So if you look at from the past, We are talking about even the 3C area, we are more focused on Server for computing and smartphone for the communication And IoT for consumer business. So if you can see, we moving Our commodity type of product into more differentiate technology enhancement type of New product, and we see the result, and that's why we are able to maintain our Gross margin at our business model of 40% and even This quarter the Q2, we already had the record to get 41.8% And we believe if we continue working toward this direction, our gross margin Should

Speaker 3

be continue improve. Yes. I think other than the product, the new product introduction from Doctor. Lu's point And also we are focusing a lot on the automotive industry, which the pricing is relatively stable in these two applications. That you can see our grossing of these

Speaker 8

Great. Thank you very much again.

Operator

And our next question will come from William Stein with Truist Securities. Please go ahead. Great.

Speaker 9

Thanks. I didn't see if the Q was filed yet, but in that document you always disclose the revenue from channel versus Direct. And I'm wondering if you can tell us what that was in the quarter?

Speaker 5

So usually, we have about 2 third of revenue coming from And 1 third from the direct roughly, and we don't really expect significant change, But I can double check the ratio. I don't have the actual percentage in front of me at this moment, but I can double check.

Speaker 4

Yes, Will. So the direct portion this quarter was around 31%. You'd see that in the Q and we do have just filed that as well.

Speaker 9

Okay. I'll check it out. But this whole dynamic that you've highlighted with Channel inventories that continues to flush sort of slower than expected. It just sort of reminds me of the Various approaches that we've seen semi companies take in this unusual cycle that we've been through, some of them have put these very Sort of long dated agreements in place and they've sort of transitioned from short lead time and short lead time in very sort of early cycle companies to later and others have once they saw demand weakening, they just waived in all the cancels they could take. It looks like you're seeing I mean, look, revenue growth has faded over the last 7 or 8 quarters.

Speaker 9

So it's not a total surprise, but This looks like a fairly abrupt change next quarter. I'm wondering if you can talk about how you're managing Customer orders relative to lead times and customer requests to cancel or push orders, Was there a delay in the willingness to accept these and then they're all being accepted in Q3? Is that a big driver of the Q3 Guidance or is there another dynamic there? Thank you.

Speaker 5

So, Will, I think we always talk about that working With the customers closely understanding their demand, right? I mean, we have been, I would say, case by case working with the Customers depends on their reset and make certain adjustments, whether it's push out or cancellation to reflect their true demand. So we have ongoing effort that working with customers. At the end of the day, we want to make sure we have a structure And nimble to support the customer and build the long term relationships, right? So we definitely not the that we're going to push down their throat whether they like it or not.

Speaker 5

So there's ongoing effort that continue to drive the relationship and continue to help us to grow to the next level. So I would say that's ongoing. Lead times definitely are slowly coming down. That's also the reason that the backlog usually customer base on the lead time to place the backlog. So we're also working with the customers to make Sure.

Speaker 5

We understand their true long term demand and make adjustments towards that. So that has been an ongoing Even when the market is different, we talked about we didn't really increase the price just bluntly, but in return,

Speaker 8

Thank

Operator

you. Our next question will come from David Williams with Benchmark. Please go ahead.

Speaker 10

Hey, good afternoon. Thanks for letting me ask the question. I guess on the first, just wanted to touch on the automotive segment. And earlier, Emily, I think you said that the demand there, It remains relatively strong, but just curious if you're seeing any posturing changes in the Tier 1s or the ODMs, particularly in the level of inventory they're willing to carry and just in the general demand, are you seeing anything change there?

Speaker 5

Yes. I think in general, Right. We're still seeing really strong demand from automotive, especially on the design momentum as well Some of the branding of the new design. So I talked about it even for the Q2, automotive is Actually a record percentage, 19%, increased from 18% from the previous quarter. And then you know, right, we start tracking automotive since 2013 to 2022.

Speaker 5

We have a compounded annual growth rate of 30%. So I mean, Q2 represented 22% year over year growth. So yes, Maybe a little bit less than 30%, but it still shows a really strong momentum. We do see some customers automotive customers Adjusting some of the inventory, I also openly talked about it before. That has been an ongoing effort Because not everything equal, every part kind of varies a little, so the customer do adjust it.

Speaker 5

It's not like they're waiting and not doing any action. But putting that aside, right, I think releasing 68 new product in Q2 just focused on automotive With 110 new product in Q3, that actually shows the momentum as well as commitment from Diodes, right? So we believe this will continue to help us to outgrow the market and continue to gain the market share. So that will continue to be The number one focus for Diodes for the years to come.

Speaker 2

Well, one more point Its automotive business is a more stable type of business. From the new product design in To their rent, it take 2 to 3 years from the time we announced the new fallout to their rent, It takes 2 to 3 years. And therefore, we can we know how much new product We introduced in the past and when they're going to be ramped and those are much more Long term stable type of business than consumer, even computer or communication, it take much We'll continue that kind of the momentum. So when we're tracking like Emily talking about our Since 2013, we are about 30% CAGR. We believe that kind of trend We'll continue.

Speaker 2

It won't be effect too much by the real business Because obviously our customer view number of car won't be have that much of variance year over year Quarter over quarters.

Speaker 5

Yes. I think the other key focus is the content expansion.

Speaker 2

Yes.

