Q3 2021 Diodes Inc Earnings Call
Good afternoon, welcome to Diana's incorporated third quarter of 2021 financial results Conference call. At this time, all participants are a listen only mode at the conclusion of today's conference.
<unk> instructions will be give it for the question and answer session. If anyone needs assistance at any time during the conference call. Please press star followed by zero on your Touchtone phone as a reminder, this conference call is being recorded today Wednesday November 3rd 2021, I would now like to turn the call over to Leon Seevers of Shelton group at best.
Relations land. Please go ahead.
Good afternoon, and welcome to Diet third quarter 2021 financial results Conference call I'm Liane Fevers, President next shopping group Jasmine better relations burnt.
Joining us today or diet, chairman, President and CEO, Dr. <unk>, Chief Financial Officer, Brett Whitmire, Senior Vice President of worldwide sales and marketing and Liang Senior Vice President of business groups. There you and director of Investor Relations Your meat Dhaliwal.
That's why I tried to call over deductively I'd like to remind our listeners that the results now today are preliminary at their subject to the company finalizing it's closing procedures and customary quarterly review by the company independent registered public accounting firm.
As such these results or unaudited and subject to revision until the company files. It's one. Thank you for the third quarter of 2021, ending September 30th 2021. In addition to the management prepared remarks contain forward looking statements was your subject to risks and uncertainties and management may make additional forward looking statements in response to your question.
Therefore, the company claims the protection of the Safe Harbor for forward looking statements that is contained in the private securities litigation with one that could 1995.
Actual results may differ from those discussed today and therefore for you to a more detailed discussion that the risks and uncertainties in the company's filings with the Securities and Exchange Commission, including forms 10-K and 10-Q.
In addition, any projections as to the company's future performance represent management estimates as of today November 3rd 2020, 1000 seems no obligation to update those projections in the future as market conditions may or may not change to the extent required by applicable law. Additionally, the company's press release in management statements. During this conference call with.
I'll include discussions of certain measures and financial information and gap and non-GAAP term included in the company's press release, our definitions and reconciliation a gap to non-GAAP items, which provide additional details also throughout the company's press release in 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 Dot diodes Dot com and now I'll turn the call over to die as Chairman President D. L. Dr case, you live separately. Please go ahead.
Thank you again.
Welcome everyone and.
And thank you for joining us today.
This quarter represented the fourth consecutive quartile record revenue.
Oh second consecutive quarter.
Gross margin expansion over 210 business point.
Resulting in Rico gross margin and profits.
Underpin old girls.
Has been the success, Oh, I will come to expansion and new Stoops.
And particularly in the automotive market.
Flu remove almost 65% yield over you and 7% sequentially.
Contributing to.
C H you're 30%.
Additionally.
Oh pill come product.
Continued to set new room, you know Rick.
Achieving four consecutive quarters girls primary Caribbean by attrition in high end computing and the civil application.
Oh, grilled <unk> higher margin and markets.
Combined with increased loading at all night long semiconductor facilities.
And where would the us to increase our Pope nine revenue and marches.
In the midst of these surprise constraint embalming.
Title is provable petitioned with a global manufacturing footprint.
Yup provides the possibility to strategically expand our capacity introduced coast.
Either by IDIOM equipment to exist and nuns all converging equipment to Dodge you wafers.
This ongoing actions.
Expected to support I'll continue grilled and the margin improvement into next year and <unk> to solve them <unk> target <unk>, one b, Oregon daughters in gross profit.
$2.5 billion in revenue and to 40% growth much.
With that let me know Penn Nicole over to Brett to discuss how are so quarter financial results.
And a fourth quarter COO salt into a new one guidance in more detail.
Thanks, Dr. Luke and good afternoon, everyone as part of my financial review today I will focus my comments on the sequential change for each of the line items and we'd refer you to our press release for a more detailed review of our results as well as the year over year comparisons.
Revenue for the third quarter of 2021 was a record $471.4 million, an increase of 7% from $444 million in the second quarter of 2021.
Gross profit for the third quarter was also a record at $181.2 million or a record 38, 4% of revenue, increasing 13% or 210 basis points from 159 $8 million or $36.
3% of revenue in the second quarter of 2021.
I would also like to point out that are gross profit increased 63% or 250 basis points from $111.1 million or 35.9% of revenue in the third quarter of 2020.
GAAP operating expenses for the third quarter of 2021, where $104 million or 22.1% of revenue and on a non-GAAP basis, where $99.6 million or 21.1% of revenue, which excludes for $1 million of amortization.
Nation of acquisition related intangible asset expenses. This compares to non-GAAP operating expenses in the prior quarter of $94 million or 25% of revenue.
Total other income amounted to approximately eight $3 million for the quarter, consisting of five $9 million of unrealized gain on investments $2.2 million of other income $765000 of interest income $800000 in foreign currency.
Gain partially offset by $1.4 million in interest expense.
Income before taxes and Noncontrolling interest in the third quarter, 2021 was 85 $6 million compared to $77 million in the previous quarter.
Turning to income taxes are effective income tax rate for the third quarter was approximately 17.3%.
GAAP net income for the third quarter of 2021 was a record 68 4 million or $1.50 per diluted share a 23% increase compared to GAAP net income of $1.22 per diluted share or 55 $4 million and <unk>.
Quarter of 2021, this represents 194% improvement from 51 per diluted share or $27.2 million in the third quarter of 2020, the share count used to compute gap diluted EPS for the third quarter of 2021 was.
45 6 million shares.
Non-GAAP adjusted net income in the third quarter was a record 67 $3 million or a dollar and 47 cents per diluted share, which excluded net of tax three $3 million of acquisition related intangible asset costs 0.3 million.
Of acquisition related and restructuring costs, and a $4.7 million gain in value on certain LSC investments. This represents a 23% improvement from the second quarter of 2021 of $1.20 per diluted share or 54 $6 million and $130.
7% improvement from 62 cents per diluted share or $32.8 million in the third quarter of 2020.
Included in third quarter 2021, GAAP net income and non-GAAP. Adjusted net income was approximately $8 million net of tax of non-cash share based compensation expense.
Excluding share based compensation expense, both GAAP earnings per share EPS and non-GAAP adjusted EPS would have increased by 18 cents per diluted share for the third quarter $2021.15 for second quarter of 2021.
EBITDA for the third quarter was a record $114 $5 million or 24.3% of revenue compared to $99.4 million or 22.6% of revenue in the prior quarter on a year over year basis EBITDA increased 81%.
From $63.3 million in the third quarter of 2020.
Further highlighting are significant operating improvements over the past year.
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 $98.9 million for the third quarter of 2021.
Free cash flow was 57 $8 million for the third quarter, which included $41.1 million for capital expenditures net cash flow in the third quarter was a negative $10 $1 million, which included a paydown of 49 $7 million of total debt.
