Q2 2023 Diodes Incorporated Earnings Call
Good afternoon.
And welcome to the diodes Incorporated's second quarter 2023 financial results Conference call.
At this time all participants are in a listen only mode.
At the conclusion of today's conference call instructions will be given for the question and answer session.
If anyone needs any assistance at any time during the conference call. Please press the star key followed by the zero on your Touchtone phone.
As a reminder, this conference call is being recorded today Tuesday August eight 2023.
I would now like to turn the call over to Leon keepers of Shelton Group Investor Relations.
Please go ahead.
Good afternoon, and welcome to diodes second quarter 2023 financial results Conference call.
Dan Sievers President of Shelton Group diodes, Investor Relations firm joining us today are diodes, chairman President and CEO . Dr case, Ya Li Chief Operating Officer, Gary Yu, Chief Financial Officer, Brett Whitmire, Senior Vice President of worldwide sales and marketing Emily Yang and director of Investor Relations for meat Deli law.
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.
As such these results are unaudited and subject to revision until the company filed its Form 10-Q, four fiscal quarter ending June 32023. 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 more detailed discussion of the risks and uncertainties in the Companys filings with the Securities and Exchange Commission, including forms 10-K and 10-Q in.
In addition, any projections as to the Companys future performance represent managements estimates as of today August eight 2023 diodes assumes no obligation to update these projections in the future as market conditions may or may not change except to the extent required by applicable law. Additionally, the company's press release and management statements. During this conference.
Call will include discussions of certain measures and financial information in GAAP and non-GAAP terms included in the company's press release are definitions and reconciliations of GAAP to non-GAAP items, which provide additional details also throughout the company's press release and management statements. During this conference call. We refer to net income attributable common stockholders as GAAP net income.
Yeah.
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 <unk> website at Www Dot diodes Dot com and now I'll turn the call over Doctor Lou Dobbs, Chairman, President and CEO . Dr. Lu. Please go ahead.
Percent of their brain me.
With that let me turn it over to Gary you.
<unk> Chief operating officer for some additional comments on that.
Okay.
Thank you Dr. Lu.
Revenue in the second quarter was 467 2 million with gross margin, reaching a record 41, 8% of revenue.
The recovery in the consumer computing and communications market was much slower than we had originally expected.
Where he asked our trend in the automotive market remains relatively strong.
During the quarter, our automotive and industrial product revenue reached a record 48% of total product revenue.
And that enabled us to maintain revenue flat sequentially.
And in line with our guidance, while also delivering record gross margin.
Also notable in the quarter, we continued to generate strong cash from operations of $92 6 million that enable us to reduce our total debt by $34 4 million to $89 million as of June 30.
Looking forward, we have begun to see early indications of market improvement with inventory days decreasing in the second quarter, coupled with an increase in worldwide POC revenue.
Although we expect a further reduction in channel inventory into third quarter ongoing strategy to improve sales and product mix, including growing revenue contribution from the automotive and industrial markets position us to continue achieving our long term growth and margin targets.
Let me now turn the call over to Brett to discuss our second quarter financial results and our third quarter guidance in more detail.
Thanks, Gary and good afternoon, everyone.
Revenue for the second quarter, 2023 was $467 2 million decreasing six 8% from $501 million in the second quarter of 2022, and flat with $467 $2 million in the first quarter of 2023.
Gross profit for the second quarter was $195 4 million or 41, 8% of revenue compared to $206 5 million or 41, 2% of revenue in the prior year quarter, and $194 5 million or <unk> 41.
6% of revenue in the prior quarter.
GAAP operating expenses for the second quarter were $105 8 million or 22, 7% of revenue.
On a non-GAAP basis were $102 million or 21, 8% of revenue, which excludes $3 8 million of amortization of acquisition related intangible asset expenses. This compares to GAAP operating expenses in the second quarter 2022 of $100.
$3 million or 20% of revenue and $108 million or 23, 1% of revenue in the prior quarter.
non-GAAP operating expenses in the prior quarter were $101 $3 million or 21, 7% of revenue.
