Diodes Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 9 speakers on the call.

Operator

Good afternoon, and welcome to Diodes Incorporated's First Quarter 20 24 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 As a reminder, this conference call is being recorded today, Thursday, May 9, 2024. I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead.

Speaker 1

Good afternoon, and welcome to Diodes' Q1 fiscal 2024 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today are Diodes' President, Gary Yu Chief Financial Officer, Brett Whitmire Senior Vice President of Worldwide Sales and Marketing, Emily Yang and Director of Investor Relations for Meade 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 Q for its fiscal quarter ending March 31, 2024.

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, May 9, 2024. 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.

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 this conference call, we refer to net income attributable to common stockholders as GAAP net income. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days in the Investor Relations section of Diodes' website at www.diodes.com. And now, I'll turn the call over to Diodes' President, Gary Yu.

Speaker 1

Gary, please go ahead.

Speaker 2

As reported earlier today, Q1 revenue reflect a slower than expected recovery in the consumer, computing and the communication market, coupled with a typical Q1 seasonality due to the Chinese New Year holiday. However, late in the quarter, we began to see some sign of demand improvement with distributor inventory levels starting to stabilize, supporting to our belief that the Q1 should be the low point and are guiding for our return to seasonal growth in the Q2. In the automotive and industrial end markets, 1st quarter combined product revenue remained above our target model of 40%, but continue to be affected by inventory adjustments and a softness in certain area. More broadly, the slower overall demand environment in the quarter contribute to reduced loading at our manufacturing facility, both internal production as well as from our manufacturing service agreement temporarily impact gross margins. We expect gross margin to resume toward our target of 40% as we increase our factory loading by qualifying more products combined with increasing revenue growth for our higher margin automotive and industrial market, consistent with our historical performance and a long term growth strategy.

Speaker 2

In summary, with early evidence of recent pricing pressures sub buying, Vios is well positioned with the size and the scale to support a return to growth as global demand and the distributor inventory improves. Across our end markets, we remain focused on operating our manufacturing facility at a high level of efficiency as demonstrated by the steps the company has taken over the past several quarters to further develop our process technology and capabilities, while lowering manufacturing costs across our operations. With that, let me now turn the call over to Brett to discuss our Q1 financial results as well as our Q2 guidance in more detail.

Speaker 3

Thanks, Gary, and good afternoon, everyone. Revenue for the Q1 of 2024 was $302,000,000 compared to $322,700,000 in the Q4 of 2023 $467,200,000 in the Q1 2023. Gross profit for the Q1 was $99,600,000 or 33 percent of revenue, which reflects the reduced loading at our manufacturing facilities due to lower revenue. This compares to $112,500,000 or 34.9 percent of revenue in the prior quarter and 194 point of revenue in the prior year quarter. GAAP operating expenses for the Q1 were $86,600,000 or 28.7 percent of revenue and on a non GAAP basis were $87,600,000 or 29 percent of revenue, which excludes $3,800,000 of amortization of acquisition related intangible asset expenses.

Speaker 3

This compares to GAAP operating expenses in the prior quarter of $91,800,000 or 28.4 percent of revenue and in the first quarter of 2023 of $108,000,000 or 23.1 percent of revenue. Non GAAP operating expenses in the prior quarter were $89,000,000 or 27.6 percent of revenue. Total other income amounted to approximately $5,900,000 for the quarter, consisting of $4,600,000 of interest income, $1,000,000 of foreign currency gain, dollars 400,000 of other income, dollars 400,000 of unrealized gain on investments and a $500,000 in interest expense. Income before taxes and non controlling interest in the Q1 2024 was $18,800,000 compared to $27,900,000 in the previous quarter and 88 point $6,000,000 in the prior year quarter. Turning to income taxes, our effective income tax rate for the Q1 was approximately 18.8%.

Speaker 3

GAAP net income for the Q1 was $14,000,000 or $0.30 per diluted share compared to $25,300,000 or $0.55 per diluted share last quarter and $71,200,000 or $1.54 per diluted share in the prior year quarter. The share count used to compute GAAP diluted EPS in the Q1 was 46,300,000 shares. Non GAAP adjusted net income in the first quarter was $13,000,000 or $0.28 per diluted share, which excluded net of tax $3,100,000 of acquisition related intangible asset costs, a $300,000 non cash mark to market investment value adjustment and a $3,800,000 insurance recovery for a manufacturing facility. This compares to $23,400,000 or $0.51 per diluted share in the prior quarter and $73,400,000 or $1.59 per diluted share in the Q1 2023. Excluding non cash share based compensation expense of $4,000,000 net of tax for the Q1, both GAAP earnings per share and non GAAP adjusted EPS would have increased by $0.09 per diluted share respectively.

