Q4 2023 Diodes Inc Earnings Call
Operator: Good afternoon, and welcome to Diodes Incorporated's 4th Quarter and Fiscal 2023 Financial Results Conference Call. At this time, all participants are enabled to normally move. 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 call, please press the star key followed by zero on your touch-tone phone.
Good afternoon, and welcome to diodes, Incorporated's fourth quarter and fiscal 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 assistance at any time during the conference call. Please press the star followed by zero under control.
Operator: As a reminder, this conference call is being recorded today, Tuesday, February 6th, 2024. I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead.
As a reminder, this conference call is being recorded today Tuesday February six 2024.
I would now like to turn the call over to Leann Sievers Shelton Group Investor Relations Ma'am. Please go ahead.
Leanne K. Sievers: Good afternoon, and welcome to Diodes' fourth quarter and fiscal 2023 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes Investor Relations Firm. Joining us today are Diodes President Gary Yu, Chief Financial Officer Brett Whitmire, Senior Vice President of Worldwide Sales and Marketing Emily Yang, and Director of Investor Relations Gurmeet Dhaliwal.
Leanne K. Sievers: Good afternoon, and welcome to diodes fourth quarter and fiscal 2023 financial results Conference call I'm Leanne Sievers President of Shelton Group diodes, Investor Relations firm joining us today are diodes, President Gary Yu, Chief Financial Officer, Brett Whitmire, Senior Vice President of worldwide sales and marketing Emily Yang and director.
Meet Dhaliwal: Investor Relations can meet Dhaliwal I'd like to remind our listeners that the results announced today are preliminary as they are subject to the company finalizing its closing procedures and customary quarterly review by the company's independent registered public accounting firm as such these results are unaudited and subject to revision until the company files its.
Leanne K. Sievers: 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 reviews by the company's independent registered public accounting firm. As such, these results are unaudited and subject to revision until the company files its long-term case for its fiscal year ending December 31, 2023. In addition, management's prepared remarks contain forward-looking statements that are 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 Reform Act of 1995.
Form 10-K for its fiscal year ending December 31, 2023. In addition, management's prepared remarks contain forward looking statements, which are subject to risks and uncertainties and management may make additional forward looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward looking statements that is.
Contained in the private Securities Litigation Reform Act of 1995 actual results may differ from those discussed today and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission, including forms 10-K and 10-Q.
Leanne K. Sievers: 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 management's estimates as of today, February 6, 2024. Diodes assumes no obligation to update these projections in the future, as market conditions may or may not change, except to the extent required by applicable law.
In addition, any projections as to the company's future performance represent managements estimates as of today February six 2020 for 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 call.
Gary Mobley: 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. Also included in the company's press release are definitions and reconciliations of GAAP to non-GAAP items, which provide additional details. Also, throughout the company's press release and management statements during the conference call, we refer to the net income attributable to common stockholders as net income. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days in the Investor Relations section of Diodes' website at www.diodes.com. And now I'll turn the call over to Diodes President Gary Yu. Gary, please go ahead.
Meet Dhaliwal: 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.
So throughout the company's press release and management statements. During the conference call. We refer to the net income attributable to common stockholders as GAAP net income.
For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days in the Investor Relations section of diodes website at Www Dot diodes Dot com and now I'll turn the call over to diodes, President Gary you Gary. Please go ahead.
Gary Mobley: Thank you, Leanne. Welcome everyone to our Resolve Conference Call. I'm pleased to be joining you today, as the House recently appointed President. If I could generate the second.
Thank you and again welcome everyone to our result conference call.
I'm pleased to be joining you could I ask the house recently appointed President effective January the second.
Gary Mobley: At the end of last year, and again at the beginning of this year, my promotion was part of Goddard's multi-year CEO succession plan. Dr. Lu will continue to serve as chairman and CEO until at least May 31, 2027, which is consistent with current employment agreements. As many of you may know, I previously served as South Chief Operating Officer and have been responsible since 2008. I'm very excited to be serving in this new role and leading Lions into the next stage of growth, which will focus on developing a broad portfolio of innovative products to enable customers to succeed in the market we serve. In terms of our 2023 results, this past year proved to be challenging as the consumer, computing, and communications markets experienced an extended slowdown, coupled with inventory rebalancing in the industrial markets late in the year, as well as softness in certain areas of the automotive market. Despite this global weakness, we made notable progress on improving the quality and the mix of our product portfolio. We continue to focus on the automotive and industrial markets through expanding design wings and increased investment in new product development, which results in over 350 new automotive-compliant products.
