Diodes Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 6, 2024

There are 10 speakers on the call.

Operator

Good afternoon, and welcome to Diodes Incorporated's 4th Quarter and Fiscal As a reminder, this conference call is being recorded today, Tuesday, February 6, 2024. I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead.

Speaker 1

Good afternoon, and welcome to Diodes' 4th quarter fiscal 2023 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today are Diodes' President, Gary Yu Chief Financial Officer, Brett Whitmire Senior Vice President of Worldwide Sales and Marketing, Emily Yang and Director of Investor Relations, Gurmeet Dollywood. 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 ks for its fiscal year ending December 31, 2023.

Speaker 1

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 ks and 10 Q. In addition, any projections as to the company's future performance represent management's estimates as of today, February 6, 2024. Dowdes 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.

Speaker 1

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 the conference call, we refer to the 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 www.dios.com. And now I'll turn the call over to Diodes' President, Gary Yu.

Speaker 1

Gary, please go ahead.

Speaker 2

Thank you, Lian. Welcome everyone to our results conference call. I'm pleased to be joining you today as Diodes' recent appointed President effective January 2. As announced at the end of last year, my promotion was part of Diodes Multiyear CEO succession plan. Doctor.

Speaker 2

Lu will continue to serve as Chairman and the CEO until at least May 31, 2027, which is consistent with current employment agreement. As many of you may know, I have previous served as Diodes' Chief Operating Officer and have been with Diodes since 2008. I'm very excited to be serving in this new role and the leading buyers into the next stage of growth, which will focus on developing a broad portfolio of innovative products to enable customer success in the market we serve. In terms of our 2023 results, This past year proved to be a challenging as the consumer, computing and the communications market experienced an extended slowdown. Coupled with inventory rebalancing in the industrial markets late in the year, as well as softness in certain area of automotive market, Despite this global weakness, we make notable progress on improving the quality and the mix of product portfolio.

Speaker 2

We continue to focus on automotive and industrial markets through expanding design wins and increased investments in new product development, which result in over 350 new automotive compliant products. The combined revenue from those two markets expanded to 46% of product revenue in 2023 compared to 42% last year. Our product mix improvements were especially evident in our ability to maintain full year gross margin near 40%, Meeting our target model despite the lower annual revenue. Throughout the year, we continue to drive manufacturing cost reductions, operating efficiency, while also further developing our process technology for expansion of our internal facility utilization. Overall, we maintained strong cash generation in 2023 that enabled us to reduce total debt by RMB 124,000,000 to RMB62,000,000, maintained a solid cash position over RMB315 1,000,000 and increased total cash less debt by 67% to approximately RMB253,000,000 Additionally, we renewed expanded our line of credit to approximately $315,000,000 to provide added financial flexibility.

Speaker 2

As we look to 2024, We remain focused on driving further improvements in the quality and the mix of our portfolio with our analog and our power discrete products, including our newly introduced SiC product family, especially target at automotive and industrial markets. We also continue to make a good progress, ramping our previous acquired fab, SCFAP and G FAP In terms of process and the product qualifications, which will support future utilization and further complement our hybrid manufacturing model. We believe our total solution sales approach that has been successful in the past, Along with further emphasized place on key account development, we'll continue to deliver increasing content opportunities, design wins and the profitable growth in the future. With that, let me now turn the call over to Brett to discuss our 4th quarter and the full year financial results as well as our Q1 guidance in more detail.

Speaker 3

Thanks, Gary, and good afternoon, everyone. Revenue for the Q4 of 2023 was $322,700,000 compared to $404,600,000 in the Q3 2023 $496,200,000 in the 4th quarter 2022. Full year 2023 revenue was $1,700,000,000 compared to $2,000,000,000 in 2022. Gross profit for the 4th quarter was $112,500,000 or 34.9 percent of revenue, which reflects the lower revenue impacted by product mix as well as our wafer service agreements. This compares to $155,900,000 or 38.5 percent of revenue in the prior quarter and $206,200,000 or 41.6 percent of revenue in the prior year quarter.