Speaker 3

EBITDA for the Q1 was $48,300,000 or 16 percent of revenue compared to $58,400,000 or 18.1 percent of revenue in the prior quarter and $121,800,000 or 26 0.1 percent of revenue in the Q1 2023. We have included in our earnings release a reconciliation of GAAP net income to non GAAP adjusted net income and GAAP net income to EBITDA, which provides additional details. Cash flow used in operations was $31,100,000 for the Q1. Free cash flow was a negative $51,500,000 which included $20,400,000 for capital expenditures. Net cash flow was a negative $47,900,000 Turning to the balance sheet.

Speaker 3

At the end of the Q1, cash, cash equivalents, restricted cash plus short term investments totaled approximately $280,000,000 Working capital was $824,000,000 and total debt including long term and short term was approximately $70,000,000 In terms of inventory, at the end of the Q1, total inventory days were approximately 184 as compared to 160 last quarter. Finished goods inventory days were 67 compared to 49 last quarter. Total inventory dollars increased $39,600,000 from the prior quarter to $429,400,000 Total inventory in the quarter consisted of $40,200,000 increase in finished goods, a $1,600,000 increase in work in process and a $2,100,000 decrease in raw materials. Capital expenditures on a cash basis were $20,400,000 for the Q1 or 6.7 percent of revenue and within our target range of 5% to 9%. Now turning to our outlook.

Speaker 3

For the Q2 2024, we expect revenue to be approximately $316,000,000 plus or minus 3 percent, representing a 4.6% sequential increase at the midpoint and reflecting a return to typical seasonal growth. GAAP gross margin is expected to be 33.5% plus or minus 1%, reflecting the lower mix of revenue from the automotive and industrial markets as the 3C markets recover. Non GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition related intangible assets are expected to be approximately 28.5 percent of revenue, plus or minus 1%. We expect net interest income to be approximately $3,000,000 Our income tax rate is expected to be 18.5%, plus or minus 3% and shares used to calculate EPS for the 2nd quarter 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 Q1 was down 6% sequentially and slightly below the midpoint of our guidance due to a slower recovery in the 3C market than originally expected. Our Q1 global POS decreased slightly due to the Chinese New Year in Asia, but has recovered since March and continued to grow into the Q2. This also drove channel inventory value to decrease, even though remaining above our defined normal range of 11 to 14 weeks. As Gary mentioned, we are beginning to see improvement in demand going into the Q2 with stronger book to bill ratio.

Speaker 4

In fact, this is the first time we've seen a positive book to bill ratio since mid of 2022, further supporting our expectation of the Q1 being the low point in the cycle. Assuming no major macroeconomic change in the market, giving the stronger backlog and better book to bill ratio and healthier inventory level in the 3C segments, we feel optimistic about 2nd quarter revenue improvement and stronger second half of the year than the first half. Looking at the global sales in the Q1, Asia represented 75% of revenue, Europe 16% and North America 9%. In terms of our end markets, industrial was 23% of Diodes product revenue, automotive 18% computing 20 5% consumer 20% and communication 14% of product revenue. Our automotive industrial end market combined totaled 41% of the Q1 product revenue, representing the 8th consecutive quarter above our target model of 40%.

Speaker 4

Now let me review the end markets in greater detail. Starting with automotive market. Revenue was 18% of our total product revenue, which was flat to last quarter on a percentage basis. The slowdown in the demand along with inventory rebalancing continued in the Q1, and we expect this would continue into the 2nd quarter. But our demand creation momentum continued with expanding design in and design win across multiple applications.

Speaker 4

Our focus on the connected driving, comfort, style, safety and electrification continued as we introduced 44 new automotive products in the Q1 with a focus on applications such as EV protection, high speed and high bandwidth automotive Ethernet network protection, management system, Wi Fi telecommunication and infotainment. We're also expanding our solutions within electric and hybrid electric vehicle subsystems, including battery chargers, onboard chargers, high efficiency DC DC converters, motor drivers and traction inverters. Additionally, the adoption of Diodes USB Type C ReDrivers display alternative active crossbar MUXs and MIPI switches have increased significantly in the rear and TVS products are being designed into various ADAS platforms. We also continue to see momentum and design win for rectifiers, switches, styles and DC product in infotainment, ADAS and telematics. Also within automotive, our linear LED drivers when designed in headlights and EV high beam, low beam applications, while our TVS products are being designed in for power line protection in the headlights, steering control modules and daylight raining lights.