Turning to the balance sheet at the end of the third quarter cash cash equivalents restricted cash plus short term investments totaled approximately $292 million.
Working capital was $619 million in total debt, including long term and short term was $252 million or net cash position demonstrates.
Significant cash generation and earnings power.
In terms of inventory at the end of the third quarter total inventory days increased to approximately 99 in the quarter as compared to 96 last quarter finished goods inventory days, where 27 compared to 26 last quarter total inventory dollars increased $18 million to appear.
Proximately $322.1 million.
Total inventory in the quarter consisted of eight $9 million increase in finished goods, a five $2 million increase in raw materials, and a $3.8 million increase in work in process.
Capital expenditures on a cash basis for the third quarter of 2021, we're $41.1 million or eight 7% of revenue.
We expect to remain within our target model of 5% to 9% for the full year.
Now turning to our outlook for the fourth quarter of 2021, we expect revenue to increase to approximately $476 million plus or minus 3%, which represents a record on both an organic and a consolidated basis for a combined increase of.
Or about 1% sequentially at the midpoint, which is better than typical seasonality of down 5% week.
We expect gap gross margin on a consolidated basis to be 38, 7% 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 21 person.
<unk> of revenue plus or minus 1%.
We expect net interest expense to be approximately $1.2 billion or income tax rate is expected to be 18% plus or minus 3% and shares used to calculate diluted EPS for the fourth quarter are anticipated to be approximately $46 2 million shares.
Please note that purchasing accounting adjustments or three $4 million after tax for previous acquisitions is not included in these non-GAAP estimates.
With that said I now turn the call over to Emily Yang.
Thank you brat and good afternoon.
Quarter revenue increased 7% sequentially, which is that Boston <unk> fr guidance and better again conscious analogy driven by record revenue market share gains and strong across all region.
While I P. O asked wrapping you without a record driven by back to P. S revenue in Asia and Europe.
Stupid their inventory in terms of weeks left flat quarter over quarter, which remains below are defined normal range of unef into your flexible weeks.
Looking at Google South end up their quota Asia represent at 80% of revenue Europe, 12% in America, 8% in terms of our end market computing represented 31st half revenue industrial 24% consume at 18% communications, 16% and automotive 12% off revenue.
We achieve record revenue in the automotive industrial computing and consumer and market.
Now, let me review that and market in greater detail.
Starting with the automotive market revenue Grill, I'll first 65%, yet oh for a year and 7% sequentially two other quantities. After wrapping it is aiming at supply constrained environment.
Launching our entrance into the automotive market in 2013, we have achieved a 30%.
Are are ongoing success can be contributed to our compact expansion initiatives that have resulted in <unk> contact opportunity increasing to almost 100 dollar per vehicle.
As part of this initiative, we have also expanded our product portfolio for a broader setup automotive applications that has to be solid and increase <unk> E N E.
S F R traction to cover more application during the quarter, we have strong Ethan E momentum flick H offers high voltage regulators hockey fast answer some math test in Nebraska, That's D C motors and actually power steering clothing said, what her palms power windows store locks in.
Tainment battery manage system and advanced tracking assistance system.
<unk> charging yes E Casey charging at 40 Ewald battery system continue to drive the natural MOSFET and protect it no switches.
We also saw strong demand for automotive, great rectifiers, and wiring harness application Aswell S or bipolar, Texas Toast and L. E. D. D me a dry first in various lighting applications, including the outbreak light training like spotlights and cockpit lighting.
C D C. By collectors also receive strong ebay and infotainment forward lighting tell like instrument clusters, telematic and a desk.
And a quarter or pair come products for the automotive space also continue to gain strong momentum with increasing D. E. E. S. B type eight charging controllers, I owe expanders and Crystal Crystal oscillators into infotainment up Rob portfolios of high temperature Crystal oscillators.
The growth in the automotive business.
Actually if you think to the strong performance off the <unk> private line doing a quarter.
In the industrial market revenue also reached a quality tobacco growing 66% off like a pioneer and 17% sequentially across a diverse set of applications, including power supplies power two's smart metering power distribution system machine automated system.
And security system at polar transistor ethical nice controllers I gain traction in power supply application and P. C. I Express packet switch from the <unk> family I can't gain momentum and debit applications.
You want to introduce step-down L. E D try first in a compound package when Stefan mute is that it for L. U D lighting applications. Additionally, arcade, Joshua ic's tranche moth technology and voltage regulators I've seen continues assassin, Nebraska, this easy motor cooling fast and the Pelorus stepper.
Motors garage door, consult and L E D strip lighting.
I will also continue to support environmental sustainable through the efficiency no problem with a rash of fires in the Green factory automated control equipment and high speed robotics.
Additionally, we can't increasing market share Atlanta, and power Ofer, Ethan that application with our MOSFET and SBR products. We also secured increasing design wings for applications, such as programmable logic controllers, I O T security Servo Motors power supply Margaret.
<unk> also we have your security new design Wink from our lite authentic conductor inmate staff that product line industrial automation machine, including scanners Bank notes detectors check, let me see and P. C. P inspection.
In the consumer market D. C D C converters, and bipolar transistors thinking of strong growth and monitors T V set top boxes and cable modem.
<unk> demand far no power audio amplifier increased significantly along with new design wins for Shockey at S. D. R products in March because we're both devices smart routers and virtual reality applications.
The integration of LSC manufacturing facilities diet, let's just not well positioned to support a strong email for upgrade to ratify a product family in the consumer applications, such as home theaters as well as smoke and carbon monoxide detectors.
Additionally, U S E power Dennis at the Coders and MOSFET skin, an increasing number after you sign me in the wireless pilot charging solution alright, industrial small this MOSFET is ramping up to meet the most critical teaneck in small footprint application, we also experienced growth and and.
New design wins for are you at the Max devices with high voltage protection and Ultra high bandwidth features I O T applications.
I need to communication, we continue to drive increasing demand for our <unk> in the five G market R. S. P D T.
Switch has been decide until five G. <unk> S. In that unit with a major 50 equipment suppliers. We also seem demand for P loss to protect a five G. R. F amplifier in the remote unit isn't it.
And and moth in the five G based power stations to reduce the power consumption.
Also during the quarter, we achieve significant contraction for our high P. S. F. R. <unk> L D L battery fat and SBR private you can a smartphone application.
<unk> also saw increased revenue from octopus, all applications for fiber optic equipment, including C. W. E. M. N D. W. D M modules S Y S switch gears and switch Bullock application.
<unk> honestly, that's off our high performance Crystal oscillator. So I'm <unk> are ultra low jato Crystal oscillator family also experienced tremendous growth in the optical modules.
Lastly, in the computing market revenue grill over 140 per se you over a year to Iraq Carter, just send <unk> and the four consecutive quantity of growth.