As announced at the end of last year, my promotion, what's probably not biased multiyear CEO sufficient plant duck.
We are continuing to serve as chairman and CEO until at least May 31st 2027.
Just consistent with current employment agreement.
As many of you may know I have previous served as our chief operating officer and happy with things in 2008 mm.
I'm very excited to be serving in this new role and the leading buyouts into the next stage of growth, which will focus on developing a broad portfolio of innovative products to enable customers to see in the market we serve.
And first off our 'twenty to 'twenty three results. This past year proved to be a challenging consumer computing and communications market experience.
Yes slowdown a.
Coupled with inventory rebalancing in the industrial market late in the year.
As well as softness in certain area automotive market.
Despite this global witness what are you, making notable progress on improving the quality and that makes our product portfolio.
We continue to focus on automotive and industrial market through expanding if you find wings and increased investment in new product development, which result in over 350, new automotive compliant products.
Gary Mobley: The combined revenue from those two markets expanded to 46% of product revenue in 2023 compared to 42% last year. Our product mix improvements were especially evident in our ability to maintain full-year gross margin near 40%, meeting our target model despite lower annual revenue. Throughout the year, we continue to drive manufacturing cost reductions, operating efficiency, while also further developing our process technology for the expansion of our internal facility utilization. Overall, we maintained strong cash generation in 2023 that enabled us to reduce total debt by $124 million to $62 million, maintain a solid cash precision of over $315 million, and increase total cash-lack debt by 67% to approximately $253 million. Additionally, we renewed and expanded our line of credit to approximately $315 million to provide added financial flexibility.
Combined revenue from those two market expanded to 46% of product revenue in front of you for any three compared to 42% last year.
Our product mix improvement, especially.
Our ability to maintain full year gross margin near 40%.
Meeting our target model, despite the lower annual revenue.
Throughout the year, we continue to drive manufacturing cost reduction.
Operating efficiency, while also further developing our process technology by expansion of our in car not but so the utilization.
Overall, we maintained a strong cash generation in 2023.
Able us to reduce total debt right 124 million to 62 million maintain a solid cash position over 315 million and increased total cash less debt by 67% to approximately 253 million.
Additionally, we renewed and expanded our line of credit to approximately $350 million to provide the added financial flexibility.
Brett R. Whitmire: As we look to 2024, we will now focus on driving further improvements in the quality and the mix of our portfolio with our analog and our power discrete products, including our newly introduced SIT product family, especially targeted at the automotive and industrial markets. We also continue to make good progress with our previous acquired fabs, SC fabs, and G fabs in terms of process and product qualification, which will support future utilization and further complement our hybrid manufacturing model. We believe our total solution sales approach, which has been successful in the past, along with a further emphasis placed on key account development, will continue to deliver increasing content opportunities, design wins, and profitable growth in the future. With that, I now turn the call over to Brett to discuss our fourth quarter and full year financial results, as well as our first quarter guidance, in more detail. Thanks, Gary, and good afternoon, everyone.
As we look to 2024.
Many are focused on driving further improvement in the quality and the mix our portfolio without at all in our power discrete products, including our newly introduced product family, especially targeted at the automotive and industrial markets.
Meet Dhaliwal: We also continue to make good progress ramping our previous acquire fab their feedback and a G. Fast in term of a process and a product qualifications, which will support future utilization and a further complement to our hybrid manufacturing model.
We believe our total solution sales approach that has to move to fixed brought in the past along with a further emphasize placed on key account development will continue to deliver increasing content opportunities you find ways and the profitable growth in the future with that let me now turn the call back.
To Brad to discuss our fourth quarter and full year financial results as well as our first quarter guidance in more detail.
Thanks, Gary and good afternoon, everyone.
Brett R. Whitmire: Revenue for the fourth quarter of 2023 was $322.7 million, compared to $404.6 million in the third quarter of 2023 and $496.2 million in the fourth quarter of 2022. Full year 2023 revenue was $1.7 billion, compared to $2 billion in 2022. Gross profit for the fourth quarter was $112.5 million, or 34.9% of revenue, which reflects lower revenue impacted by product mix as well as our wafer service agreement. This compares to $155.9 million, or 38.5% of revenue in the prior quarter, and $206.2 million, or 41.6% of revenue in the prior year quarter. For the full year, GAAP gross profit was $658.2 million, and GAAP gross margin was 39.6%, effectively at our target model of 40%. GAAP operating expenses for the fourth quarter were $91.8 million, or 28.4% of revenue, and on a non-GAAP basis were $89 million, or 27.6% of revenue, which excludes $3.8 million of amortization of acquisition-related intangible asset expenses and $1 million in a restructuring cost gain.