Speaker 3

For the full year, GAAP gross profit was $658,200,000 And GAAP gross margin was 39.6 percent effectively at our target model of 40%. GAAP operating expenses for the 4th quarter were $91,800,000 or 28.4 percent of revenue And on a non GAAP basis were $89,000,000 or 27.6 percent of revenue, which excludes $3,800,000 of amortization of acquisition related intangible asset expenses and $1,000,000 in a restructuring cost gain. This compares to GAAP operating expenses in the prior quarter of $102,000,000 or 25.2 percent of revenue And in the Q4 of 2022 of $109,700,000 or 22.1 percent of revenue, Non GAAP operating expenses in the prior quarter were $95,600,000 or 23.7 percent of revenue. Total other income amounted to approximately $7,200,000 for the quarter, consisting of $4,800,000 of interest income, $3,500,000 of other income, dollars 1,800,000 unrealized gain on investments, a $2,500,000 foreign currency loss and $500,000 in interest expense. Income before taxes and non controlling interest in the Q4 2023 was $27,900,000 compared to $60,500,000 in the previous quarter and $94,800,000 in the prior year quarter.

Speaker 3

Turning to income taxes, Our effective income tax rate for the Q4 was approximately 9.9 percent. For the full year 2023, the tax rate was approximately 17 percent, which was within our expected range. GAAP net income for the 4th quarter was $25,300,000 or $0.55 per diluted share compared to $48,700,000 or $1.05 per diluted share last quarter and $92,100,000 or $2 per diluted share in the prior year quarter. Full year GAAP net income was $227,200,000 or $4.91 per diluted share compared to $331,300,000 or $7.20 per diluted share in 2022. The share count used to compute GAAP diluted EPS was 46,300,000 shares for both the Q4 2023 and the full year.

Speaker 3

Non GAAP adjusted net income in the 4th quarter was 23 point $4,000,000 or $0.51 per diluted share, which excluded net of tax 3,100,000 Of acquisition related intangible asset costs, dollars 2,800,000 gain on investments, dollars 1,400,000 non cash mark to market investment value adjustment and a $700,000 gain on restructuring costs. This compares to $52,500,000 or $1.13 per diluted share in the prior quarter and $79,600,000 or $1.73 per diluted share in the Q4 2022. For the full year, Non GAAP adjusted net income was $222,800,000 or $4.81 per diluted share as compared to $339,000,000 or $7.36 per diluted share in 2022. Excluding non cash share based compensation expense of $5,900,000 net of tax for the 4th quarter and $24,400,000 for the full year both GAAP earnings per share and non GAAP adjusted EPS would have increased by $0.13 $0.53 per diluted share respectively. EBITDA for the 4th quarter was $58,400,000 or 18.1 percent of revenue compared to $90,600,000 or 22.4 percent of revenue in the prior quarter and $129,600,000 or 26 0.1% of revenue in the Q4 2022.

Speaker 3

For the full year, EBITDA was $404,200,000 or 24.3 percent of revenue compared to $520,400,000 or 26 percent of revenue for 2022. 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 $38,400,000 for the 4th quarter $280,900,000 for the full year. Free cash flow was $11,100,000 in the 4th quarter, which included $27,300,000 for capital expenditures And for the full year free cash flow was $130,100,000 including $150,800,000 for CapEx. Net cash flow was a positive $20,900,000 and for the full year net cash flow was a negative $22,600,000 which includes the net pay down of $124,300,000 of total debt.

Speaker 3

Turning to the balance sheet. At the end of 4th quarter, cash, cash equivalents, restricted cash plus Short term investments totaled approximately $329,000,000 Working capital was 7.90 $4,000,000 and total debt including long term and short term was $62,000,000 In terms of inventory at the end of 4th quarter, total inventory days were approximately 160 as compared to 124 last quarter. Finished goods inventory days were 49 compared to 34 last quarter. Total inventory dollars increased $46,100,000 from the prior quarter to $389,800,000 We increased inventory during the quarter in order to support short lead time orders and also prepare for the lower output expected in the Q1 due to Chinese New Year holiday. Total inventory in the quarter consisted of a $34,600,000 increase in finished goods an $8,100,000 increase in work in process and a $3,400,000 increase in raw materials.

Speaker 3

Capital expenditures on a cash basis were $27,300,000 for the 4th quarter or 8.5 percent of revenue and $150,800,000 or 9.1 percent of revenue for the full year and within our target range of 5% to 9% as we continue to invest in the future growth and expansion of our business. Now turning to our outlook. For the Q1 of 2024, we expect revenue to be approximately $305,000,000 plus or minus 3%. We expect GAAP gross margin to be 34% 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 28.7 percent of revenue plus or minus 1%.