Energy Conservation trend continues in the commercial P. C market, which requires are so no integrity Lee drivers were C. U F E type C and Displayport read drivers Chemosh USB powered delivery bought converters and only Paula cost answers design wasting a notebook not that black and a I O five.
Additionally, stroppy ma'am for high resolution display Pow Pow R. H E M. I display we drive for a product to other volume P. H D. M. I too thought Oh V drivers are deciding application site mobile station gaming P C and notebook and our newly released do channel L. U D dry.
First of <unk>, we need that the fries with major P C manufacturers.
Along with telecom products.
<unk> F. B R process are also increasing our new design with and Klopp have one and data center application L. S. These inmates dance or Prada have also be giving you the families and scanners and Multifunction printers.
In summary, we are very pleased to have and a cheese slavkov second quarter of record revenue coupled with roethke fulfillment across all financial matrix. The continued success off our compact expansion initiative F F. As in by a record revenue H T hockey a market.
It's like automotive industrial and computing, which has also Sarah S. A T coach with you there to our Martin expansion with our expectations for other quarter off about seasonality resell and roethke performance. We look forward to reporting are continuous progress.
With that we now open the floor to question operator.
Ladies and gentlemen, if you have a question at this time. Please press Star then one if your question has been answered and you'd like to remove yourself from queue. Please press the pound key our first question comes from the line of Tristan gear off from Bird Your question. Please.
Hi, Good afternoon, you've mentioned market share gains in a quarter is that the ongoing share gains that'd be driven by Carrie cum or are you, saying it would change a or an X generation I need to share gains due to some of your competitors deemphasizing.
Lower margin product, which presumably would be an opportunity for you to go ahead on some additional sure there.
Right. So Tristan this is Emily uhm.
I think the Ah market share game, that's really across the bar across all the problem lies right not only just have her account. So you know I think with our compact expansion and a top or a total solution south strategy driving additional designs and design we of course with the kind of market C.
Asia also accelerated some after deciding activities right. So I would say is culmination off everything.
Okay. Thanks for the feedback and.
A D photo how the shortages potentially waiting on you ability to to ship either at your neighborhood or at the customer table meeting customers waiting for other Carlton might be doing some inventory rebalancing there was he.
Try that accompanied it talked about it earlier this earnings season, how do you see charity to to supply.
Potentially constraining you not necessarily this quarter, but to the the next few quarters.
Right. So you know what I mean first of all right. We we we definitely all kind of strange red because the over all the the situation for this rise quite dynamic. So what we have been doing is actually working with customers understanding their true the man and overcome different bottlenecks right. So ofer always seem.
The backlog is still extremely strong we haven't really seen any significant changes from the behavior from customer rebalancing their inventory at this moment.
Great. Thanks again.
[noise]. Thank you. Our next question comes from the line Williams died from two Securities. Your question. Please.
Great. Thanks for taking my questions first I want to ask about the above seasonal guide I Wonder if there's a one of the end markets that we should think about more prominently representing this seasonal.
Seasonal expectation or is it spread across more than one.
Right. So uhm, let me let me address that question first you know I think Oh for always seems strange across all the market. So let me just break it that will live at the in the automotive we still seeing it very very strong industrial is also very strong on the.
<unk> area, we're seeing a lot of strong demand driven by the cloth based applications Surfer data center are extremely straw.
Enterprise size still very strong the only area, we've seen a little bit, but I would say you know maybe soft is actually consumer related low N. P. C. Both of <unk> that was never really a big focus for US right and then if we look at that communication I think overall, the backlog still straw, especially.
Driven by five G. My latest stuff, including the smartphones you know all the other I would say wireless phones, we definitely see a <unk> I wouldn't say slow but stable demand in general right and then so yeah. So that's communication computing industrial Ottoman.
Yeah, that's about the five seven is that we see.
Yeah. So I was like pretty broad based I wonder if you could give us an update on the times maybe characterize.
What person portfolio, perhaps it's.
Approximating 52 weeks or more how that's changed and maybe backlog. So you can provide it. Thank you.
Right. So oh for all there's no significant change in terms of the times like I mentioned before what we do is working with customers, especially the tier one tier two customers understanding their true the man right back.
<unk> very strong bow to bill ratio really straw as well and we also had a record revenue P. O S revenue for the second quarter and a strange that's really across all regions as well. So as you can see based on a lot of this kind of information. We did provided a strong guidance look cute.
For which is 1% quota offers clutter growth and compared to the usual system Ality O. 5% you know, we we see that as a strong guidance as well.
Well in the additional we implement this unknown principle six months that grill.
And the big foot mirror, we still have those broken and alright, I will <unk> did not really get console and we almost.
Booked for the next six months.
Okay. So you can see the bitchiness two very strong.
Great. Thank you very much.
Three Q. Our next question comes from the line of David Williams from Benchmark. Your question. Please.
Hey, Thanks for taking my question and congrats on the excellent results here So [noise].
Maybe first Doctor Lou you mentioned in your prepared remarks.
The expanding capacity by adding equipment or converting to larger wafers. Just wondering if you can maybe provide some some color as it relates to those remark and if this is currently in motion or how we should think about the capacity expansion efforts.
Immediate term.
Okay.
You know just for both of them.
Some we acquire a O C.
Some of the a T P. P plug the syringe, we all combo two four inch than some of the food each with the <unk> in two six inch and from there you can see the capacity and of course bolt will be.
Plus it will be increased and the order.
Then I don't know and the Oh.
Two we you know we explain all this.
Purple than the <unk> and the other half is H, we actually wrap it up all the eight inch capacity.
So we supposed to.
<unk> <unk> bye and dope fourth quarters.
Then you remember we bought the cheap clip from Texas instrument and that cheap clip.
We have fun three service, but went down 10% a.
Are you in.
And because we are granted up O M b men into that.
Chief Pet and you've been some will do.
Flip so from there we do.
Ah more capacity support I'll still buy T.
Person instrument in the country Hick deduced the funds would you support Oh hold fund to support her name, 10% a year and so you know due to all those.
Those actions.
We are able to increase our capacity and at the same time you know some of our facility for example, the the pill come Crystal nine and also there's a nine we all.
Ooh, we actually <unk> Oh, you stole.
Two nuns one in in the forties and airports C U and one one to be start to rent buy and though this year. So both of US all here there we are able to increase our capacity to support future.
No room, you might expect.
Great excellent color certainly appreciate that Uhm I'll take you wanted to see that had that kind of capacity coming into the shortest is good to see I guess, maybe from a component shortage perspective are there areas, where you're may be seeing any type of inventory excesses of where the visibility is less clear and green.