Brad: Revenue for the fourth quarter of 2023 was $322 $7 million compared to $404 $6 million in the third quarter, 2023, and $496 $2 million in the fourth quarter 2022.
Full year 2023 revenue was $1.7 billion compared to $2 billion in 2022.
Gross profit for the fourth quarter was $112 $5 million or 34, 9% of revenue, which reflects the lower revenue impacted by product mix as well as our wafer service agreements.
This compares to $155 $9 million or 38, 5% of revenue in the prior quarter and $206 $2 million or 41, 6% of revenue in the prior year quarter.
For the full year GAAP gross profit was $658 $2 million in GAAP gross margin was 39, 6% effectively at our target model of 40%.
GAAP operating expenses for the fourth quarter were $91 $8 million or 28, 4% of revenue and on a non-GAAP basis were $89 million or 27, 6% of revenue, which excludes $3 $8 million of amortization of acquisition.
Related intangible asset expenses and $1 million and our restructuring cost game.
This compares to GAAP operating expenses in the prior quarter of $102 million or 25, 2% of revenue in the fourth quarter of 2022 of $109.7 million or 22, 1% of revenue non-GAAP operating expenses in the prior quarter, where now.
Brett R. Whitmire: This compares to GAAP operating expenses in the prior quarter of $102 million, or 25.2% of revenue, and in the fourth quarter of 2022 of $109.7 million, or 22.1% of revenue. Non-GAAP operating expenses in the prior quarter were $95.6 million, or 23.7% of revenue. Total other income amounted to approximately $7.2 million for the quarter, consisting of $4.8 million of interest income, $3.5 million of other income, $1.8 million of unrealized gain or investment, a $2.5 million foreign currency loss, and $0.5 million in interest expense. Income before taxes and non-controlling interest in the fourth quarter of 2023 was $27.9 million, compared to $60.5 million in the previous quarter and $94.8 million in the prior Turning to income taxes, our effective income tax rate for the fourth quarter was approximately 9.9%. For the full year of 2023, the tax rate was approximately 17%, which was within our expected range.
$95 $6 million or 23, 7% of revenue.
Total other income amounted to approximately $7 $2 million for the quarter, consisting of $4 8 million of interest income $3 5 million of other income 1.8 million unrealized gain on investments a $2 $5 million foreign currency loss in <unk>.
<unk> 5 million and interest expense.
Income before taxes and non controlling interest in the fourth quarter, 2023 was $27 $9 million compared to $65 million in the previous quarter and $94 $8 million in the prior year quarter.
Turning to income taxes our.
GAAP net income for the fourth quarter was $25 $3 million or 55 cents per diluted share compared to $48 $7 million or $1.05 per diluted share last quarter, and $92 $1 million or $2 per diluted share in the prior year core.
Full year GAAP net income was $227 $2 million or $4 91 per diluted share compared to $331.3 million or $7.20 per diluted share in 2022.
Brett R. Whitmire: Gap net income for the fourth quarter was $25.3 million, or $0.55 per diluted share, compared to $48.7 million, or $1.05 per diluted share last quarter and $92.1 million, or $2.00 per diluted share in the prior year quarter. The full year GAAP net income was $227.2 million, or $4.91 per diluted share, compared to $331.3 million, or $7.20 per diluted share in 2022. The share count used to compute GAAP diluted EPS was 46.3 million shares for both the fourth quarter 2023 and the full year. Non-GAAP adjusted net income in the fourth quarter was $23.4 million, or 51 cents per diluted share, which excluded, net of tax, $3.1 million of acquisition-related and tangible asset costs, $2.8 million gain on investments, $1.4 million non-cash mark-to-market investment value adjustment, and a $0.
The share count used to compute GAAP diluted EPS was <unk> 46, 3 million shares for both the fourth quarter 2023, and the full year.
non-GAAP adjusted net income in the fourth quarter was $23 four.