Total other income amounted to approximately $11 $4 million for the quarter, consisting of $12 2 million unrealized gain on investments $2 $2 million of interest income $1 $4 million of other income $2 $2 million of interest expense and.
$2 $2 million of foreign currency loss.
Income before taxes and Noncontrolling interest in the second quarter, 2023 was $101 million compared to $101 2 million in the prior year quarter and $88 $6 million in the previous quarter.
Turning to income taxes, our effective income tax rate for the second quarter was approximately 17, 1%.
GAAP net income for the second quarter, 2023 was $82 million or $1 77 per diluted share.
Compared to $80 2 million or $1 75 per diluted share in the second quarter 2022.
And $71 2 million or $1 54 per diluted share in the first quarter of 2023.
Share count used to compute GAAP diluted EPS for the second quarter of 2023 was $46 2 million shares.
non-GAAP adjusted net income in the second quarter was $73 3 million or $1 59 per diluted share, which excluded net of tax $3 1 million of acquisition related intangible asset amortization and $11 $7 million related to equity.
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This compares to $86 9 million or $1 90 per diluted share in the second quarter, 2022, and $73 4 million or $1 59 per diluted share in the prior quarter.
Excluding non cash share based compensation expense of $6 million net.
Net of tax for the second quarter, both GAAP earnings per share and non-GAAP adjusted EPS would have increased by 13 per diluted share.
EBITDA for the second quarter was $133 5 million or 28, 6% of revenue compared to $136 million or 26, 1% of revenue in the second quarter 2022 and.
And $121 8 million or 26, 1% of revenue in the prior quarter.
We have included in our earnings release, a reconciliation of GAAP net income to non-GAAP adjusted net income and GAAP net income to EBITDA, which provides additional details.
Cash flow generated from operations was $92 $6 million for the second quarter.
Free cash flow was $55 6 million, which included $37 million for capital expenditures.
Net cash flow was a negative $1 $2 million, including the Paydown of $34 4 million of total debt.
Turning to the balance sheet at the end of the second quarter cash cash equivalents restricted cash plus short term investments totaled approximately $334 million working capital was $747 million in total debt, including long term and short term was 89 million.
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In terms of inventory at the end of second quarter total inventory days were approximately 112 as compared to $1 16 last quarter finished good inventory days were 30 compared to 31 last quarter total inventory dollars decreased $16 2 million from the <unk>.
Prior quarter to approximately $325 $7 million total inventory in the quarter consisted of a $7 $2 million decrease in finished goods a $7 million decrease in work in process and a $2 million decrease in raw materials.
Capital expenditures on a cash basis were $37 million for the second quarter or seven 9% of revenue and within our target model of 5% to 9%.
Now turning to our outlook for the third quarter of 2023, we expect revenue to be approximately $425 million plus or minus 3% as we expect to continue reducing channel inventory due to the slower recovery in the consumer computing.
And communications markets.
We expect GAAP gross margin to decrease sequentially to 40.0% plus or minus 1%, primarily due to the impact of our manufacturing and service agreements, but remains at our target model.
non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition related intangible assets are expected to be approximately 23% of revenue plus or minus 1%.
We expect net interest expense to be approximately $1 million.
Our income tax rate is expected to be 20% plus or minus 3% and shares used to calculate EPS for the third quarter are anticipated to be approximately $46 7 million.
Not included in these non-GAAP estimates is amortization of $3 $1 million after tax for previous acquisitions with that said I will now turn the call over to Emily Yang.
Thank you Brad and good afternoon.
Revenue in the second quarter, it was flat quarter over quarter, reflecting the slower than expected cockpit in China and Destiny C market.
As Gary mentioned, a lot of automotive and industrial markets reached a record of 48% off the total product revenue.
Looking more closely at the quarter staffing.
Revenue in Europe , what director distributor inventory in transit equally quite shortly.
Yes.
Right.
Oh, great first quarter.
With me from <unk>.
Yeah.
Oh for all time highs.
It continues to be very strong, especially in the automotive, Microsoft which exactly Sir Arthur <unk>.