Ask a few others have spoken to potential builds an maybe preparation of scares components, becoming available and just maybe thinking about the production numbers and the bills that aren't yet in the production number do you think there's any part of the demand transit you're seeing now maybe that are pull forward because of those those production deals that I haven't been there aren't in the numbers you.
Yet.
Yeah. So David this is Emily Oh for all we still seem constrained really across all the proud of life. We haven't really seen any specific podcast of private life as seen some after I wouldn't say draw, but it's really you know relax right. So we definitely don't see that at this moment so like.
Doctor Little mention right, we pretty much booked.
With our non cancellation policy in with our visibility on the backlog <unk> you know we are pretty well positioned for the next few months.
Well I think you truly I think he's a butcher need because we are getting the monk shoe and because of all solutions cereals, we are able to participate more in the customer design Bill for you.
We owe a great new grill is really but it does not just the one here do.
Yes, we are pocket.
In the pause a mix like I'm really just to mention automotive.
T E G a 30%.
That.
The potential group.
If you choose what N like we focus on you know I M. P C <unk> and and those four walls and doses.
<unk> come in from all pill come pulled up and we continue sipping, the new redbook, Rick premium liquor wholesale consecutive quarter now and they're so doses.
Is the group to support the old Ghoul and even on consumer.
Focus on I O T pebble activity and do for those who still.
Continue growing and.
Yeah <unk> <unk>.
And communication Y T.
Related to that station or cell phone, Oh, hi informed also.
Any group.
<unk> for you which is beautiful.
I am not colston, even the capacity may start to boost up but I don't get home soon Oh grilled continue.
And that's a color one more if I can just squeezing you real quick just totally gross margin side do you have a sense of maybe what the magnitude of margin improvement stand for maybe the volume in pricing versus just the value optimization <unk> have the same more in the Morgan things do you think.
Well.
Go ahead, Oh, Oh will produce a pole.
Is we only raised the price too.
The threat Oh of course and please.
Okay. So.
Oh Venda race, the place for wafer fab or or building material we.
Please oh, it's P to reset that calls increase.
But majority of our gross margin improvement is not come in from the H P. Quiz it is coming from old maybe fiction.
C.
Okay and old product mix.
And when you look at the menu fiction efficiency, you know when we when we consolidate it always see it one two this year.
Oh G P when done.
300 basis point, and you said because you know the the.
And it took him a frequency is not a squint.
Titles.
But.
But then.
After we took over you can see all the second of all the girls 270%. This is <expletive> also quota grow to one in 10.
But uhm basis point is or do too many fiction and frequency and product mix. The calls from PA mixed point of view is that.
<unk> much more in automotive area and.
I'll mention 30%, 30% C O T O and that gives you a much better gross margin, but many infection at least Nancy I think even though the <unk> infection we from.
Help rolled it and we are no get to a ball.
I always see one of the fifth is 91% in the fourth in the third quarter. So dose is really a team.
To the improvement of the girls much yeah, I think on top of that right. We talk about <unk>. Besides the manufacturer insanity, we still have three other area, which is product customer base as well as the market segments. There's still a lot of room for us to continue to grow we also seeing a new.
New wave opportunities, especially open up a lot of new doors, new socket at the latest strategic customers. So we believe this is the beginning of it and with our total solution South strategy are compact expansion focus that will continue to help us to drive the margin improvement in any a few.
Check to see all the strategy is even this is shortage capozzi confront we are not.
Oh, great. The S. P Crazy, we only deep red the H P increase but of course increase so all customer can understand why we need to <unk>, but we put this opportunity to develop the deeper relationship with our.
Key customer, we we are able to open the door for the area, which we are not able to participate in the pez no the customer really well.
To support it and but but this strategy op no race is P talk ways to be.
We built a golden time partnership did this issue at the same time, we are able to sail our portal solution.
Into the customer, saying so.
Doses I P T b.
Data strategy than just reduce the.
The S P and hurt our customers relationship.
Fantastic. Thanks, so much and the best of luck on the fourth quarter.
Thank you. Thank you I want to get too maybe.
<unk> just like you have a question at this time. Please press Star then one our next question comes from the line of Matt Ramsey from Count wondering company. Your question. Please.
Yeah I know this is Ethan <unk> actually on from that Ramsey Congrats on and I said results here just wanted to follow up on a previous question in understanding I guess the utilization of the light on Fabs.
Given already high level of how much incremental utilization is to come and then from like a margin revenue perspective, if the fabs are getting close to full how much of the older lower margin lower ASP P products are running through the facility that.
That can be replaced by higher margin higher ASB products, and and what impact that might have on the piano going forward.
Well, let me I'm system, and then I'll get gaily to answer to raise topic. Okay. If you look at the menu function of LSC then.
Some of the embryo reach.
<unk> you Bye style Alright, then dot portion is one we're talking about one of the the the <unk>.
Oh no sir.
Okay preach we call to confess and thus won't with heifer audion now to almost 91%.
But the other flip switch I mention combo from Sweden, two to four inch combo from four inch to six inch those Jeff <unk>, we put in the equipment at the in the in the we puts us equipment in September this year.
And ooh install and and the combo two six inch then we wrap it up Q1then we'll 40 rent by second court, so that kind of support for the capacity going to support the grill.
They always see.
And a huge because.
I said, the a O C seemed much.
I've been to make them function the products emoji monkeys synergy.
And the customer's energy it took the time, so I prepared for that.
One to two years to be able to rent it and so we get the capacity.
To prepare for the mature of those synergies no you asking how much percent we week difficult.
Another orcas that we know that's it.
We're going to we're going to enhance we're going to.
Input improved but the week with does not put them forecast of Hum.
Much percent.
Is the ongoing productivity improvement ongoing capacity inquiries ongoing den the synergy for LSC. So we are not separate.
Oh I talked on that form for LSC, all right. Let me put in low color cover Dr. New statement on that and it's really difficult to break it out once the low Margaret <unk> before and what is it now, but I forgot to mention about at very beginning about that Jacob loading okay from 50% of <unk> This year.
Up to 91%.
Increase the capacity utilization, but also reduce the Idaho cost is either no matter styles problems as a second source will be in front of us up call, okay or existing line I'm proud of Oprah Ooh. They do have a much better cost structure no again for like three quarters before so that does help us to break up.
You know the competition of those divide nomadic lamb part of our Bios product right. So maybe let me add one more comment your question regarding lower ASCII margin replace it by higher Aspie My up at the margin products that is actually part of our product makes strategy that we continue to drive.
And that there's still a lot of room for us to continue to improve and that this will also include I mean loud semiconductors part of our overall portfolio. So we'll continue to execute this strategy alright.
Okay totally totally understand thank you for that and then just a quick follow up.
If you could give us a little color maybe on what you expect from a different segments sequentially is given the.
Given the guide.
So I think.
When.
