Q3 2019 Earnings Call
Good afternoon, and welcome to diodes incorporated third quarter 2019 financial results Conference call.
This time, all participants are not listen only mode at the conclusion of today's conference call instructions will be given where the question and answer session.
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Please press the star key all that by the zero I know Touchtone phone.
As a reminder, this conference call is being recorded today.
They November four 2019.
I would now like to attend the call over to the answer the rest of shopping group Investor Relations Leann. Please go ahead.
Good afternoon, and welcome to diodes third quarter 2019 financial results Conference call I'm Leanne Sievers, President of Shelton Group diodes Investor Relations firm.
Joining us today from Taiwan, or diodes, President and CEO Dr., Kashi Lu Chief Financial Officer, Whitmire, Vice President of worldwide sales and marketing Emily Yang and director of Investor Relations Lora MRO before I turn the call over to Dr. Luiz I'd like to remind our listeners that the results announced today our preliminary as there is subject to the company finalizing.
The closing procedures and customary quarterly review by the company's independent registered public accounting firms as such these results are unaudited and subject to revision until the company filed its Form 10-Q , four third quarter 2019. In addition, management's prepared remarks contain forward looking statements, which are subject to risks and uncertainties and manner.
But it may make conditional forward looking statements in response to your question.
Therefore, the company claims the protection the Safe Harbor for forward looking statements that is contained in the private Securities Litigation Reform Act 1995 actual results may differ from those discuss today and therefore, we refer you to a more detailed discussion at the risks and uncertainties in the company's filings with the Securities and Exchange Commission, including forms 10-K and 10-Q.
In addition, any projection does to the company's future performance represent management's estimates as of today November 4th 2019 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's statements. During this conference call will include discussions a certain measures in financial information and GAAP and non-GAAP terms, including the company's press release or definitions and reconciliations of GAAP to non-GAAP items, which provide additional details.
Also throughout the company's press release in management's 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 called this time recording will be available via webcast for 90 days in the Investor Relations section of diodes website at Www Dot diodes, Dotcom and now I'll turn the call over to does president and CEO Dr. pay she lives Dr. Lu. Please go ahead.
Thank you Dylan.
Worldcom every one.
Thank you for joining us today.
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We said I mean, known kinda coal will vote to bring it to discuss our so called Doe funding shortly adults and whole fourth quarter two sold in 19 guidance in more detail.
Thanks, Dr. Lu and good afternoon, everyone.
As part of my financial review today I'll focus my comments on the sequential get change for each of the line items I would refer you to our press release for more detailed review of our results as well as the year over year comparisons.
Revenues for the third quarter 2019 was a record $323.7 million compared to 322 million.
In the second quarter 2019.
Gross profit for the third quarter remained a record $122 million were 37.7% of revenue.
Compared to the prior quarter, that's 122 million or 37.9% of revenue.
GAAP operating expenses for the third quarter 2019.
Were $73.3 million or 22.7% of revenue.
And $68.8 million were 21.3% or rather do on a non-GAAP basis.
Which excluded $4.5 million the amortization of acquisition related intangible asset expenses.
This compares with GAAP operating expenses in the second quarter 2019.
$73.5 million.
Were 22.8% of revenue.
$69 million were 21.4% of revenue.
On a non-GAAP basis.
Total other income amounted to approximately $20000 for the quarter.
Putting 2.6 million of other income.
272000 of interest income.
Largely offset by $2 million, an interest expense and 822000.
Foreign currency losses.
Income before taxes, a non controlling interest in the third quarter 2019 was a record $48.7 billion compared to $47.9 billion in the previous quarter.
Turning to income taxes, our effective income tax rate for the third quarter was approximately 21.8%.
GAAP net income for the third quarter 2019 was a record $38.1 million.
Were 73 cents per diluted share.
Compared to net income of $36.3 million were 70 cents per diluted share in the second quarter 2019.
The share count used to compute gap.
Diluted EPS for the third quarter 2019.
51.9 million shares.
non-GAAP adjusted net income in the third quarter was a record $41.9 million for 81 cents per diluted share.
Which excluded net of tax $3.7 million non cash acquisition related intangible asset amortization costs.
This compares to non-GAAP adjusted net income of $40 million or 77 cents per diluted share in the second quarter 2019.