Speaker 4

Our hall effect switches and latches continue to gain design in, design win and revenue growth momentum for cooling water pumps and window lift controls. In the industrial market, 1st quarter revenue represented 23% of the total product revenue, which was also flat to the last quarter, but down in terms of revenue as the inventory rebalancing continues during the quarter and this may last into the second half of the year. Despite the slowdown, we continue to focus on expanding our design pipeline and application opportunities. Specifically during the quarter, our LDOs continue to gain traction in fans, power tools and e meter applications, while rectifier and switch diodes silicon carbide power MOSFET are being used in the power tools, power storage, solar inverters and high efficiency LED back lightings. We also continue to win designs with our piezo driver portfolio in smoke detectors and alarm applications.

Speaker 4

Also in the industrial market, we are seeing adoption of HDMI MUXs and DisplayPort, HDMI Redrivers and LED Drivers in the commercial display, highway size and conference TV applications. We're also seeing traction for silicon carbide products in HVAC, energy storage system, power factor correction and server power supplies. Additionally, our contact image sensor had new design wins in automated optical inspection applications. In the computer market, like I mentioned earlier, inventory is healthy, and we expect to see a gradual improvement in revenue, especially in the AI server areas with signs of stronger backlog in Asia. From a design momentum point of view, our signal integrity and connectivity products continue with increased adoption of HDMI, USB C, MIDI, EDP redrivers and switches along with USB C power switches and TVS in applications including workstation, gaming, notebook, desktop, docking stations and tablets.

Speaker 4

We also saw new design ins and production ramping for PCI Express Gen 3 Packet Switch, PCI Express Clock Buffers, TVS, rectifier and switches diodes in server, artificial intelligence surfers and data center applications. We also secured design wins and revenue growth for Hall eFAT Latch Switches in DC fans, LED drivers in keyboard lighting and contact image sensors for multifunction printers. Turning to communication market. On the enterprise side, due to slower than expected demand, the inventory depletion rate has been slow and we expect this may last into the second half before returning to healthy levels. On the smartphone side, even though inventory is clean, the recovery will likely to be gradual over the coming quarters.

Speaker 4

For the design side, our camera fresh LED driver rectifiers, cloud buffers and LDOs with design in and ramping up in the smartphone and 5 gs equipments, while TVS products are being designed into smartphone battery protection applications. We have several design wins for crystal oscillators in optical transceiver modules and Hall EFS switches in true wireless stereo technology for earbuds. And lastly, in the consumer market, similar to the PC market, inventory is relatively clean, Even though the overall demand is not as strong as we expected, we still expect some of the new designs will start to ramp in Q2 and peak in Q3. Our buck converters, LED drivers and MOSFETs are being designed into several smart home IoT and virtual reality projects, while our LDO saw new design wins in smartwatches. Also our rectifiers, switch diodes and low switches and buck converters were designed in and ramping up during the quarter in televisions and monitors.

Speaker 4

We're also seeing traction for USB Type C DP retimers in USB Type C active cable and docking station applications. In summary, as indicated by our Q2 guidance, we are expecting a return to seasonal growth based on the demand demand improvement and channel inventory stabilization that we began to see, specifically in the 3C markets. Asset demand improved further across all our end markets, we expect gross margin to benefit from increased loading of our internal facilities as we qualify more products, while also benefiting from our product mix improvement initiatives by expanding revenue contribution from our higher margin automotive and industrial solutions as those markets recover and resume growth. With that, we now open the floor to questions. Operator?

Operator

We will now begin the question and answer And our first question today will come from David Williams with Loop Capital. Please go ahead.

Speaker 5

Hey, it's actually David from Benchmark, but thank you. So I appreciate you taking the question here. I guess one of the things I wanted to ask about is just on the gross margin. I know last quarter 34 was kind of what we thought it would be. I thought that'd be the bottom.

Speaker 5

And it felt like there was a healthy level of utilization charges that were baked into that. But it seems like we saw a little bit more pressure. So I guess if you were looking at the puts and takes there on the margin, how much of that was utilization versus pricing in the quarter?

Speaker 4

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

Speaker 5

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

Speaker 4

Yes. So I think a couple of factors driving the margin improvements, right? So, obvious, driving the underloading utilization is one of the key initiatives. As the market start returning revenue improved that will naturally improve some of the loading. We also been talking about aggressively porting and qualifying some products into our own factory to really improve the overall loading supporting our high brick manufacturing model, right?