Oh for does set men stray so automotive is going to be strong industrial is gonna be straw P. C. Higher end stuff cloud driven data center surfers will be straw consumer focus more on the I O T area, and and then communications really <unk>, we don't really breakdown in <unk>.
Down to each of the statement, but that's what we see in the market Nowadays.
Understand thank you very much.
Thank you. This does conclude the question and answer session. If today's program I'd like to have the program back to Doctor Lou for any further remarks.
Thank you for your participation on today's call.
Operator, you may now disconnect.
Thank you and thank you, ladies and gentlemen for your participation in three eggs conference. This does conclude the program you may now disconnect good day.
[music].
[music].
[music].
Good afternoon, and welcome to diodes incorporated third quarter 2021 financial results Conference call. At this time all participants are in a listen only mode. At the conclusion of today's conference call instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference.
Please press star followed by zero on your Touchtone phone as a reminder, this conference call is being recorded today Wednesday November 3rd 2021, I would now like to turn the call over to Leann Sievers Shelton Group Investor Relations Leanne. Please go ahead.
Good afternoon, and welcome to diodes third quarter 2021 financial results Conference call I'm Leanne Sievers President of Shelton Group Investor Relations firm joining us today are diodes, Chairman President and CEO, Dr case, Ya, Li Chief Financial Officer, Brett Whitmire, Senior Vice President of worldwide sales and marketing.
<unk> senior Vice President of business groups scare, you and director of Investor Relations or me dollar Walt.
Before I turn the call over to Dr. Lee 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 filed its Form 10-Q for third quarter 2021, ending September 30th 2021. In addition to 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 1995 actual results may differ from those discussed today and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission, including forms 10-K and 10-Q.
In addition, any projections as to the company's future performance represent managements estimates as of today November three 2021 diodes assumes no obligation to update those projections in the future as market conditions may or may not change except to the extent required by applicable law.
Additionally, the company's press release and management statements. During this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP term.
And in the company's press release are definitions and reconciliations of GAAP to non-GAAP items, which provide additional detail also throughout the company's press release and 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 call at this time, a recording will be available via webcast.
That's for 90 days in the Investor Relations section of diodes website at Www diodes dot.
Dot com and now I'll turn the call over to diodes, Chairman President and CEO. Dr case, you live Dr. Lu. Please go ahead.
Uh huh.
Thank you Yan.
Welcome everyone.
And thank you for joining us today.
This quarter represented the fourth consecutive quarter of record revenue and our second consecutive quarter of gross margin expansion over 210 basis point.
Its all opinion breakout gross margin and profits.
Underpinning our growth.
Has it been the success of our country expansion initiatives.
Particularly in the automotive market.
Revenue grew over 65% year over year and 7% sequentially.
Contributing to a CAGR of 30%.
Additionally, hope he'll come products continued to set new records.
Achieving four consecutive quarters.
Growth, primarily driven by attrition in high end computing and the civil applications.
Our growth in Europe.
Higher margin end markets.
Combined with increased loading at our day, one semiconductor facilities.
And they want us to increase our top line revenue and margins.
Even in the midst of this supply constrained environment.
Tayo is provable positioned with our global manufacturing footprint.
<unk> provides the flexibility to strategically expand our capacity and did use cost.
Either by adding equipment to existing names or converting equipment to Dodge your wafers.
This ongoing actions.
Expected to support our continued growth and the margin improvement into next year and tour, our <unk> target of $1 billion in gross profit.
All two $5 billion in.
Revenue and a 40% gross margin.
With that let me now turn the call over to Brett to discuss our third quarter financial results.
Our fourth quarter 2021 guidance in more detail.
Thanks, Dr Lu and good afternoon, everyone.
As part of my financial review today, I will focus my comments on the sequential change for each of the line items and we'd refer you to our press release for a more detailed review of our results as well as the year over year comparisons.
Revenue for the third quarter 2021 was a record $471 $4 million, an increase of 7% from $444 million in the second quarter of 2021.
Gross profit for the third quarter was also a record at $181 $2 million.
Were a record 38, 4% of revenue, increasing 13% or 210 basis points from $159 8 million or 36, 3% of revenue in the second quarter of 2021.
I would also like to point out that our gross profit increased 63% or 250 basis points from $111 1 million or 35, 9% of revenue in the third quarter 2020.
GAAP operating expenses for the third quarter, 2021 were $104 million or 22, 1% of revenue and on a non-GAAP basis were $99 6 million or 21, 1% of revenue, which excludes $4 1 million of amortization.
<unk> of acquisition related intangible asset expenses. This compares to non-GAAP operating expenses in the prior quarter of $94 million or 25% of revenue.
Total other income amounted to approximately $8 $3 million for the quarter, consisting of $5 9 million of unrealized gain on investments $2 2 million of other income $765000 of interest income $800000 in foreign currency.
Again, partially offset by $1 4 million and interest expense.
Income before taxes and Noncontrolling interest in the third quarter 2021 was $85 6 million compared.
Compared to $70 7 million in the previous quarter turning.
Turning to income taxes, our effective income tax rate for the third quarter was approximately 17, 3%.
GAAP net income for the third quarter 2021 was a record $68 4 million or $1 50 per diluted share a 23% increase compared to GAAP net income of $1 22 per diluted share or $55 $4 million and cents.
Quarter 2021, this represents a 194% improvement from 51 per diluted share or $27 $2 million in the third quarter 2020, the share count used to compute GAAP diluted EPS for the third quarter 2021 was.
$45 6 million shares.
Non-GAAP adjusted net income in the third quarter was a record $67 $3 million or $1 47 per diluted share, which excluded net of tax $3 3 million of acquisition related intangible asset costs zero point $3 million.
Of acquisition related and restructuring costs, and a $4 $7 million gain in value on certain LSC investments. This represents a 23% improvement from the second quarter of 2021 of $1 20 per diluted share or $54 $6 million and 130 <unk>.
7% improvement from 62 per diluted share or <unk> $32 8 million in the third quarter of 2020.
Included in third quarter 2021, GAAP net income and non-GAAP. Adjusted net income was approximately $8 million net of tax of noncash share based compensation expense.
Excluding share based compensation expense, both GAAP earnings per share EPS and non-GAAP adjusted EPS would have increased by <unk> 18 per diluted share for the third quarter 2021 and 15.
For second quarter of 2021 E.
EBITDA for the third quarter was a record $114 5 million or 24, 3% of revenue compared to $99 $4 million or 22, 6% of revenue in the prior quarter on a year over year basis, EBITDA increased 81% for.
$63 $3 million in the third quarter of 2020 further highlighting our significant operating improvements over the past year.
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 $98 9 million for the third quarter of 2021.
Free cash flow was $57 8 million for the third quarter, which included $41 $1 million for capital expenditures.
Net cash flow in the third quarter was a negative $10 1 million, which included a paydown of $49 $7 million of total debt.