Speaker 5

So we're not only counting all the number of cars Per year shift to the consumer, but really continue to expand in different applications like the connected driving, the comfort Safety and lighting as well as connected cars, right? So there's different areas we focus and this is all very high growth area With the contact expansion.

Speaker 10

Okay. Thanks so much. Excellent color there. Certainly appreciate it. And then secondly, not to be on the gross margin too much, but just kind of curious and Doctor.

Speaker 10

Liu, you've been very upbeat on the margin progression and the sustainability there. The resiliency is certainly showing up this quarter in the Q3 guidance down 180 basis points given the magnitude of revenue decline, but how should we think about the margin given the dynamics of the correction and just kind of thinking about some of these other segments maybe coming back? And as those recover, should we think about maybe a little more pressure on the gross margin side? Or is 40 kind of maybe a trough here that we should think about longer term?

Speaker 5

Well, maybe let me address the question first and Doctor. Lu can add some colors, right? With the product mix initiative, with the new product introduction, With the total solution sales, we are confident that we continue to drive our margin model Ahead of the 2025 model that we shared with you guys, which is 40%, right? Short term, we talked about the surface Agreement, but in the longer term, we are confident that our strategy and our direction is the right direction will continue to improve. The other key point is, if you go back to 2021, I believe, Q2, similar revenue range.

Speaker 5

I think our margin is really in the 36% range, right, 36% range. So from 36% To the guidance 40%, I know it sounds like we actually have a 1.8% retraction, which is a short term, but that's Still significant improvement over the longer term, right? So we understand the concern, but we believe that will continue to drive the improvement over

Speaker 2

Yes. If you want to talk about gross margin, okay, I would say that we The price pressure is offset by our new product And product mix and total solution. 2nd is what we when we Dude, when we get the foundry or assembly foundry especially, We negotiate with our foundry supplier to go down The price, so we go through both directions. 1 is the material Done. 2nd is new product mix.

Speaker 2

3rd is Market segment, we focus more on automotive, industrial and reduce the 3C, which is though so from all these three directions, that's why our long term, our gross margin Continue to improve and that like Emily just said, we from 30 something percent, we continue to increase To this quarter Q2, 41.8%. Now the drop down from 41.8 To 40% in this quarter is due to our service agreement, But how do we solve that is by ramping our own product into The capacity left over by our service agreement, so you can see all the directions For us, we believe from long term point of view, we were able to again continue improve that March. And if you remember when I make it our 2025,000,000,000 gross profit, we are setting the model of 40%. And we actually already exceeded that. And even with This quarter's service agreement, we're still able to maintain So that's the direction what we are working on to work our business model and We know we're going to exceed our business model of 40% and continue our improvement.

Operator

And our next question will be a

Speaker 8

Just a follow-up on what you just mentioned. As you ramp and qualify new product to switch away from those service agreements, that implies that either you A recovery in demand or and that you are gaining share and I know there's been share gain just on the basis of some of your peers De emphasizing some products and doing product pruning, but that trend presumably will slow down next year or even later this year As we see more balanced supply demand. So what's the level of confidence that you can actually find the demand For those products that you're now qualifying at those fabs to replace those service agreements and embedded in that question, How should we look at the gross margin differential between those service agreements versus what you plan on replacing with internal production?

Speaker 3

Okay. This is Gary. Let me speak for that first and if Doctor. Lu or Emily have any color, they can always plug in. Okay.

Speaker 3

So first of all, the project that we've been working on for years, so called a second source project, Which means we are working with our the fab or the facility we acquire from our peer And we identified the process externally, and we want to internally transfer those kind of internal wafer fab loading into our internally, Which being said, the demand is very solid. We already have a customer base on those kind of product we already running for years. Okay. So we I would say the confidence level of the demand loading for the 2nd source product internally is very high. Okay.

Speaker 3

So as for the GP person point of view, and I'm not talking about that we are kind of losing GP, but majority is kind of under low cost that are hitting us at this moment. So as long as we can load up product into the internal wafer fab, the analog cost will be significantly reduced. And this way, we can recover GP Dollars from those kind of analog costs. And I can tell you just like Doctor. Wen mentioned about probably early next year, we can see those kind of demands start ramping up internally.

Speaker 5

Yes. Of course, that will couple with market improvement and also market share gains. So we are actually going through all different directions To minimize the impact, so to continue to improve the gross margin percentage.

Speaker 2

Yes. Well, you know, we have a lot of experience on the semiconductor business. So one of the strategy will be The capacity figures, okay, they have a lot of pull ups we can Loading it and using it as a buffer, okay, to the loading. That's one. 2nd, like we have said, we have a lot of OEM and foundry business outside, And we can use that to start to develop the process our internally And then as a second source, like Gary talking about, and then we can Move in some of the requirement inside our own manufacturing.

Speaker 2

So there are so many different way we can all using our capacity and To reduce the overall under low cost and to improve the gross margin. So there's so many different ways and we are working toward those directions.

Speaker 8

Great. Thanks again.

Speaker 3

Thank you.

Operator

This concludes our question and answer session. I'd like to turn the conference back over Doctor. Kehsu Lu for any closing remarks.

Speaker 2

Thank you for your participation on today's call.

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Earnings Conference Call
Diodes Q2 2023
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