Speaker 4

So that is definitely ongoing on track. And so we believe with all this going on, right, it definitely would naturally improve the under loading situation. At the same time, product mix improvement has been a key initiative, right? There's a couple of ways to look at it. We talk about new product introduction.

Speaker 4

Just 2023 alone, we introduced a lot of automotive customer automotive products and we want to continue to expand our portfolio. That would naturally continue to help us to support our market expansion, right, and also content expansion. We also talk about analog and power discrete that will continue to be the key focus. Of course, a lot of new product also concentrated focusing this area. We also talk about Pericom Semiconductor product that will continue to be a key focus for us.

Speaker 4

That's kind of part of the analog plus the power discrete focus. From a different area, we talk about auto industrial focus, right? So we I also talk about it, it's 41% by the end of last quarter, which is 8 consecutive quarters above the 40% model. When the auto industrial inventory rebalancing getting improved, we strongly believe that with the momentum and the pipeline we have in place that will continue to drive percentage improvement in this area. So if we continue to do all this and plus the manufacturing efficiency improvement, including the cost downs and stuff like that, we are confident that the margin will going back to the right momentum, right.

Speaker 5

Fantastic. Thanks for all the color. Just one quick last one, if I may. Are you seeing any demand impact in the China region specifically from some of the domestically sourced component quotas that they've initiated? Is that happening down your demand?

Speaker 5

Are you seeing anything in that area yet? Thank you.

Speaker 4

So, Dave, can you repeat? Are you saying China quota? I want to make sure I hear it correctly.

Speaker 5

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

Speaker 4

Yes. I think, I mean, definitely we talk about the competition from China, Sorelli or Indorelli related to Dakota, right? So I think at the end of the day, if our product doesn't really have a strong differentiation, if it's not the feature functions and then we're ending up with a lot of competitors from the other regions. These are the products and also business we'll face or continue to face a lot of challenge, right? So our strategy, specifically in China, has been more focusing on the technology and the product differentiation.

Speaker 4

I don't really believe all the American company are impacted. It's all down to the level of the product and the technology, right? So I would say definitely there are some impacts, but I would say it's probably more on the small scale.

Speaker 2

Right. Right. Right. Actually, as you know, the total revenue of China really especially like China local, local does not really take a bigger percentage of Diodes total revenue. So the impact is relatively small because we have a lot of customers in China, but they produce the product is really OEM or like international transfer business.

Speaker 2

So I do believe in this area we're pretty firm on our position. Please

Speaker 6

go ahead.

Operator

Hey, everyone. Thanks for Please go ahead.

Speaker 7

Hey, everyone. Thanks for taking my question. I want to start with a clarification and clarification request and then a related question. So when you speak of qualification of new products to become more vertically integrated, I assume you're talking about the qualification at the Portland fab, which you picked up from on semi and the Granite facility you picked up from TI. Is that correct?

Speaker 7

And then related to the MSA that you have with those 2 particular parties, can you give us a sense of how those evolve over time? How you will slowly transition those facilities over to your own internal manufacturing? And maybe what some of the minimums are with those parties and how those minimums go down over time?

Speaker 2

Hi, Gary. This is Gary. So, I think for the years, we have been we have a manufacturing service agreement in places for our OEM customer in both AT and the foundry service. So not only limited on the foundry service, just want to make sure that we understand on that. And their loading can be adjusted time to time by their end demand and average days.

Speaker 2

With that, we do see some impact on revenue and GP from Q3 last year. But not much we can control that. I cannot disclose too much detail about that just in case you have any questions related to that kind of demand stuff or not. However, while we're working very hard in the past couple of years is continue to offload or outside loading from our partner in the different foundry and continue to qualify internally and get our key customer approval. But as you know, you're absolutely correct for those kind of SPFAB for Allen Semi and the G fab for TI.

Speaker 2

And we are doing our best to qualify our technology and our product over there. But at the same time, we do need to have our customer to approve our PC and to change wafer fat. That takes a little bit longer time. Now, especially after COVID and the demand softening at this moment, the customer willingness to change the PCN or change the different wafer fat, our site will be much slower than the time we have a shortage area. Okay, that's what you need to understand.

Speaker 2

But so far, overall progress internal product feature is very good. And we do see some projects ahead of our June schedule as I can tell you at this point. So just like Emily said, at this moment, we do see the loading risk on those 2 wafer fab as well as some loading in our assembly side. But in the nearly future, I do believe and I do have a very good confidence those new product can be qualified in both our side and our customer side and start ramp up.