$4 million or <unk> 51 per diluted share, which excluded net of tax $3 1 million of acquisition related intangible asset costs $2 8 million gain on investments 1.4 million noncash mark to market investment value adjustment.
Zero point $7 million gain on restructuring cost.
This compares to $52 $5 million or $1.13 per diluted share in the prior quarter and $79 $6 million or $1 73 per diluted share in the fourth quarter 2022.
For the full year non-GAAP adjusted net income was $222 $8 million or $4.81 per diluted share as compared to $339 million or $7.36 per diluted share in 2022.
Brett R. Whitmire: This compares to $52.5 million, or $1.13 per diluted share, in the prior quarter and $79.6 million, or $1.73 per diluted share, in the fourth quarter of 2022. For the full year, non-GAAP adjusted net income was $222.8 million, or $4.81 per diluted share, as compared to $339 million, or $7.36 per diluted share, in 2022. Excluding non-cash share-based compensation expense of $5.9 million net of tax for the fourth quarter and $24.4 million for the full year, both GAAP earnings per share and non-GAAP adjusted EPS would have increased by $0.13 and $0.53 per diluted share, respectively.
Excluding noncash share based compensation expense of $5 $9 million net of tax for the fourth quarter and $24 $4 million for the full year, both GAAP earnings per share and non-GAAP. Adjusted EPS would have increased by 13 cents and 53 cents per diluted.
<unk> share respectively.
EBITDA for the fourth quarter was $58 $4 million or 18, 1% of revenue compared to $96 million or 22, 4% of revenue in the prior quarter and $129 $6 million or 26, 1% of revenue.
Brett R. Whitmire: EBITDA for the fourth quarter was $58.4 million, or 18.1% of revenue, compared to $90.6 million, or 22.4% of revenue in the prior quarter, and $129.6 million, or 26.1% of revenue, in the fourth quarter of 2022. For the full year, EBITDA was $404.2 million, or 24.3% of revenue, compared to $520.4 million, or 26% of revenue for 2022. We have included in our earnings release a reconciliation of GAF net income to non-GAF adjustment income and GAF net income to EBITDA, which provides additional details. Cash flow generated from operations was $38.4 million for the four quarters and $280.9 million for the full year. Free cash flow was $11.1 million in the fourth quarter, which included $27.3 million for capital expenditures. For the full year, free cash flow was $130.1 million, including $150.8 million for CapEx.
In the fourth quarter 2022.
For the full year, EBITDA was $404 $2 million or 24, 3% of revenue compared to $524 million or 26% of revenue for 2022.
We have included in our earnings release, a reconciliation of GAAP net income to non-GAAP adjusted net income and GAAP net income to EBITDA, which provides additional details.
Cash flow generated from operations was $38 $4 million for the fourth quarter and $289 million for the full year.
Free cash flow was $11 $1 million in the fourth quarter, which included $27 $3 million for capital expenditures and for the full year free cash flow was $131 million, including $150 8 million for Capex.
Net cash flow was a positive $29 million and for the full year net cash flow was a negative $22 $6 million, which includes the net pay down of $124 3 million of total debt.
Turning to the balance sheet at the end of fourth quarter cash cash equivalents restricted cash plus short term investments totaled approximately $329 million.
Working capital was $794 million and total debt, including long term and short term was $62 million.
Brett R. Whitmire: Net cash flow was a positive $20.9 million, and for the full year, net cash flow was a negative $22.6 million, which included the net pay down of $124.3 million of total debt. Turning to the balance sheet, at the end of the fourth quarter, cash, cash equivalents, restricted cash plus short-term investments totaled approximately $329 million, working capital was $794 million, and total debt, including long-term and short-term, was $6 In terms of inventory, at the end of the fourth quarter, total inventory days were approximately 160 as compared to 124 last quarter. Finished goods inventory days were 49 as compared to 34 last quarter. Total inventory dollars increased $46.1 million from the prior quarter to $389.8 million. We increased inventory during the quarter in order to support short lead time orders and also prepare for the lower output expected in the first quarter due to the Chinese New Year holidays.
In terms of inventory at the end of fourth quarter total inventory days were approximately 160 as compared to 124 last quarter finished goods inventory days were 49 compared to 34 last quarter total inventory dollars increased $46 $1 million from.
The prior quarter to $389 $8 million, we increased inventory during the quarter in order to support short lead time orders and also prepare for the lower output expected in the first quarter due to Chinese new year holiday.