Speaker 3

We expect net interest income to be approximately $2,000,000 Our income tax rate is expected to be 18% plus or minus 3% and shares used to calculate EPS for the Q1 are anticipated to be approximately $46,500,000 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 4

Thank you, Brett, and good afternoon. Revenue in the 4th quarter was down 20% sequentially and slightly below the midpoint of our guidance. Our global POS decreased in the quarter and our disti inventory increased slightly, remaining above our defined normal range of 11 to 14 weeks. Looking at global sales in the 4th quarter, Asia represented 78% of revenue Europe, 14% and North America, 8%. For the full year of 2023, Asia represented 71% of revenue, Europe 17% and North America 12%.

Speaker 4

In terms of our end markets, industrial was 23% of Diodes' 4th quarter product revenue Automotive 18%, Computing 25%, Consumer 19% and Communications 15% of product revenue. Our automotive and industrial end markets combined totaled 41% of the 4th quarter product revenue, representing the 7th consecutive quarter above our target model of 40%. For the full year, Industrial was 27%, auto 19%, computing 23%, consumer 18% and communication 13%. Auto and industrial revenue in 2023 reached a record 46% of product compared to 42% last year. Now let me review the end markets in greater detail.

Speaker 4

Starting with the automotive market. In the Q4, automotive was 18% of our total product revenue, which is a slight decrease from the last quarter 19%. We began seeing some slowdown along with inventory rebalancing in Q4 and believe this will continue into the Q1. For the full year, revenue reached a record 19% of product revenue compared to 15% last year, which represented a 28% compounded annual growth rate from our initial launch into the auto market in 2013, which was only about 3% revenue at that time. Over this time period, Our compact per car increased from US28 dollars in 20.13 to over US160 dollars in 2024.

Speaker 4

And Diodes' focus will continue to be on the compact expansion going forward. In 2023, we introduced more than New product continue to drive the expansion of our design pipeline and total available market, while also improving our product mix. Even though we still see pockets of softness in the automotive market, design momentum has remained very strong for Diodes. During the Q4, our TVS Diodes and ideal Diodes controllers continued to gain traction, While our LTOs got designed into applications for ADAS, smart cabin, telematic and infotainment, The adoption of our USB Type C redrivers, DisplayPort active crossbar mux and MIPI switches have increased significantly In the rear seat entertainment, smart topic, ADAP and active cable designed for automotive applications. We also achieved several design wins for our crystal oscillators and PCI Express clock generator for the development of new ADAS design.

Speaker 4

Our newly updated USB power delivery controller portfolio that supports extended power range It's gaining traction from in vehicle infotainment system and USB Type C charging functions. Our VR products are also seeing momentum in battery management system, display, lighting and headlight systems. Also during the quarter, we saw positive design momentum for our newly released end channel MOSFET, specifically targeting the growing demand for silicon carbide solutions in electric and hybrid electric vehicle automotive subsystems. These MOSFETs are tailored for applications such as battery charger, onboard chargers, high efficiency DC DC converters, motor drivers and traction inverters. Additionally, our SBR and Shawky product shipments have ramped up significantly for EV applications.

Speaker 4

In the industrial market, 4th quarter revenue represented 23% of total product revenue, which was a 3 percentage point decreased sequentially due to the weaker demand and inventory rebalancing we mentioned last quarter. Since our last call, we have seen this market weakness broaden. For the full year of 2023, Industrial represented 27% of product revenue. Even despite the market softness, our design pipeline remained very strong throughout the year, and we continue to see new application opportunities as our content has expanded. In terms of progress on the product initiatives, Our PCI Express 3 packet switch are winning designs across diverse applications, including artificial intelligence of things, Automation inspection, power plant controllers, test instrument applications.

Speaker 4

These package switches enable SoC to connect to various endpoint devices such as wired, wireless network, SSD storage and specific industrial controllers over the industrial standard PCI Express bus. We secured new design wins for a range of essential components like HDMI, USB Type C DisplayPort, mid P Redrivers and MUX switches in commercial displays, drums and robotic applications. One area of strength in the industrial market has been solar, where our SBR product has gained traction in residential roof solar panels along with our real time cloud being used in solar systems and our TVS product being designed in for data line protection in battery management system for solar energy storage battery cells. Additionally, our silicon carbide MOSFET has been gaining traction in industrial motor drivers, solar inverters, data centers and telecom power supplies. Turning to computing markets.