Thanks to our long term future outlook towards 2025 operational goals.
Looking at the global sales in the second quarter Asia represented 67% revenue.
We're up 20% and North America, 13%.
In terms of our and Michael Industrial was 29% of diode auto residue Aqua <unk> tape with Nebraska 19 Pearsall.
22%.
18 Christian.
Indications, 12% of product basketball.
Our automotive industrial and <unk> combined at 48% of product basketball Representatives.
Sorry for the quarter.
What do you perceive and eight percentage points above our 2025 target.
This achievement.
Underscoring the ongoing success of our content expansion strategy and market share gains.
Now, let me review the end market.
The house.
In the automotive market with a record.
Represented a growth of 22% yeah, okay yeah.
We continue to run past design win while maintaining ongoing design win momentum across multiple applications.
Our SBR and bipolar Johnson checklist, when a new design info sadly lacking an excellent vehicle for battery management system and that's it.
Distributions from Celgene.
Yeah sure.
Also our clock buffer and crystal oscillators I being used.
My topic on <unk>.
With that application.
We also saw design wins with TBS products for power line protection, and EV charging and clock and data lines with Exxon with thing that domain controller.
Our automotive USB C. How it did listen controllers engaged right now being designed into card charge offs modules and wireless charging solution.
Our retrofire Nina.
As we grow and conventional in Richard's second wireless power circles.
As well as Bobby controllers.
Additionally, our linear L E D driveways on controllers I've seen traction in infotainment and head up display Y D. C D C, but coming back to us.
This should continue to see solid demand from L. E D Lightning audio video navigation and instrument clusters.
Also during the quarter, we introduced 100 com no automotive compliance part.
Including Silicon carbide MOSFET.
And channel MOSFET are designed to address the growing demand for silicon carbide solutions.
And hybrid vehicles subsystems, such as battery Chargers onboard charging high efficiency.
Converter motor drivers on tracking right along with us.
Locates MOSFET and battery management system Wifi telecommunication.
Payment application.
In the industrial market Silicon carbide, Schottky diodes, and MOSFET, along with high current transistors.
The increasing traction on the power factor correction episodes.
Which helps improve voltage regulation as well as system capacity.
Todd I also mean industrial motors offers solar Inverters power supply as well you can kind of vectors.
Renewable energy.
We need to be a key focus area for us with design wins for high current Chestnut Ridge.
Rich rectifiers, a drive for insights into wind energy energy storage system, a retrofire Dino di products also continue to see grow applications ranging from smart energy metering too high. He says he argued eat back like factory automation.
Yes, Green building control systems, as well as renewable power generation and distribution systems.
We also saw strong growth during the quarter farm rectifiers in the embedded computing modulus robotic consult with building automation and point that sounds terminal at our SBR power devices, which has been adopted in power over Ethernet surfer applications.
Hi, art and qualify are being <unk>.
Right into power generator control modules.
Every increasing data transmission rates and high frequency, what small power supplies continue to drive demand for size Altra fashion popular that's what buyers that are also expandable to eight I just an automated vehicle control system as well as connect the home and smart factory automation controls.
System.
In the computing market, we continue to secure design wins for our PCI Express clock generators and buffers ice class C market on current monitor products into data, what I'm certain surface, including AI surfers well, our low voltage hall sensors schottky, Thanks, UBS Potter as easy math.
On the combos.
In fact, the computing end market is one area, where we start.
Some recovery side.
Also experienced solid growth across multiple rectify potash and desktop PC high efficiency switching Mon power supplies and notebook PC adopt players along with heightened fishing Bridgeport, that's why high voltage circuit power application.
Additionally momentum for power switches continue USB type, a and C. Powersoft application in notebooks desktops and docking station without content made sensor product, so new deciding scanners and printers application.
In the communication market, our timing products, including clock buffers and differentiated crystal oscillators, I need and finally for notebook interface.
Ethernet switching applications.
Our products are being designed into snooker and athletes coin voucher and are also seeing traction.
All of it what's your application.