EBITDA for the third quarter was a record.
$78.3 million.
Or 24.2% of revenue.
Compared to $77.1 billion or 23.9% 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.
EBITDA, which provides additional details.
Cash flow generated from operations, the $67.2 million for the third quarter 2019.
Free cash flow was $41.8 million.
Which included $25.4 million for capital expenditures and net cash flow.
In the third quarter was a negative 17.1 million, which includes a paydown.
$52.6 million of long term debt.
Turning to the balance sheet at the end of third quarter cash and cash equivalents plus short term investments totaled approximately.
$226 million.
Working capital was 465 million and long term debt, including the current portion was 119 million.
In terms of inventory at the end of third quarter.
Total inventory days increased 204 in the quarter.
Compared to 100 last quarter.
Total inventory dollars amounted to approximately $230.8 million.
Which reflects the 5 million dollar increase in raw materials.
$2.8 million increase in finished goods.
And 100000 dollar increase in work in process.
Finished good inventory days was 27 in the quarter compared to 26 in the second quarter 2019.
Capital expenditures on a cash basis for the third quarter, 2019, or $25.4 million or 7.9% of revenue.
And within our target model, a 5% to 9% of revenue.
Now turning to our outlook for the fourth quarter, we expect revenue to be approximately 300 million plus or minus 2%, which at the midpoint represents an annual growth of 2.8% even in the overall weak market environment and continued outperformance of our served market.
We expect GAAP gross margin to be 36.5%.
Plus or minus 1%.
non-GAAP operating expenses, what your GAAP operating expenses adjusted for amortization of acquisition related intangible assets.
Were expected to be approximately 22% of revenue plus or minus 1%.
We expect net interest expense to be approximately $2 million.
Our income tax rate is expected to be 21%.
Plus or minus 3%.
And shares used to calculate diluted heap, yes.
The fourth quarter are anticipated to be approximately 52.5 million.
Please note the purchase accounting adjustments to $3.7 million after tax for Pericom and previous acquisitions are not included in these non-GAAP estimates.
With that said I will now turn the call over dental Yang.
Thank you Brad and good afternoon.
Looking more closely S. <unk> revenue Pos revenue without driven by strong <unk> Asia distributor inventory in terms of lease was down in the quarter and we're seeing our normal range of 11 to 14 weeks, which is where we expect it to remain near term.
Global sales for the third quarter Asia represented 74% off revenue you're up 17% in North America <unk>, 9%.
In terms of our end markets industrial was once again, our largest representative end market at 20% off revenue consumer 24% communication, 22% computing 16, and automotive 10% off revenue now let me review the end markets in greater details.
Starting with our automotive market revenue reach out a record as we continue to gain increasing traction and content in this key focus area with iOS. We also expanded our product portfolio by introducing exciting new products from multiple product lines, including Mosfets Crystal.
Oh, you de July 1st P.S., Senior Dias protection, Prattas bipolar junction transistors SBR sensors.
I used to also recently released our XR Q family of Christo qualify to eight you see Q2 hundred great why requirements targeting auto applications that demand frequency accuracy under harsh environments.
Additionally, dives, leading pizza express for Oh solution, and U.S.P. type C solutions, let's say no maxing and signal integrity continue to see growth emergent automotive applications like instrument cluster infotainment and assisted driving information.
In fact piece express has become the interface of choice for the backbone transmission of engine control units eight das navigation Telematic infotainment systems.
Hi, this is well positioned to address this need with a variety of product designed to support the piece I expressed protocol.
Hi, this is the only suppliers to offer a PC I expressed for dot oclock generators and copper first with eight you see Q gray to one Oh I see ambient temperature support.
Also in the automotive market, we continue to see success with our proprietary SBR technology as well as Mosfets he signings.
This product are suitable for a wide range of applications in connected rising eight das telematic infotainment.
Our train covering commissioning hi, breaking electric vehicles and battery management systems.
In addition, we saw new design wins for our key try for I see for in car charging system for portable equipment, such as phones and tablets.
We also saw growth in our Tvs, Prada and cameras and Ada Es system and for our multi chip iray process using engine diagnostic test systems.
I will also have multiple design wins and revenue growth from our newly introduced L.E.D. try for it and we're lights and air future applications.