Turning to the balance sheet at the end of third quarter cash cash equivalents restricted cash plus short term investments totaled approximately $292 million.
Working capital was $619 million and total debt, including long term and short term was $252 million, our net cash position demonstrates.
Our significant cash generation and earnings power.
In terms of inventory at the end of third quarter total inventory days increased to approximately 99% in the quarter as compared to 96 last quarter finished goods inventory days were 27% compared to 26 last quarter total inventory dollars increased $18 million to.
<unk> $322 $1 million.
Total inventory in the quarter consisted of $8 $9 million increase in finished goods, a $5 2 million increase in raw materials, and a $3 $8 million increase in work in process.
Capital expenditures on a cash basis for the third quarter 2021 were $41 1 million or eight 7% of revenue.
We expect to remain within our target model of 5% to 9% for the full year.
Now turning to our outlook for the fourth quarter 2021, we expect revenue to increase to approximately $476 million plus or.
<unk>, 3%, which represents a record on both an organic and a consolidated basis for a combined increase of about 1% sequentially at the midpoint, which is better than typical seasonality of down 5%.
We expect GAAP gross margin on a consolidated basis to be 38, 7% 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 21 person.
Of revenue plus or minus 1%.
We expect net interest expense to be approximately $1 2 million. Our income tax rate is expected to be 18% plus or minus 3% and shares used to calculate diluted EPS for the fourth quarter are anticipated to be approximately $46 2 million shares.
Please note that purchasing accounting adjustments of $3 $4 million after tax for previous acquisitions is not included in these non-GAAP estimates.
With that said I'll now turn the call over to Emily Yang.
Thank you Brett and good afternoon into third quarter revenue increased 7% sequentially, which is above the midpoint of our guidance and better than typical seasonality driven by record revenue market share gains and strong demand across all regions worldwide.
Worldwide Pos revenue without a record driven by record revenue in Asia, and Europe distributor inventory in terms of weeks was flat quarter over quarter, which remains below our defined normal range of 11 to reflection of weeks Lucky.
Looking at global sales in the third quarter Asia represented 80% of revenue Europe, 12% in Americas, 8% in terms of our end markets computing represents 30% of revenue industrial 24% consumer, 18% communications, 16% and automotive 12% of revenue.
We achieved record revenue in the automotive industrial computing and consumer end markets now, let me review the end market in greater detail.
Starting with automotive market revenue grow over 65% year over year, and 7% sequentially to other quantity Baxter revenue either in a supply constrained environment.
Since launching our entrance into the automotive market in 2013, we have achieved a 30% CAGR our ongoing use of SaaS can be contributed to our content expansion initiatives that have resulted in diodes content opportunity increasing to almost $100 per vehicle.
As part of this initiative, we have also expanded our product portfolio for a broader set of automotive applications that has resulted in increased visa, Inc, and <unk>.
As evidence of our traction to cover more applications. During the quarter. We have strong design win momentum for Gateway offers high voltage regulators hall effect sensors, and MOSFET and the brushless DC Motors electric power steering cooling water.
Water pumps power Windows door locks infotainment battery management system, and advanced driving assistance systems wireless charging USB type C charging and 48 volt battery system continued to drive demand for MOSFET and protected no switches.
We also saw strong demand for automotive, great rectifiers, and wiring harness applications as well as our bipolar transistors and led the linear drivers area lighting applications, including grab break lite, turning lite spotlights and cockpit lighting DC DC Buck converters also.
We see strong demand infotainment forward lighting tell lite instrument clusters, telematics and Adas.
During the quarter our per home products for the automotive space also continued to gain strong momentum with increasing desire for USB type eight charging controllers, Io expanders and crystal Crystal oscillators into infotainment up.
Rob portfolios of high temperature Crystal oscillators.
Growth in the automotive business contributing to the strong pro forma after Paragon product line during the quarter.
In the industrial market revenue also reached a quarterly record growing 66% off like a pilot year and 17% sequentially across a diverse set of applications, including power supplies power to smart metering power distribution system machine operators.
And security system bipolar transistors now synchronized controllers.
Traction in power supply applications, and PCI Express packet switch from the <unk> product family is gaining momentum and debit efficacious.
Newly introduced.
E G drivers in a compound package when stephane <unk> lighting applications. Additionally, RK, Joshua Ics trench Mos technology and voltage regulators are seeing continuous SaaS in Nebraska. This DC motor cooling fans and blowers stepper motors garage door controls.
<unk> Street lighting.
I will also continue to support environmental sustainable through the efficiency improvement with our rectifiers in the Green factory automated control equipment and high speed robotics. Additionally, we gain increasing market share in <unk> and power over Ethernet applications with our MOSFET and SBR.
Our products, we also secured increasing design wins for applications, such as programmable logic controllers, Iot security Servo Motors power supplies smart grid and energy also we have been and securing new design wins for AMR Lite on semiconductor inmates sensor product line.
Industrial automation machine, including scanners Bank notes detectors chat received and PCB inspection.
In the consumer market DC, DC converters, and bipolar transistors has been gaining strong growth in monitor Tvs set top boxes and cable modems. Similarly demand for our low power audio amplifier increase significantly along with new design wins with Schottky SBR.
In March <unk>.
Wearable devices, smart routers and virtual reality applications with.
With the integration of LSC manufacturing facilities dialysis, not well positioned to support our strong EMEA for a bridge rectifier products family in the consumer applications, such as home theaters as well as smoke and carbon monoxide detectors.
Additionally, USB power delivery, the coders and MOSFET gain an increasing number of design wins in the wireless power charging solutions.
Industrial small this MOSFET is ramping up to meet the most critical thing that in small footprint applications. We also experienced further growth and the new design wins for our USB MX devices with high voltage protection and ultra high bandwidth features into Iot applications.
Turning to communications, we continue to drive increasing demand for our <unk> products in the <unk> market.
Our ASP PDP switch has been designed into a <unk> action Athene that unit with a major <unk> equipment suppliers. We are also seeing demands la palmas to protect <unk> RF amplifier in the remote unit units and and mass in the <unk> based power stations to read.
The power consumption.
Also during the quarter, we achieved significant traction for our high PFS article farmers Ldls battery <unk> and SBR product in a smartphone application.
<unk> also saw increased revenue from our typical applications.
Our fiber optic equivalents, including E. W M and D WDM modules as well as switch gear and switch.
Applications.
Adding all of the success of our high performance Crystal oscillators, one para com, our ultra low jitter Crystal oscillator family also experienced tremendous growth in the optical modules.
Lastly, in the computing market revenue grow over 140% year over year to a record of Joseph by record <unk> revenue and the fourth consecutive quarter of growth.