Lastly, in the consumer market, our bridge rectifiers haul latch switches and T V. S potash traction in home appliance applications like air Conditioners washing machines and this is a great place I retrofire in diodes continues to grow from fire and carbon monoxide.
Sensors, all you do.
I'd like to start with for home appliances, as well as pay TV panels, while the momentum Y L. E. D drivers S. E. R. M. P. S O sounds drivers continue with virtual reality headsets Tvs and check our application.
In summary, we have began to see early indications of market improvement with inventory days decreasing in the second quarter, coupled with increased worldwide P. O S rapidly.
Focus going into the third quarter, there continues to be P. O S growth and depleting channel inventory.
I always ongoing strategy to improve south and program mix, including growing revenue contribution from automotive and industrial markets positions us to continue to achieve our long term growth and margin targets.
With that we now open the floor to questions.
Operator.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will take our first question will come from Gary Mobley with Wells Fargo Securities. Please go ahead.
Good afternoon, everybody and thanks for taking my question.
Emily I presume that distribution inventory, while down sequentially, it's still above the targeted level and I ask the question because I'm trying to get a sense of you know the seasonal.
Winds that youll face throughout the balance of the college a year would you expect.
A normal seasonal decline in the fourth quarter, or maybe something atypical one direction or the other.
Yeah, So Gary.
I didn't mention unfortunately, the China recovery SBC recovery is slower than our expense.
Patient right.
The good news is we start seeing some signs, especially in the computing segment.
You know as I reported earlier Q2 few ASP increase and the channel.
Deeply and unfortunately, it's still higher than our normal range right. So we'll continue to drive.
The inventory depletion in the third quarter.
But the key is really tracking the appeal as revenue for us I see some markets really dynamic at this moment and the inventory weeks was really calculate it based on the <unk> revenue.
Thank you and I'll, just I said that would be our continued focus for the coming quarters and we'll definitely keep you posted when we see some updated information.
Okay I appreciate that color Emily.
Can you help me understand what you mean, specifically by that gross margin headwind for manufacturing agreements are these manufacturing agreements with the sellers of your <unk>.
He recently took over Ti in on specifically.
Yeah, Gary this is Gary I won't be able to disclose too much detail about that but however, you know we do have a manufacturing service agreement in place with supporting our OEM customer in both assembly and testing in our foundry service, Okay and due to the soft loading in front of the third quarter of this year by the contract and just really kind of have our impact.
Net revenue.
Slightly so that's all I can talk about it.
Alright, Thank you Gary.
No problem.
And our next question will come from Matt Ramsay with TD Cowen. Please go ahead.
Yes. Thank you very much good afternoon.
For my first question I wanted to to to build on maybe the first question that Gary asked.
As we see some of these maybe trends that havent recovered in China. As you guys had hoped or expected that they would it.
It seems like the guide for the September quarter revenue contemplates some some softness in the end markets, but also some drawing down of channel inventory and maybe you could.
If you guys could give a little color on where you think.
Your revenue trends are in the third quarter that you've guided versus what sell through actually looks like in your end markets or do you feel like you're under shipping sell through to bring down channel inventory and buy by how much.
Yeah, Matt I think you know definitely if you look at the Q as it's really the sell through revenue right. So we reported by the end of Q2, we actually see a few asked growth globally and the majority of this growth is really coming from Asia, which gave us a really good indicator of the actual mark.
Right also because like I mentioned event there are some signs of recovery, but the recovery is definitely slower than what we expected. So I would say that's eating up the channel inventory is Florida, our expectation as well. That's the reason we guided to a lower number for the third quarter. So shifts through interest there should be.
Sure.
At the same time, increasing the <unk> revenue right, but you know I mean, I also talk about the actual business signs right. So there are signs of a recovery in the PC market there are signs even into smartphone, especially with you know.
The leading manufacturers or from the U S. So not everybody. He called me also talk about it and that's why we continue to believe that the inventory or the customers inventory continued to decrease at the you know the actual business will continue to recover.
We are.
Other than that you know.