In our largest represented to end markets industrial our momentum continued with new design, we activities across many applications such as metering D.C. fans power to and power supply as well as home appliances, including you lock applications.
Our class Pesification process gratifying and bridge ratify a prada experienced strong growth in applications, including palms mixers operation system and measurement system in the third quarter revenue increase for our linear mode discrete LCD driver.
In various commercial <unk> industrial lighting applications.
Polar transistors also continue to be in demand for industrial applications, where they are often useful voltage regulation and driving that gates of power devices, such as MOSFET and IGBT.
Additionally, we continue to expand our market position in industrial PC I, expanding decitabine activities with our low Powerpc I Express to Dot OPEC is switch our progress low power performance gift iOS or leading position in the small Lincoln port expansion applications.
We are also see U.S.P. type C adoption into medical equipment with our H.D. am I O for that type C. Cross bar switch defined inflict transporting V deal MH to monitor Ofer, I guess B type C interface.
Hi, This also introduce doing to quarter, our universal high speed Cross bar switch that supports the latest total costs such as piece I Express what Oh Sunda, both three superspy U.S. be 20 gigabit per second and tank T. base K., Our April wise and almost universal.
Solution to routing high speed since it was up to 20 gigabit per second.
Further with the rapid adoption of high speed interfaces across multiple end applications in the Aiotv industry, Yes. He protection is becoming more and more important for such data links multiple design wins in third quarter come from die is leading position, yes see protection devices.
Turning to consumer this market continues to be strong area for dialysis, SBR, shockey, and G.P.P. ratified growing both sequentially and year over year.
We saw increased the momentum for new applications like smart speakers wireless Chargers gaming PC power White goods protection Searcher modules for me worse, Paul routine protection and IP phone market.
Lonely Kate C.S.P. Potter are increasingly using the battery pack for portable devices to boost battery life.
Also during the quarter guys protection product continued to gain traction in various panel applications, such as mobile Pinos TV pulling those monitor panels and notebook panels.
In the communication market as reported last quarter, we continue to see de sign we expansion off our products into five t. applications like CP small cell base station. They spent units and remote radio units for higher speed increased bandwidth and improve how.
Our density we also saw additional design leasing fiveg applications for discrete power management clocks, and connectivity products, including U.S.P.B. drivers and switches.
Power density is one of the key concern for Fiveg smartphones and die who has been actively engaging this market with a comprehensive small footprint DFN CSP boss that portfolio.
Also in the communication market, we continue to see revenue growth from mobile handset applications for our products like tight tolerant senior Guy Who's high voltage fast switching diodes, lonely Capes and no diodes and fast recur freeing G.P.P. ratified.
In addition, our protection products continue to be our key growth area, driven by U.S. B type C adoption in mobile phone applications.
Lastly into computing market revenue grew in notebook PC applications for Tvs products high current L. Dios tight tolerances, you know dial stratify or its masuno fast switching diet was.
Our signal integrity solutions continue to maintain a leadership position estee well recognized I see P. you partners.
What's the adoption of U.S. B type C notebook in PC applications. We are seeing this area as the next big growth engine for protection and connectivity product for my Pericom product line.
Speaking off our Pericom I see product line as Dr. Lou mentioned in his comments, we once again achieved another quarter of record revenue from this product, which is a testament to the iOS ability to leverage our global sales channel and cross selling opportunities, we have been able to achieve.
Across our customer base. We also achieved strong revenue growth for low switches in PC and mobile applications combined with increasing design wins for our high breakdown voltage products for our applications such as power over Ethernet surfer power and data center.
In summary, our chief months of recovery cells in the third quarter. It suffered are testament to diagnose consistent execution and the increasing benefit from our total solution sales approach and content expansion at key customers further as indicated by our fourth quarter.
Cadence, we expect full year revenue to grow 2.8% Oh for 2018, which is further evidence of our continues outperformance off our served markets.
We look forward to the additional opportunities afforded by the proposed acquisition of light on semiconductor in terms of Broughton Prada offering as well as wafer and packaging capacity to further support our future growth.
With that we are now open the floor two questions.
Operator.
Thank you to ask a question you'll need to press star one on your telephone.
I would try your question pest upon key piece and Bob why we compile the <unk> Monday roster.