Total inventory in the quarter consisted of the $34 $6 million increase in finished goods and $8 $1 million increase in work in process and a $3 $4 million increase in raw materials.
Capital expenditures on a cash basis were $27 $3 million for the fourth quarter or eight 5% of revenue and $158 million or nine 1% of revenue for the full year and within our target range of 5% to 9% as we continue to invest in the <unk>.
Brett R. Whitmire: Total inventory in the quarter consisted of a $34.6 million increase in finished goods, an $8.1 million increase in work in process, and a $3.4 million increase in raw materials. Capital expenditures on a cash basis were $27.3 million for the fourth quarter, or 8.5% of revenue, and $150.8 million, or 9.1% of revenue for the full year, and within our target range of 5-9%, as we continue to invest in the future growth and expansion of our business. Now turning to our outlook, for the first quarter of 2024, we expect revenue to be approximately $305 million, plus or minus 3%. We expect GAAP gross margin to be 34%, plus or minus 1%. Non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition-related intangible assets, are expected to be approximately 28.7% of revenue, plus or minus 1%. We expect net interest income to be approximately $2 million. Our income tax rate is expected to be 18%, plus or minus 3%. And the shares used to calculate EPS for the first quarter are anticipated to be approximately $46.5 million. Not included in these non-GAAP estimates is amortization of $3.1 million after tax for previous acquisitions.
<unk> growth and expansion of our business.
Now turning to our outlook for the first quarter of 2024, we expect revenue to be approximately $305 million plus or minus 3%. We expect GAAP gross margin to be 34% plus or minus 1% non-GAAP operating expenses, which are GAAP operating expenses.
<unk> adjusted for amortization of acquisition related intangible assets are expected to be approximately 28, 7% of revenue plus or minus 1%. We expect net interest income to be approximately $2 million. Our income tax rate is expected to be 18%.
Or minus 3% and shares used to calculate EPS for the first quarter are anticipated to be approximately $46 5 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, all revenue in the fourth quarter, it was down 20% sequentially and slightly below the midpoint of our guidance.
Our global P. O S decreased in the quarter and I guess, the inventory increased slightly remaining above I'd define normal range of 11 to flexion a week.
Looking at global sales in the fourth quarter Asia represented 78% of revenue you were up 14% and North America, 8% for the full year of 2023 Asia represented 71% of revenue Europe, 17% and North America, 12%.
Emily Yang: With that said, I will now turn the call over to Emily Yang. Thank you, Brett, and good afternoon. Revenue in the fourth quarter was down 20% sequentially and slightly below the midpoint of our guidance. Our global POS decreased in the quarter, and our district inventory increased slightly, remaining above our defined normal range of 11 to 14 weeks. Looking at global sales in the fourth quarter, Asia represented 78% of revenue, Europe 14%, and North America 8%.
In terms of our end markets industrial was 23% of diodes fourth quarter product revenue automotive, 18% computing, 25% consumer, 19% and communications, 15% of product revenue, our automotive and industrial end markets combined total.
41% of the fourth quarter product revenue, representing the second co second quarter above our target model of 40% for the full year industrial was 27% all totaled 19% computing, 23% consumer 18 per se and communication 13th.
Emily Yang: For the full year of 2023, Asia represented 71% of revenue, Europe 17%, and North America 12%. In terms of our end markets, industrial was 23% of Gaio's Q4 product revenue, automotive 18%, computing 25%, consumer 19%, and communication 15%. Our automotive and industrial end markets combined for a total of 41% of the 4th quarter product revenue, representing the 7th consecutive quarter above our target model of 40%. For the full year, industrial was 27%, auto 19%, computing 23%, consumer 18%, and communication 13%. Auto and industrial revenue in 2023 reached a record 46% of product revenue compared to 42% last year. Now, let me review the end markets in greater detail. Starting with the automotive market, in the fourth quarter, automotive was 18% of our total product revenue, which is a slight decrease from the last quarter's 19%.
Is that.
Auto and industrial revenue in 2023 reached a record 46% of product revenue compared to 42% last year now let me review the end markets in greater detail.
Starting with the automotive market in the fourth quarter automotive was 18% of our total product revenue, which is a slight decrease from the last quarter, 19%. We began seeing some slow down along with inventory rebalancing in Q4 and believe this will continue into the first quarter.
Yeah.
For the full year revenue reached a record 19% of product revenue compared to 15% last year, which represented a 28% compounded annual growth rate from our initial launch into the auto market in 2013, which was only about 3% revenue at that time.