Our inventory position in the channel also help us to support the customer with our last minute or offshore.
So that's pretty much what we believe.
Got it. Thank you for that I guess as my follow up question I wanted to ask a couple not on revenue, but on the rest of the P&L.
You guided gross margin and discuss some of the obligations.
Obligations, there that are affecting it.
How do you.
How should we think about margins recovering I mean is there some rule of thumb on on.
A return to revenue growth that would drive a margin recovery.
Are some of these obligations things that are going to be there permanently as long as revenues at a certain level I just kind of like to understand that a little bit better how would be model margins recovering as we come out of this and in the second part of it is on Opex.
Maybe you could talk a little bit about.
What actions you guys might take given revenues come down or is this something that youre going to continue to invest through I'm, just trying to understand philosophically, how you might want to control opex with the revenue down I don't know close to 20% year over year. Thanks.
Yeah. So maybe let me answer the first part right. So you know when the market is.
Soft, especially in the SBC area, we do see a little bit more price pressure than mature that price pressure is really coming from the D. Commodity area. We also mention stretchy, Jimmy we tried to walk away from from there and just like you said right machinery. The major margin impact is really due to some menu.
I can't surface agreements. So as we continue to I would say ramp up our internal capacity, our internal guys product at the same time, you know what that's going to continue to improve but keep in mind that the key margin improvement initiatives on diode is actually focused on the product mix improvement right.
So we believe that with the product mix initiative, including a lot of new product introduction and that will continue to offset some of the price pressure and that will continue to help us to drive margin improvements in the longer term.
Yeah.
Brad you want to cover that.
Yeah, and I think our I think Matt the way to think about the Opex is what we would expect us to continue to do and I think what you see is R&D with Super area. We continue to invest in in terms of our new products, our new processes and that from an SG&A perspective, we continue to manage that.
Very tightly and work within kind of our model and I think as we go forward you would expect that to kind of step back into the model that we advertise more broadly.
Thank you very much for the detail I appreciate it.
And our next question will come from Tristan <unk> with Baird. Please go ahead.
Hi, Good afternoon, just wanted to.
Some.
Some follow up questions on gross margin in terms of how much of the.
Decline embedded into the Q3 guidance is due to the service agreements that you've you've referenced versus <unk>.
Lower utilization rates on your core business.
Could you give us a sense of what gross margin will be if you had shipped in line within demand and also is that headwind from the service agreements and presumably foundry customers, who kind of renegotiating lower volume you know how long that can last well it linger for the next few quarters.
Yeah, So uh huh.
Let me try to answer that.
A question right. So I think.
Mike Brent mentioned in the guidance maturity of the margin impact is due to the surface agreements right. So as we continue to ramp up our internal products that utilization will continue to improve so we do expect this is going to be a short period of time, it's not going to be ongoing issue right.
And then you know.
Related how long can undertake is really depends on some of the internal qualifications in progress and I. Thank them for all of its progressing very well.
If you want to talk about timing.
Thanks.
We noticed.
The market was slow long such that our stuff is we men.
Cause us the I know the issue.
So we are aggressively working on.
<unk> Oh Paula.
To the infection.
The friction to occupy that capacity.
And it takes time to qualify.
And two grip.
We are not talking about you.
We're you know we can start ramping up in probably six months, Yes, and then you know then from there we can start.
Thank you bye.
Capacity due to our Soc servicer, we man hour.
Hard to know all comparator here.
No no. These are.
Our OEM customer.
<unk> got some months, they actually unbilled loaded due to the market situation.
Looking toward two to taking that capacity. So I don't think you said don't come all of them.
Steve.
Probably.
Six months.
Sure.
I know how do we win.
How do we piece.
PCM debt.
One our notification.
Our customer a stick.
Yes.
Great that's very useful thank you and then.
For my follow up question, you've mentioned some pricing pressure in the more Commoditized segment of your business that obviously you're deemphasizing.
It purely a function of the supply demand and lead time contracting yet or is it a function of higher competitive.
Levels.
China based supplier and and and if that's the case trying to understand the other labs from those emerging.