First question comes from game multi with Wells Fargo Securities. Your line is now open.
Hey, everyone. Thanks for taking my question.
What's the start asking about the gross margin assumption for the fourth quarter with gross margins are expected to decrease about 120 basis points quarter over quarter I'm curious to know how much of that is under utilization of manufacturing versus.
Pricing on a like for like basis for products.
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Okay.
As a follow up question I went to ask about seasonality for the first quarter typically in the first calendar of any calendar in fiscal year you see.
Some of the neighborhood of a 3% sequential revenue decline just given what you know today about timing to Chinese new year, and maybe you know demand trends or whatnot, how would you call the seasonal trends in the in the first quarter relative to revenue and then with respect to Opex. One would think that you would show an increase in opex.
Sequentially in the first quarter, because the payroll taxes and whatnot, but in recent years, you basically trend that flat.
In the first quarter on a sequential basis. So so how would you called the Opex change as we look into Q1 Brent.
Okay very.
Again, and all this from seasonality point of view.
Oh, one to be quoting is a 5%.
And so we expect this year.
Send me, though.
To that can know tool but.
We're not sure yet but from the market point of view Oh, we can see.
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Thank you for that.
Thank you as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Sean has done with Longbow Research. Your line is now open.
Hi, everybody and congratulations on the a strong result.
Thank you Sean.
If you look at the guidance in terms of the sequential change for the December quarter are there any end market verticals that you would anticipate to perform better or worse.
Then the implied sequential decline.
Well I do they do you hold pill call I see an old promoting still going to be perform.
I still okay. We.
We target.
Within these DCIO and so while we continue.
And intend button and we even have to recur.
So oh and so forth.
So I see we expect.
Daniel British all I don't see have reason or watch swing going weaker in automotive and appeal come I see right. So let me just add a little bit more right. So overall Kumar automotive market is definitely not growing and it's actually quite slow.
So majority of the growth coming from diodes really up coming from the content expansion that we've been really focusing all so you know again overall market is definitely not growing it's definitely not that positive. The overall RV saw has been pretty positive really you know just sent by the focus we being.
Focusing on what the last few years.
So I guess, particularly would be the underperforming areas would be within your consumer electronics communications and Pcs just seasonality plus.
Maybe a little weaker market trends and I'm trying to put words in your mouth, but.
Okay, I'm, sorry, I assume you're talking about the Q4 revenue guidance.
Correct correct I was wondering if you.
Okay.
Maybe weaker end markets right. So I think overall lower revenue guidance, just mainly driven by more than you show our your inventory adjustment, especially in Europe , and North America, but if you look at our overall business in Q3 Q. Our Pos is actually up our channel inventory style, we actually.
Hold on better than our surf the market right, so even with our Q4 guidance.
Oh your estimate was still grow about 2.8%, which is still much stronger than our peers right. So I think overall if you look at the business, we're very confident that we actually in good shape.
That's very helpful. The Brett as a follow up a tax rate has continued to decline here.
Nice to see.
If we look at over the next 12 to 18 months, how much further I can't commit a decline.
Well I would expect us continue to see some improvement there charged to say exactly what that is but you know we're guiding into fourth quarter to continue that momentum down and I would expect has continued to see momentum.
As we go into 2020, you know we've been working toward a model and we haven't gotten full entitled whether that yet.
Okay, and then last if I may just.
Is China, the big regulatory approval here that that.
The one that you need to see get cleared to get to deal closed in April there's or something else I'm missing.
Hi, China.
Anti trust is the key Oh key item for us to Oh to be able to consolidate.
Oh I see okay, we don't see.
They're going to tend to die.
In my just timing.
Yes.
We will be deep.
There was a pool.
That's just may not be the time, we expect.
So that's.
Yeah, that's what we understand from our attorneys that are handled this for US we basically addressed everything that's been asked we provide all the information. It's just a matter of timing work into their process and we're just trying to keep everybody updated on that.
And we thank you very well right we are right per the requirement so at all.
Just.
Although we do that go into action upright.
Her order right you know double Mamquam that's right.
Okay. Thank you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to adopt Acacia though for any further remarks.
[noise]. Thank you for your participation on today's call.
Operator, you may now disconnect.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.