Speaker 4

4th quarter revenue represented 25% of product which is flat to last quarter. Full year revenue represented 23% of total product revenue compared to 24% last year. After few quarters of inventory adjustment, we are seeing customer inventory levels returning back to normal levels Due to the impact of Chinese New Year holiday on the Q1 revenue, we expect to see some recovery beginning in the second quarter and progressing in the second half of the year. In terms of design wins and secure new designs and ramp production for our SBR and Schottky diodes in notebook adapters and power applications, Surfer as well as Noble motherboards. Protection devices for high speed data line are being designed into Chromebook to protect the Type C port, And our TVS product are being used to protect the power sourcing line of the solid state drive modules for data center server.

Speaker 4

We have also gaining momentum for signal integrities and connectivity products for various protocol in computing applications, including workstation, gaming, notebook, desktop, docking stations and add in cars. We also secured new design ins for PCI Express clock buffers, crystal oscillators and silicon carbide Schottky diodes in surfers, machine learning and for various power correction applications in surfers. In the communication market, 4th quarter revenue was 15% of product revenue, which is an increase from 12% in the 3rd quarter. Revenue for the full year represented 13% of product revenue compared to 15% last year. After a few quarters of inventory adjustment in the smartphone specifically, We are seeing customer inventory level returning back to normalization level.

Speaker 4

In the telecom and networking market, inventory rebalancing continues. In terms of design wins in the quarter, our timing products, including clock buffers and crystal oscillators, are seeing new wins for smart NIC and connectivity products like MIPI switches and our TVS protection products are seeing adoptions in smartphone applications. And lastly, in the consumer market, 4th quarter revenue represented 19%, which is a 1 percentage point increase compared to last quarter. Similar to the inventory situation in computing market and also in smartphones, After a few quarters of rebalancing, customer inventory is now mostly clean. Following the Chinese New Year holiday and seasonality for consumer in the Q1, we expect to see some recovery late in the second quarter and into the second half of the year.

Speaker 4

For the full year, revenue in consumer market represented 18% of product revenue compared to 19% last year. During the quarter, we have seen strong adoption of our USB Type C display active crossbar mux, USB Type C display redrivers and read timers, PCI Express clock generators, real time clock and signal conditioners in various applications like tablets, docking stations, USB Type C Aptik cables, cable extenders, cameras, televisions and monitors. We also secured design wins for our MOSFET and MIFI switches and re drivers in gaming and VRAR applications. In summary, although the 3C market has been slower to recover and Overall global demand remains soft. We are encouraged by the continuous progress we have made over the past year in the automotive and industrial market.

Speaker 4

Our team remains focused on driving new product introductions, product mix improvements, design win momentum as well as a focus on key account development. Diodes' strong cash generation has enabled us to remain investments in support of the future growth and expansion of our business that positions us well as the global market improved throughout the coming year. With that, we now open the floor to questions. Operator?

Operator

Thank Today's first question comes from Matt Ramsay with TD Allen, please go ahead.

Speaker 5

Thank you very much guys. Good evening. It's obviously been an Interesting period here as the inventory and the industry have corrected. What I wanted to start the conversation with is Maybe to give a little bit more detail on where you think your sell in for The March quarter guidance is across the different segments relative to the sell through and how much inventory we might still need to burn down. If you could give any color by segment that would be helpful and just where you think you are in terms of getting to that sell in sell through balance so we can

Speaker 4

So I think from the market segment point of view, right, like I mentioned earlier, start with automotive, What we are seeing is the inventory rebalancing kind of started in Q4 and it will continue into the Q1. And then from the industrial market segment, we experienced weaker demand in Q4 plus inventory rebalancing. Unfortunately, we've seen the weakness rotten. And from the computing point of view, Customer inventory is pretty clean. I think the only concern or Estimate that need to keep in mind is the Chinese New Year.

Speaker 4

So this is definitely going to impact some of the production as well as the output, we do expect the recovery in the second quarter and progressing into and half of the year. From communication point of view, I talked about smartphones, customer inventory is pretty much normalized, But for the typical telecom networking or the enterprise point of view, We see the inventory rebalancing will continue. So I think from the consumer market segment, because it's Pretty wide range of applications, but I think in general what we see in customer inventory is relatively clean. We do expect more ramp up in the late Q2 based on usual consumer seasonality cycles, right? So that's really what we see overall by each of the market segments and the inventory situation.