Competitors in China relative to your product portfolio and and presumably if that trend continues what does that mean in terms of.
Your mix, which continues to weibo's toward higher margin products.
Yeah. So let me address your question I think the pricing pressure is really more on the demand supply side and then also it's more on the inventory rebalancing right. So we talked about a lot of customers.
It's a high inventory on hand, mainly.
Mainly industry C market right, the computing consumer and communication, especially on the smartphone area. So that's what we see.
I don't really I would say interacting a lot with a Chinese.
Supplier, which is also our strategy Ryan walk away from this area, we've really seen war.
Top tier top tier supplier not China base that we are really playing with them. So we believe that once the demand overall situation in Peru, and we're also going to see improvement in this area of Florida very deep commodity. We also talk about walking away. So you know.
That's really I would say a lot of area you might see some Chinese based supplier piece is really not our interest so.
That's really not impacting guidance that much.
If you look at this.
And for several years, we have focused our Newport rock from that depreciated technology to easing type of Newport.
So that is the evidence.
US to get away from the China commodity comparator.
Therefore.
Sure.
Current situation is not due to China.
Is that due to the market situation. Okay. So if you took it from the past.
Talking about even the suite C area.
We are more focused on <unk>.
<unk>.
Ann.
Smartphone fault, the complication and Iot.
Consumer beaches.
So if you can see we movies.
Moving.
The commodity type of pull up into more differentiated tech knowledge enhancement type up new Florida, and we see the result, and that's why we are able to maintain our gross margin.
Our business model of 40%.
And even this sick.
Second quarter, we already had the rate curve to get to 41, 8% and we believe if we continue working towards this as an issue.
Gross margin should be continue improve.
I think the auto than their product you know the new product introduction front at this point and also we are focusing a lot on the automotive industrial pushed the pricing is relatively stable and this tool application that you can see our frozen after this two areas increasing quarter by quarter and I think thats very good thing for us to keep our pricing is stable.
All of our iOS.
Great. Thank you very much again.
And our next question will come from William Stein with true Securities. Please go ahead.
Great. Thanks, I didn't see if the Q is filed yet but in that document you always disclose the revenue from channel versus direct and I'm wondering if you can tell us what that was in the quarter.
So usually we have about two third of revenue coming from distribution and one third from the rat roughly and we don't really expect significant change, but I can double check the ratio I don't.
Have the actual percentage in front of me at this moment I can double check.
So the.
Direct portion this quarter. It was around 31% you would see that in the Q and we do have just a file that as well so.
Okay I'll check it out.
But.
This whole dynamic that you're that you've highlighted with channel inventories it continues to flush.
A slower than expected.
Can you just sort of reminds me of the various approaches that we've seen semi companies take in this unusual cycle that we've been through some of them have put these very sort of long dated agreements in place and they've sort of transition from short lead time and short lead time and very sort of early <unk>.
Cycle companies to later.
And others have once they saw demand weakening they just waved in all the cancels they could take.
It looks like Youre seeing if you know what I mean look revenue growth has faded over the last seven or eight quarters. So it's not a total surprise, but but this looks like a fairly abrupt change next quarter.
I'm wondering if you can talk about how you're managing.
Customer orders relative to lead times and customer requests to cancel or push orders was there a delay in the willingness to accept these and they're all being accepted in Q3 is that a big driver of.
The Q3 guidance or is there another dynamic there. Thank you.
So well I think you know, we always talk about that I'm working with our customers closely understanding therapy math right.
No I mean, we have been I would say case by case working with our customers depends on their research and made certain adjustments.
Theres pushout or cancellation to recite there to demand. So we have ongoing efforts that Watson with customers at the end of the day, we want to make sure we have a structure and a nimble to support the customer and build a long term relationship space. So we definitely notwithstanding that we've done to put.
And they're thrilled whether they like it or not so there's ongoing efforts that continue to drive their relationship and continue to help us to grow to the next level. So I would think that the ongoing lead times definitely are slowly coming down. That's also the reason that the backlog you know usually customer based on the data.