Energy Conservation trend continues in the commercial PC market, which requires our signal integrity re drivers, we're seeing USB type C and Displayport re drivers P. Mod USB power delivery Buck converters, and only taller hall sensors design wins in the notebook market blur and AI ops.
Platforms. Additionally, strong demand for high resolution displays propelled our HDMI display driver product to other volume peak HDMI two <unk> OLED drivers RP siding applications mobile station's gaming Pcs and notebooks and our newly released do channel led.
<unk> has when we need the designs with major PC manufacturers.
Along with Paragon product shelf.
<unk> SBR products are also increasing our new design wins in cloud and data center applications.
<unk> image sensor products have also been gaining new design wins in scanners and Multifunction printers.
In summary, we are very pleased to have achieved wolfcamp.
Slavkov that fifth quarter of record revenue, coupled with record performance across all financial metrics. The continuous success of our content expansion initiative.
Evidence by our record revenue in key target markets like automotive industrial and computing, which has also served as a key contributor to our margin expansion with our expectations for the quarter of above seasonality reached out and record performance.
Look forward to reporting our continuous progress.
With that we'll now open the floor to questions operator.
Ladies and gentlemen, if you have a question at this time. Please press Star then one if your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.
Our first question comes from the line of Tristan <unk> from Baird. Your question. Please.
Hi, Good afternoon, you've mentioned market share gains in the quarter is that the ongoing share gains, notably driven by Shire com or are you seeing a change.
Generation and those share gains due to some of your competitors deemphasizing.
Lower margin product, which.
Presumably it would be an opportunity to go ahead on some additional share there.
Right. So Tristan this is Emily.
I think the market share gain that's really across the board across all the product lines not only just the per account so.
I think with our content expansion and the top our total solution sell strategy driving additional designs and design wins of course with the current market situation also accelerated some of the design in activities right. So I would say is combination of everything.
Okay. Thanks for the feedback and.
Hello, how are the shortages.
I'm sure you're waiting on.
Our ability to to ship either at your level or at the customer level meeting customers.
Waiting for other parts and might be doing some inventory rebalancing there was a large tenant company that talked about it.
Earlier, this earning season, how do you see charity to supply.
Potentially constraining you not necessarily this quarter, but over the next few quarters.
Right, So I mean.
First of all right, we definitely all constraints red because overall the situation for this round is quite dynamic. So what we have been doing is actually working with customers understanding their true the man and Ofer, Tom different bottlenecks right.
So overall, we've seen the backlog is still extremely strong.
We haven't really seen any significant changes from the behavior from customers rebalancing their inventory at this moment.
Yeah.
Great. Thanks again.
Thank you. Our next question comes from the line of William Stein from Securities. Your question. Please.
Great. Thanks for taking my questions.
First I wanted to ask about the above seasonal guide.
I Wonder if there is a one of the end markets that we should think about more prominently representing this.
Above seasonal expectation or is it spread across more than one.
Right so.
Let me, let me address that question first.
I think overall, we've seen strength across all the markets. So let me just break it down a little bit better in the automotive we still seeing very very strong industrial is also very strong on the computing area. We're seeing a lot of strong demand driven by the class based applications.
<unk> data center are extremely strong.
Enterprise sized feel very strong the only area, we're seeing a little bit I would say you know maybe soft is actually consumer related low end Pcs, but for diodes that was never really a big focus for US right and then if we look at the communication I think overall the backlog is still strong, especially.
Driven by <unk> related stuff, including the smartphones.
All the other I would say wireless phones, we definitely seen a little bit.
I wouldn't say so.
Slow, but stable demand in general right and then so yes, so thats communications computing industrial automotive, yes, that's above the five centers that we see.
It sounds like pretty broad based.
I Wonder if you could give us an update on <unk>.
Lead times, maybe characterize.
What portion of the portfolio perhaps.
Approximating 52 weeks or more how thats changed and.
And maybe backlog.
You can provided thank you.
Right. So overall there is no significant change in terms of lead times like I mentioned before what we do is working with customers, especially the tier one tier two customers understanding their true demand right back.
Backlog very strong book to Bill ratio really strong as well and we also had a record revenue appeal as revenue for the second quarter and our strength is really across all regions as well. So as you can see based on a lot of this kind of information we did provide a strong guidance for Q4.
For which is 1% quarter over quarter growth and compared to the usual seasonality of 5%.
We see that as a strong guidance as well.
In additional we.
Employment decent noncancelable six months that grill.
And.
From there we still have.
Very strong bookings and our backlog did not really get council and we almost all booked for the next six months capacity. So you can see the business too.
Pretty strong.
Great. Thank you very much.
Okay.
Thank you. Our next question comes from the line of David Williams from Benchmark. Your question. Please.
Hey, Thanks for taking the question and congrats on the excellent results here so.
Maybe first Dr. Lou you had mentioned in your prepared remarks of the expanded capacity by adding equipment or converting to larger wafers.
Wondering if you can maybe provide some color as it relates to those remarks.
This is currently in motion or how we should think about the capacity expansion efforts in the intermediate term.
Okay.
Just first of all for them.
When we acquire LSC.
Some of the <unk> industry.
<unk> will convert to for each than some of the food each week.
<unk> converted into six inch and from there you can see the capacity and of course, both will be capacity will be increased and the cost go down.
And then I don't know.
Oh.
Two we.
We expense all of this.
Purple them as <unk> and the other half is eight inch we actually ramp it up or each capacity.
So we suppose to.
$40.
Bye.
Fourth quarters.
Then.
You will remember we bought the chief slip from Texas instruments, and that's G clip.
We have <unk> service, but went down 10%.
Yield.
And because we are granted up.
Demand into that.
Each key fab and even some of the six inch fab so from there we.
Do.
More capacity to support our sale by Ti person instrument in the contract.
The funds really support.
<unk> support to name, 10% a year and so.
Due to all those.
All of those actions.
We are able to increase our capacity and at the same time some of our own facility for example.
Pill come Crystal.
Wine and <unk> nine.
<unk>.
So who we are.
Actually it is.
Install.
291.
In the third parties in airport Acu and one one could be start to rent by end of this year. So those this is all here or there.
Able to increase our capacity to support future.
No revenue or expense.
Great excellent color certainly appreciate that thank.
Thank you I wanted to see that have had that kind of capacity coming into the shortage.
C.
I guess, maybe from a component shortage perspective are there areas, where you're maybe seeing any type of inventory excesses are where the visibility is less clear and the reason I ask is a few others have spoken to potential builds and maybe preparation of scarce components, becoming available and.
Just maybe thinking about the production numbers and the builds that aren't yet in the production numbers do you think there is any part of the demand trends that youre seeing now maybe that or pull forward because of those production deals that haven't been that aren't in the numbers yet.
Yeah. So David this is Emily overall, we still see constrained really across all the product lines. We haven't really seen any specific pockets of product lines that seeing some of the I wouldn't say drop but it's really.