Speaker 5

Emily, thank you for that. I really appreciate it. I guess as my follow-up question and this maybe will be across the different business segments. I wanted to ask about the pricing environment. So and maybe from 2 angles.

Speaker 5

First of all, we do hear a lot about Some of your larger competitors may be getting more price aggressive in certain end markets. So that's one element to it. And then Secondly, I wanted to kind of compare you guys guided to a bit above $300,000,000 for the March quarter. And if you compare that to say 3 or 4 years ago when you were at similar revenue level, maybe what the pricing has done over that period of time? Do you see pricing obviously increased post the pandemic when the supply was all tight?

Speaker 5

Is it coming back down rapidly? Are we Any commentary that you have on the pricing trends would be really helpful. Thanks.

Speaker 4

Yes. So I think usually Pricing is always a balance between demand and supply, right? So when you see a weaker demand market, usually you definitely get more of the Price pressure, this also varies by the type of product, right? If it's more Differentiated, you usually get a little bit less price pressure versus very deep commodities, which is really that you have a lot of competitors Within the same arena, right? So what we've been saying all along is we focus on product mix improvement, which really means strategically walking away from some of the key commodity area, right.

Speaker 4

So in general, that will continue to be our focus. And we believe with this execution of The product mix initiative continue to improve that will help overall Diodes not only from the margin point of view, but also from the new point of view. I think the second part of your question is, we guided around 300 some range and if I just look back to the historic Numbers, let me see. I would say probably back to year 2000, so that's a pre COVID timeframe that's also before the LION Semiconductor acquisitions, I just look at, for example, the 3Q, twenty 2000 And that is about 310 revenue quarterly and our margin is around 35.9% and keep in mind that That's actually before the LightOn Cement Conductor acquisition and that pretty much gave us about 3% margin degradation. So that will be representing about 32% margin.

Speaker 4

The other difference is actually also from the under loading Point of view is quite significantly different from what we have right now versus before. So I think that's pretty much the reference point, right. So if you look at the overall margin, I think majority of the pressure is actually coming from the under loading and that's also the area that we are driving very aggressively backfill some of the capacities, improve the utilization in the near future, right. So I would say that's really the second part of your question. I hope I answered it.

Speaker 5

No. Thank you, Emily. I really do appreciate that. I'll jump back in the queue. Thanks.

Operator

Thank you. And our next question today comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Speaker 6

Hey, everyone. Good afternoon. Thanks for taking my question. And, Emily, thanks for Detailed response to Matt's question and that's where I want to pick up and start. So you covered the pricing dynamics, the underutilization, Let me ask a question on gross margin in a different way.

Speaker 6

Given that Q1 should represent seasonal low point, at least in the near term, Would you expect the Q1 gross margin to be the bottom for the year? And maybe more pointedly, do you What do you expect for gross margin for the full year? And within that, how much of a headwind does the wafer service agreements represent?

Speaker 4

Yes, Gary. So let me answer the first portion of the question and then I'll let Brad or Gary answer So definitely Q1 with our guidance, our revenue Decrease about 5.5 percent matching pretty much our seasonality, right. The market is still Truly dynamic and definitely we are not ready to guide the 2nd quarter, but Based on the usual seasonality, usually 2nd quarter will be a growth quarter and then the 3rd quarter. Because the lack of, I would say, overall visibility, what we truly believe the second half is definitely going to be stronger than the first half, right. I think we just need to continue to monitor the overall market as we grow from the revenue point of view as we also have time To really qualify importing additional products into our internal fab, the utilization will continue to improve, Right.

Speaker 4

So, it's difficult for us to forecast the whole year. That's also not something we usually provided. But I think with the expectation of the second half will be stronger than the first half, with the product mix initiative we continue to drive with a total solution sales approach that we're confident that Our gross margin will improve over time.

Speaker 6

Got it. Got it. Appreciate that, Emily. Before I ask my follow-up, I do want to congratulate Gary on his new role. I forgot to mention that.

Speaker 7

Well, thank you, Gary. It's My honor.

Speaker 4

So, Brad, you want to talk a little bit about the manufacturing?

Speaker 3

Yes, I would just Gary, I would just add to what Emily said regarding We'd expect transitionally on margin connected to the revenue expectation that we're not guiding, but from a seasonal perspective, that's what we would And then for wafer service agreement, we believe we've absorbed that transitionally and going forward. Hopefully, what we would see is that would kind of be a neutral to tailwind for us as we continue to work on technology qualification and the ability to port our product into These locations as well as ability to ramp revenue and that capacity being available to us. Got it.