Time to place our backlog, but we also are working with our customers to make sure we understand their two long term be met and make adjustments to our staff.
That has been the ongoing effort even when the market was your friend, we talked about we didn't really increase the price.
Just a blend knee, but in VITAS working on the demand creation, expanding the business and that will continue to be the strategy and philosophy of values overall.
Thank you.
Again, if you have a question or a follow up you May Press Star then one to join the queue.
Our next question will come from David Williams with benchmark. Please go ahead.
Hey, good afternoon, and thanks for letting me ask the question.
For me I guess on the first I just wanted to touch on the automotive segment and earlier I think you said that the demand there.
He is relatively strong, but just curious if youre seeing any posturing changes in the tier ones or the odm's, particularly in the level of inventory, they're willing to carry and just in the general demand are you seeing anything changed there.
Yeah, I think in general right, we're still seeing really strong demand from automotive, especially on the beach Dci momentum as well as some of them ramping up in the site.
I talk about it you found for the second quarter automotive is actually a record percentage, 19% increased from 18% from the previous quarter.
And then you know Ryan we started tracking the automotive since 2013 to 2022, and we have a compounded annual growth rate of 30%. So you know I mean Q2 represented 22% year over year growth. So yeah, maybe a little bit less than 30%, but it's still shelter.
Really strong momentum, we do see some customers automotive customers adjusting some of the inventory I also often he talked about it before that has been the ongoing effort because not everything he call every park kind of area from with also the customer do adjusted its not like the waiting of not doing any <unk>.
Accident.
But putting that aside right I think in the releasing 68, new product in second quarter, just focus on automotive with a 110 new product in Q3 that actually shows the momentum as well as commitment from guidance right. So maybe if this will continue to help us to outgrow the market.
We continue to gain the market share so that will continue to be the number one focus without items you know for the years to come.
Well one more point is on top of all the beaches.
More stable type of business from the new Paul at the time.
Two the Gwen.
Two to three years from the time, we announced the new fall up to good rent. It takes two to three years and therefore, we.
We can we know how mentioned new Paula we introduced in the past and when they're going to really ramp and doses much more known.
Stable type of business than consumer.
Computer communications it took much shorter time, therefore, we P D. Since our effort in the past our CAGR.
To me that kind of the momentum so can we tweak in that game when you're talking about you know since 2013, we are above 30% CAGR.
<unk>.
Is that kind of twin.
Continue it won't be affected too much by the real business, because obviously, our customer bill gumbel call wouldnt be material barriers.
Over a year or quarter over quarters, Yeah, I think the other key focuses of contact expansion. Yeah. So we're not really counting on the number of cars per dealership to the consumer so really continue to expand in different applications like a connected dressing for safety and nine.
And as well as connected cars right. So there's different areas. We focus and this is all very high growth area with our content expansion.
Okay. Thanks, so much excellent color there certainly appreciate it.
And then secondly, not to be on the gross margin too much but just kind of curious and Dr. Lu <unk> been very upbeat on the margin progression in the sustainability there.
You can see it's certainly showing up this quarter in the third quarter guidance down 180 basis points, given the magnitude of the revenue decline, but how should we think about the margin given the dynamics of the correction in just kind of thinking about some of these other segments, maybe coming back and as those recover should we think about maybe a little more pressure on the gross margin side or.
40 kind of maybe a trough here that we should think about longer term.
Well, maybe let me address the question first and Dr. Lou can add some colors right with the product mix initiative with a new product introduction with a total solution sales. We are confident that we continue to drive our margin model.
After 2025 model that we share with you as much as 40% right. You know short term we've talked about the surface agreements you can help.
But in the longer term, we are confident that our strategy and our direction is the right direction will continue to improve and the other key point is if you go back like a back to 2021 at least second quarter. Similarly revenue range I think our margins really in the 36th Street.
Thanks.
Range. So you go from 36 to the guidance, 40% I know it sounds like we actually have a one 8% retraction, which is short term, but that's still a significant improvement over the longer term right. So we understand the concern, but we believe that will continue to drive the improvement.