Relapse rate.
We definitely don't see that at this moment, so like Dr. Lu mentioned right, we pretty much booked.
Our non cancellation policy and with our visibility on the backlog.
We are pretty well positioned for the next few months.
Well I think.
Really I think is a virtually because we are gaining the market share and because of our solutions sales we are able to participate.
In the customer design build for.
Our revenue growth is really very balanced.
Jeff.
One here or there.
We are positive.
In the product mix.
And what are you just mention automotive.
CAGR of 30%.
That give us the potential growth in the future and we focus on.
And PC data center and in those tables and doses.
Really coming from our <unk> product and we continue setting the new railroad.
Rick.
<unk> fourth consecutive quarter now and so those.
The group to support our growth and even on consumer.
We focus on.
Purple activity and therefore, those who still.
We continue growing.
And.
Yes.
And communication.
T.
Related.
That station or cell phone.
Hi informed goes.
Containing.
Growth for.
Therefore, I am not constant even the capacity may start to goes up but I don't call soon.
Growth will continue.
Yeah.
Fantastic color.
One more if I can just squeeze in here real quick just on the gross margin side.
Do you have a sense of maybe what the magnitude of margin improvement and for maybe the volume and pricing versus just the value optimization house, how sustainable are the margin trend do you think.
Yeah.
Go ahead.
Our producible.
We only raised the place to.
The threat.
The increase.
Okay. So.
I will win the race the place for wafer fab or beauty material we increase.
It's P. Two.
<unk> said that cost increase.
The majority of our gross margin improvement is not coming from the ASP increase is coming from or maybe fiction. If these things.
Okay.
Product mix.
And when you look at the friction efficiency.
When we when we consolidate at OFC.
<unk> year.
Our GP when done.
300 basis point and is it because you know.
The manufacturing of frequency.
Great.
Yes.
<unk>.
But.
But then.
After we took over you can see our second quarter gross 270% basis points, our third quarter growth of 210.
Basis points is all due to manufacturing efficiency and product mix because from a mix point of view is that we.
Growth much more in the automotive area and.
I already mentioned, 30%, 30% CAGR and that gives you a much better gross margin, but maybe infection of recency I think even though the LSC manufacturing.
From.
I'll have loaded and we are now get to Paul I always see one of the Fas, 91% in the fourth in the third quarter. So those is really <unk>.
Due to the improvement of the gross margin, yes, I think on top of that right. We talk about LSC synergies right beside the manufacturing synergy we still have three other area, which is product customer base as well as the market segments. There is still a lot of room for us to continue to grow we also.
So seeing a new wave of opportunities, especially open up a lot of new doors new sockets.
<unk> strategic customers. So we believe this is the beginning of it and with our total solution sell strategy. Our content expansion focus that will continue to help us to drive the margin improvement.
The near future.
Our strategy is even this shortage.
Does it concern.
No.
Grace the ESP Crazy, we only depressed ASP increase but.
Cost increase so our customer can understand why we need to risk SP, but we took this opportunity to get built.
<unk> relationship with our key customer.
We are able to open the door for the area, which we are not able to participate in the past now the customer really will come.
Supporting it and but but this strategy of not race SP too aggressively.
The Bill are gone term partnership Division ship at the same time, we are able to sale our total solution.
Two the customers, saying.
Yes.
Those.
<unk> is a better strategy than just risk.
SP and hurt our customers relationship.
Fantastic. Thanks, so much and best of luck on the fourth quarter.
Thank you I want to get too.
Ladies and gentlemen, if you have a question at this time. Please press Star then one our next question comes from the line of Matt Ramsay from Cowen <unk> Company. Your question. Please.
Yeah, Hi, this is Ethan <unk> actually on for Matt Ramsey Congrats on a nice set of results here.
Wanted to follow up on a previous question.
In understanding I guess, the utilization of the lite on Fabs.
Given our already high level, how much incremental utilization is to come and then from a margin revenue perspective, if the fabs are getting close to full.
How much of the older lower margin lower ASP products are running through the facility that can be replaced by higher margin higher ASP products and and what impact that might have on the P&L going forward.
Well, let me answer some and then Gary to answer the rest of it. Okay. If you look at the mid can function of LSC then.
Some of the area, which <unk> used by Daniel Alright, then that portion is the one we're talking about one of the deal.
<unk>, Okay, which we call take effect and that's what we'll have rolled in now to almost 91%.
But the other.
Other which I mention combo from three two to four inch cobo from four inch to six inch those Jeff.
We put in the equipment.
In the in we purchased equipment in September this year and will install and and.
Two six inch then we ramp it up Q1then we will fully ramp.
Second quarter, so that kind of support for the capacity going to support the growth of the and you always see.
And a huge because.
I said I always see seemed much.
I'll, then make them function the product synergy market synergy.
And the customer synergy it took the time, so I prepare for that.
One to two years to be able to ramp and so we get the capacity really to prepare for the mature of those synergies now you are asking how much percent weak difficult.
I'm not at all Chris that we know that's the area we're going to go.
And hence we're going to.
Input improved but weak week does not put them forecast of how much percent going to be.
Ongoing productivity improvement ongoing.
Policy inquiries on <unk>.
So in that.
That synergy for LSC, So we are not footprint.
I talked on that form for LSC.
Alright, let me put more color on cover Dr. Lu statement on that and it's really difficult for us to break it out what is the low margin <unk> before and what is it now okay, but as Dr. <unk> mentioned about at very beginning about J K fab loading okay from 50% of first quarter. This year up to 91% it does increase the capacity.
Utilization, but also reduce the Idaho cost.
Either no matter style product.
I saw some will be in front of a sub con, okay or existing line product <unk> do they do is have a much better cost structure.
So like a three quarters before so that does help us to bring up the.
Competition of those device no matter, if lampard, our Bios product right. So maybe let me add one more comment.
Your question regarding lower ASP margin replace about higher ASP better margin product that is actually part of our product mix strategy that we continue to drive and there's still a lot of room for us to continue to improve.
And this will also include I mean lie on semiconductors are part of our overall portfolio. So we'll continue to execute this strategy right.
Okay totally totally understand thank you for that and then just a quick follow up.
If you could give us a little color.
Maybe on what you expect from the different segments.
Sequentially as given the.
Given the guide.
So I think.
When.
Ofer does set ministry so automotive is going to be strong industrial is going to be strong PC hire and staff cloud driven data center surface will be strong consumer focus more on the Iot area.
And then communications really <unk>, driven we don't really breakdown in <unk> guidance down to each of the statement, but that's what we see in the market Nowadays.
Understand thank you very much.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Dr. Lu for any further remarks.
Thank you for your participation on today's call.
Operator, you may now disconnect.
Thank you and thank you ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.