Speaker 7

Okay. Thanks for that, Gary. As a follow-up, I do have another clarification question. With respect to the green shoots of improving demand, should I assume that's primarily on the 3C side of the market as inventories have been normalized there. And given that those businesses are your most seasonally sensitive businesses and you're seeing green shoots of end demand, would you expect this normal second half seasonal patterns where the 3rd quarter is up, maybe high single digit percent sequentially, the 4th quarter down mid single digit percent sequentially?

Speaker 4

Yes. So Gary, this is Emily. Let me answer the question, right. So I think I did talk about it before, right. So what we're seeing is automotive inventory rebalancing will probably continue into the Q2 because it's not across the board, customer and part and program varies a lot.

Speaker 4

So it's not going to be like one way or the other. So it's going to gradually, right, change. Industrial, because it's a broad market, so most likely the correction will last into the second half of the year, right? 3C, from the computing point of view, inventory is clean and we do expect the Q2 as well as the second half stronger than the first half. From the consumer side, I think overall demand is still slower than our expectation, but we still expect some of the new programs will start ramping in the Q2 and peak in the Q3, right?

Speaker 4

And then because the holidays will be built, usually 4th quarter maybe only half month or a month only benefit from this market segment. And then from the communication point of view, right, the networking, the telecoms, I think the demand is more on the slow side. So the inventory correction is actually slower to digest the inventory and it will probably last into the second half of the year, depends on the customers as well. On the smartphone side, I think it's driven by the demand. And overall, I would say the demand is still slower than the expectation.

Speaker 4

But with all adds up, we actually strongly believe that Q2 will be a stronger quarter than Q1. That's the reason we actually guided 4.6%. We also believe second half of this year will be better than the first half, right? So that's still we actually based on what we have as a backlog, we look at the book to bill ratio, we look at different factors. So I would say yes to your question.

Speaker 4

The second half will be stronger than the first half. We are not here to call out the percentage of the improvement, right, because I think there's still a lot of uncertainty going on in the market. But if you combine both, second half is better than the first half for sure.

Speaker 7

Thank you.

Operator

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

Speaker 6

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

Speaker 3

Tristan, on this one, I think what you'll see is what we're it's a blend of both our analog and our discrete that we're bringing inside. What we're really trying to do is the technology nodes that run-in a decent past, really we look at wanting to be able to in source between 50% to 60%. And during softer times, we'd like to run that higher. And we'd want to make sure that we have SP fab and the GreenOak fab being able to carry the brunt of that because they're kind of our foundational fabs across the 2 different platforms we have. And that's really where the initiative is, is not being so dispersed and spread out, but really getting integrated into those factories and really trying to drive leverage both from a cost and scale and be able to drive both revenue opportunities as well as cost over time.

Speaker 3

So that's kind of what we see.

Speaker 2

Right. And also I want to clarify, Justin, that is not 100% from those 2 phase transfer from outside to inside. We do have a newer technology really tape out in those 2 wafer phase starting from 0. So that's really good news for us. So when we say that does not mean 100%.

Speaker 2

We are offloading from the outside feng shui factory. So we do have our internal technology and product take out new release in this 2 particular wafer fab.

Speaker 6

Great. That's very useful. And then just following up on the commentary about inventories. In the Q2 guidance that you're providing, do you expect to build additional inventories on your books? Or do you think that as you reduce your utilization rates in the quarter, you're now building in line with actual land demand?

Speaker 6

And then secondarily, could you talk about what point of sales for at this stage is embedded in your Q2 revenue guidance?

Speaker 3

Yes. I'll make a couple of comments Tristan and then let Emily run with some others. Is that what I'd say on the inventory front is that we basically have done some things in Q1 that address needing to make sure we have availability in place, addressing uncertain order patterns, addressing the fact that Chinese New Year came in February, which is a much more difficult time to manage that across the quarter and have an availability in place. And as we look out in 2nd quarter, what we expect is essentially to be running at a level of what we expect demand to be. I don't expect to be building inventory internally.

Speaker 3

And what we certainly don't expect to be building inventory externally, we continue to expect to make progress there and we continue to see good activity from a POS perspective and maybe I'll see if Emily wants to extend that comment at all.