Hi.
Yeah, if you want to talk involve gross margin okay.
Fair enough.
We do.
The price pressure is offset by our new fall up and pull out mix and total solution.
Second.
Is what.
We when we do do that.
Get the factory cost or assemblies, so country, especially we negotiate with our fund tree supplier.
To go long.
Price.
So we go through both the direction one is the material.
Don.
Second new Paula.
Product mix.
Sir if market sentiment, we focus more on automotive industrial.
And did you use the series C. Wichita, so from all of this reorganization.
That's why our gold toe our gross margin.
Daniel Pope and that's like we've just I'm going to say, we from 30 something percent.
Continuing inquiries to this court second quarter $41 eight.
No.
The drop down from 41.8% to 40%.
This quarter is due to our Suez service agreement, but how do we solve the Dod.
Ramping all.
Paula.
To.
The capacity.
Over by our service agreement.
You can see all the direction for us.
Yes.
<unk> from long term point of view.
Two.
Can't continue that March.
And you know if.
If you remember when when I make it out to solve them 25.1 billion gross profit.
We are setting the moto of 40% and we actually already do you see that.
And even with these quotas service agreement, we are still able to.
10 days.
The bulk of our.
This is the model and we will continue to improve.
So that's the direction.
We are all can know what our business model and.
We know we want to see.
Our business model of 40% and continue.
The improvement.
Oh.
Yes.
Yes.
And our next question will be a follow up from Tristan <unk> with Baird. Please go ahead.
Thanks for letting me back in the queue just to follow up on what you just mentioned.
As you went and qualified new product too.
To switch away from those service agreements that implies that either you have a recovery in demand.
And that you are gaining share and I know theres been share gains just on the basis of some of your peers.
And to sizing some products and doing product pruning.
But that trend, presumably would slow down next year or even later this year is as we see.
More balanced supply demand so what's the level of confidence that you can actually find the demand for those products that you are not qualifying at those fabs to replace those service agreements.
And embedded in that question how.
How should we look at the gross margin differential between those service agreements versus what you plan on replacing with internal production.
Okay. This is Gary speaking for that first and they started to do our Emily how any color. If they can always plugging. Okay. So first of all and you know the project that we've been working on for years of work. So called a second source project, which means we are working with our you know the.
Or are the facilities, we acquire are peer and we identified a process externally and we Wanna internally chose spread those kind of external wafer fab loading into our internally, which thinks that that demand is very solid we already have a customer base of those kind of product we already running for years okay.
Well I would say, it's a comfort level that the amount of loading for the second source product internally is very high.
Okay. So as far the GP percent point of view and I'm not talking about that we are kind of loosing GPU, but the majority is kind of in the low cost either hitting us at this moment. So as long as we can load off you know part of it into the internal wafer fab and demo costs would be significantly reduced and that's the way we can't recover cheaply.
Frank that was kind of all costs and I can tell you just like your thoughts on emission about probably by early next year, we can see those kind of demands about ramping I'm eternally.
Yeah of course has a couple with a market improvement.
And also our market share gains so we are actually going through all different directions.
To minimize the impact.
Continue to improve the gross margin percent.
Well you know we have a lot of experience.
We cannot the beaches.
One of the one of the strategy will be.
The capacity of freedom.
Okay. There are a lot of you know.
Paula we can.
Noting it and using it.
Buffer.
Okay to the loyalty.
That's one.
Like we said, we have a lot of OEM and country bitterness outside.
And we can use that to start to pay off the process.
Our internally and then.
You know as a second source that can carry tuck in Nepal, and then we can move in some of the requirement.
Inside our own.
Oh the defection.
There are so many different ways we can.
Using our capacity.
To reduce the over under low cost and to improve the gross much. So theres. So many different ways and we are working.
Most of that actions.
Great. Thanks again.
Thank you.
This.
<unk>, our question and answer session I'd like to turn the conference back over to Dr. Quay Shew Lu for any closing remarks.
Thank you for your participation on today's call.
Operator.
Now disconnect.
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