Speaker 6

Thank you for that. It looks like you're bringing down your non GAAP operating expenses by about 12%, 13% from where they were a year ago. How much of that is variable versus structural. And the reason I'm asking the question is just trying to get a sense of by how much operating expenses improve when revenue improves?

Speaker 3

Yes. So basically, what you see in that is a combination of things. So we have taken We continue to take action connected to variable things as you mentioned, but we're also doing Actions that provide restructuring inside the company to drive efficiency. We've also Impacted with the performance we've had, that's been an impact on variable pay. And we continue to look at Where our investments are, I think what you'll see is our continued focus on R and D and that investment being kind of flat or tied with revenue growth and from an SG and A perspective continuing to look for opportunities to bring that down to drive structural efficiency and then not bring it up any more than some portion of what the revenue growth would be.

Speaker 6

Thanks, Brett.

Operator

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

Speaker 8

Good afternoon. And let me add my congratulations to Gary.

Speaker 2

Thanks, David.

Speaker 8

Absolutely. So a lot of my questions were around the gross margin, but maybe just on the order velocity, I don't know if you can provide any color there. It sounds like It's still a mixed bag, but inventories are clearing in better in a few places. So just as you think about your order velocity through the quarter and maybe how those have trended so far into this Q1 here?

Speaker 4

Yes. So I think we definitely see improvement from the book to build ratio point of view. And so I think there's a lot of positive signals on the inventory side, I talk about within the 3 Cs is getting cleaner than ever before. So I think this is all positive. I think the unknowns really the actual demand, especially after the Chinese New Year, right.

Speaker 4

I think the China Recovery is still extremely slow than anybody's expectation. So I think overall, unfortunately, still weaker from the business visibility point of view. We just need to continue to monitor it very closely. But definitely, there's some good

Speaker 7

And then David, this is Gary. I will put some comment on that, too. So I know we are going to put a lot of effort to the Key Account focus. That's being said, we're going to put a lot of sales effort to work with Key Account to create a demand. At the same time, when you see the short lead time PO continuing to increase during this kind of period and we kind of work with the distributor to put the right inventory in their warehouse to make sure they can handle this kind of short term and surely time the PO in time like basis.

Speaker 8

Okay, great. And I guess, do you get a sense that your customers, that They are being fairly rational with their inventories and taking them to normal levels? Or do you get a sense that maybe those are being brought down too low and you might get a bit of a snapback because of replenishment there?

Speaker 4

Yes. I think that's a really challenging question, David. I think it's really down to the actual Customer and their experience as well as their view sometimes also involve their financial cash flow situation. So it is a little bit dynamic, right? So what we have seen I think what Gary mentioned is we start to see more urgent orders, which is really driven by probably not enough of the inventory buffer that they build into their formula, So because the customer base varies a lot, that also varies a lot as well.

Speaker 4

So that's really where the challenge. But I think just like Gary mentioned, we focus more on to the quality of the products on the shelf, So we can actually pretty much quickly adjusting our support to the customers with this kind of very short Lead time orders, right? So that's really pretty much what we focused on and will continue to focus for the next few quarters as the market continue to evolve, right?

Speaker 8

Thanks so much. I appreciate the help.

Speaker 2

Any other questions?

Speaker 7

Hello?

Speaker 8

That was it for

Speaker 4

me. We thought it just went silent.

Operator

Apologies everyone. And our next question today comes from William Stein with Truett Securities. Please go ahead.

Speaker 6

Great. Thanks for taking my questions. Also, Gary, I wanted to ask my comments.

Speaker 2

Thank you so much, Mayo.

Speaker 6

I'm hoping you can talk to the split of revenue that went direct versus to the channel in the quarter?

Speaker 4

Yes. So for the Q4 and our Split by the channel is actually 65% distribution and 35% direct. This number usually varies a little from quarter to quarter, depends on the customer demand and some of The order situation, I usually say rule of thumb is probably about 2 thirds distribution, 1 third the direct portion.

Speaker 6

Great. Thank you. Also, I wonder to what degree the inventory build helped gross margin for the quarter usually when it relates to a question I'll ask in concurrently with this And that is utilization. Can you tell us what fab utilization was in the quarter? What you expected to be next quarter?

Speaker 6

And then also The dynamic that I expect occurred in the Q4, which is when you build inventory like that, normally it's a boost to gross margin and if you can quantify that? Thank you.