Speaker 4

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

Speaker 6

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

Speaker 3

Well, I would say that we haven't really been communicating our utilization rates, but relatively And in that place on either one. We're significantly below that and we believe that as things pick up and we continue to see strength, that's going to be a tailwind for us as being able to load our factories. That's not something we've been we have not maintained our utilizations across the period over the last year as we've seen this softness. As we think about the utilizations over time, what we're will be our strategy is going to be to maintain utilization consistent with demand as we move. We think we have availability in a good place.

Speaker 3

We're trying to make sure we're opportunistic. We think that's what we're going to win with that. And so that's the approach we're taking from a factory side.

Speaker 6

Great. Thanks again.

Operator

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

Speaker 8

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

Speaker 3

I'd say on inventory, what we're looking at is trying to when we look at our portfolio of 50,000 parts and the availability and the mix, one of the things that we were never able to do is really get availability across the breadth of our portfolio in place, especially off of some of the more critical products and some of our most premium products. And so we would actually be constrained on some of our best products in terms of availability near term. And so what we've done across this period and you can see it last couple of quarters is as we start to get a feeling that we're coming out seeing light at the end of the tunnel, making sure we're in a position that from availability within that 6 to 8 weeks, we want to have a reasonable mix of product off the shelf. And that is something we're actively working on. We're actively both our shelf, we're actually working availability mix with our distributor.

Speaker 3

We see progress on that and Emily mentioned it. And I think from weeks of inventory at finished goods, that's not something we're strategically planning to increase. As we actually see things start to lift up, our goal would be to try to maintain that as we move through, maintain utilization with demand and be able to basically have an advantage on availability. We think our service is an advantage over time. And certainly, if we have availability there, we think that's going to be opportunity to gain share and to get momentum as demand picks up.

Speaker 2

Yes. Actually, we do see more and more short lead time PO coming in and really the demand we saw starting from end of Q1. So if we put a right mix of our inventory in our house, we get much better chance to support this kind of rush order.

Speaker 8

Just before I go on to my next question, I just want to make sure I understand what you're saying. You're running at about 190 days of inventory. Is that it would be, I guess, sort of unusual to hear a company at this point in the cycle say that they want to maintain that level of inventory. But maybe that's a great strategy. Can you just confirm my understanding?

Speaker 8

Or are you meaning on a dollars basis whereby the days would shrink pretty precipitously if revenue rebounded?

Speaker 3

I think what we're saying, Will, is if you look at the mix of that by finish level across this across time, this has not been something that's really changed significantly in terms of the dollar investment that we've made on the raw material side. That's something that kind of feeds our factory as well as we outsource. From a work in process perspective, that's something that's really kind of been adjusted as we see demand. But from a finished good perspective, we have strategically tried to put availability in place to have a better mix of product. What would as demand picks up, I would imagine at some point that strips away from us, but for some period of time, we're going to try to maintain that kind of 6 to 8 weeks of finished goods availability on average.

Speaker 3

I think that's not something we have across all the parts that we're trying to the portfolio is large and broad, but I think that's what you see us trying to do. And when I say trying to maintain, I think we're going to try to hold on to the fact that we believe that having good availability is going to give us a benefit to grow on some of our most premium accounts and premium parts.

Speaker 8

That's really helpful. I had a couple of maintenance question. Normally, I've asked about the disty versus direct split, but you provided that in the presentation. I appreciate it. One of the other sort of maintenance questions is the year over year change in ASP, which you always have in the 10 Q.

Speaker 8

Also, I was wondering if perhaps you'd start disclosing what book to bill is in the quarter and what backlog is in the quarter? Thank

Speaker 5

you.

Speaker 4

Yes. So let me answer the question, right? So direct and distribution is 39% versus 61%. What we usually still using 2 third versus 1 third as a rough estimate, Some of the quarter changed a little bit here and there. Specifically, you see 61% of distribution for the Q1 also reflected it in my discussion earlier that we actually seen the channel inventory value decrease by the end of Q1, right?

Speaker 4

So on the weighted ASP change from year over year point of view, it actually dropped slightly more than 25%, but there's definitely a mix change in there as well, right? So when we start seeing auto industrial as an example from the percentage decrease that's actually directly impacting the weighted average price as well, right? So if we look from the mix independent point of view, we did actually build in 1.5% to 2% per quarter cost degradation. What we've seen is actually with the mix independent, ASP change is actually pretty small and definitely within the range, within our estimate, right? And then how do we really balance that is really driving some of the cost down manufacturing efficiency that I mentioned earlier, right?

Speaker 8

Okay. Thank you.

Operator

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

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.

Speaker 6

The conference has now concluded.

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Earnings Conference Call
Diodes Q1 2024
00:00 / 00:00