Speaker 3

Well, I think what you saw, Will, in terms of our We've talked about strategically putting availability in place both from a kind of finished goods availability, but also from The availability as we procure about half of our wafers on the outside, so that we can have flexibility in mix to build what we need. And so as you look at that and you look at utilization and then you also look at typically in 4th quarter, We're building in anticipation and preparing for Chinese New Year. And so when you look at the combination of that, What we saw from a utilization perspective was something that was pretty consistent. We continue to run below where we want to be. We're and we believe that is something that's going to help us as we go forward, as revenue starts to hopefully strengthen And we're in a position to be able to drive more inside the factory.

Speaker 3

So, we didn't really obviously, It is all related, but as we look at Q4, it wasn't something we drove utilization up in order to deliver those results.

Speaker 6

Okay. Thanks.

Operator

Thank you. And our next Question today comes from Tristan Gerhardt with Baird. Please go ahead.

Speaker 9

Hi, good afternoon. So just going back On gross margin, what's the impact of underutilization in terms of bps? And sorry if I missed, if you quantified what the utilization rates are currently? And then is there a way to break down how much of the Underutilization is from the service agreements where I know you're qualifying new products to fill capacity as opposed just general weakness in demand?

Speaker 3

Well, what we've talked about, Tristan, was we talked about the fact From an overall utilization perspective, we ran pretty consistent from 3rd to 4th quarter. We continue to run below where we want to be. In doing that, we have, I think successfully been able To get better availability in place to support short time ordering that we're seeing, we've also been able to address Getting our hybrid manufacturing model services about half of our wafers outside the company. So we put some more availability in place on that. That's not something that really drives up our utilization.

Speaker 3

And we believe that from a wafer service contract perspective, we've pretty much absorb the negative impacts in transition and we believe going forward that's a kind of neutral to positive thing as we continue to qualify Our technology is internal. We can bring loadings internal and we can help enable revenue growth. But in total, we're running below where we want to be. And we have been at that place for really all of this year and we continue to be there in anticipation for things to strengthen as Emily kind of gone through and what we anticipate kind of going into 2024.

Speaker 7

Yes. And the one comment I would like to put, Justin, this is Gary. And when we've seen several key customer, they're kind of talking about the utilization of internal wafer fab. I think that's really kind of think about it is like in the future growth they really want to make sure that have this kind of capability can support in growth in the future. So I would say like we are still in the kind of under your decision level as Brad mentioned about, but for the future as long as we qualify our product and the process into our our own internal fab and we should have the kind of capability to support more business to our customer.

Speaker 9

Okay, that's great. And then for my follow-up, I believe most of your pricing agreements are in automotive. So outside of Automotive, in terms of your revenue that's not locked into pricing agreement, I mean, what type feedback are you getting from customers? Are people trying to ask for better pricing? Or is Is it relatively stable?

Speaker 9

And how do you think that evolves through the rest of this year?

Speaker 4

Yes. I Tristan, it really varies a lot, depends on the end market, right? So, you're absolutely right. Usually in the automotive market segment, We actually have a longer time price matrix type of agreement in place with the customers. And for example, in the computing market segment, it's going to be a lot more function and feature Sure, protocol driven discussions than some of the others.

Speaker 4

Of course, our price competitiveness is a given, right? If we take more extreme in the consumer market because the overall cost is very sensitive, the demand is weaker, you tend to get more of the pricing discussions, right? So I think it varies a lot. It also varies from customer to customer. But in general, right, definitely as the demand is weaker, you definitely get a little bit more price pressure.

Speaker 4

It's almost going back to my discussion earlier, depends on the product type. If it's a function feature rich type of product, you get less of the competition. If it's a deep commodity, you get more. And just keep in mind that pre COVID, Diodes actually had a 1.5% to 2% bill in quarterly price reduction. So, we actually definitely structure To support this kind of overall pricing, I would say, trend and the way to The focus on is actually improve the manufacturing efficiency and the cost down to really balance this kind of pressure that we've seen in the market.

Speaker 9

Okay, great. That's very useful. Thank you very much.

Operator

Thank you. And this concludes today's question and answer session. I'd like to turn the conference back over to the company's President, Gary Yu.

Speaker 2

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

Operator

Thank you, sir. This concludes today's conference call.

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Earnings Conference Call
Diodes Q4 2023
00:00 / 00:00