This time period, our content per car increase from $28 in 2013 to over 160 in 2024 and tireless focus will continue to be on the compact expansion going forward.
In 'twenty two 'twenty three we introduced more than 350, new automotive compliance product demonstrating our commitment to this market that new product continued to drive the expansion of our design pipeline and total available market, while also improving our product mix, even though we still see.
Emily Yang: We began seeing some slowdown along with inventory rebalancing in Q4, and believe this will continue into the first quarter. For the full year, revenue reached a record 19% of product revenue compared to 15% last year, which represented a 28% compounded annual growth rate from our initial launch into the auto market in 2013, which was only about 3% of revenue at that time. Over this time period, our contact per card increased from $28 in 2013 to over $160 in 2024.
See pockets of softness in the automotive market design momentum has remained very strong for the iOS.
During the fourth quarter, our Tvs diode and ideal diodes controllers continue to gain traction while our L. P always got designed into applications.
H S smart cabin telematics and infotainment the adoption of USB type C. V drivers just pay for active crossbar MX and mid teens switches have increased significantly and the rear seat entertainment smart topic eight that an active cable design for automotive applications.
Emily Yang: And Diodes' focus will continue to be on contact expansion going forward. In 2023, we introduced more than 350 new automotive-compliant products, demonstrating our commitment to this market segment. New products continue to drive the expansion of our design pipeline and total available market, while also improving our product mix. Even though we still see pockets of softness in the automotive market, design momentum has remained very strong for Diodes. During the fourth quarter, our TVS diodes and Ideal Diodes controllers continued to gain traction while our LDOs got designed into applications for ADAS, smart cabins, telematics, and infotainment. The adoption of our USB Type-C re-drivers, DisplayPort active crossbar mugs, and MIDI switches increased significantly in rear seat entertainment. Smart topics, ADAS, and active cables designed for automotive applications.
We also achieved several design wins for our Crystal oscillator, and PCI Express clock generator for the development of new HST side.
Our newly updated USB power delivery controller portfolio that supports extended power range, it's gaining traction from in vehicle infotainment system and USB type C. Charging fashion. Our SBR products are also seeing momentum in battery management system display light.
And had like system.
Also during the quarter, we saw positive design momentum for our newly released and channel MOSFET, specifically targeting the growing demand for silicon carbide solutions and the electric and hybrid electric vehicle automotive sub systems. This MOSFET are tailored for applications such as battery.
Charter envoy charges high efficiency, DC, DC converters motor drivers and traction Inverters. Additionally, our SBR and Schottky products Sherman has ramped up significantly for EV applications.
Emily Yang: We also achieved several design wins for our crystal oscillators and PCI Express clock generator for the development of new ADAS designs. Our newly updated USB Power Delivery Controller Portfolio that supports an extended power range is gaining traction in the in-vehicle infotainment system and USB Type-C charging function. Our SDR products are also seeing momentum in battery management systems, display, lighting, and headlight systems. Also, during the quarter, we saw positive design momentum for our newly released N-channel MOSFETs specifically targeting the growing demand for silicon carbide solutions in electric and hybrid electric vehicle automotive subsystems. These MOSFETs are tailored for applications such as battery chargers, onboard chargers, high-efficiency DC-DC converters, motor drivers, and traction inverters.
In the industrial market fourth quarter revenue represented 23% of total product revenue, which was a three percentage point decrease sequentially due to the weaker demand and inventory rebalancing, we mentioned last quarter since our last call. We have seen this market witnessed brought it.
For the full year of 2023 industrial represented 27% of product revenue, even despite the market softness our design pipeline remained very strong throughout the year and we continue to see new application opportunities as our contest has to expand it.
In terms of progress on the product initiatives, our PCI Express three packet switch are winning designs across diverse applications, including artificial intelligence <unk> things.
Emily Yang: Additionally, our SVR and SHARP-C product shipments have ramped up significantly for EV applications. In the industrial market, fourth-quarter revenue represented 23% of total product revenue, which was a three percentage point decrease sequentially due to the weaker demand and inventory rebalancing we mentioned last quarter. Since our last call, we have seen this market weakness broaden. For the full year of 2023, industrial revenue represented 27% of product revenue. Even despite the market softness, our design pipeline remained very strong throughout the year, and we continue to see new application opportunities as our content has expanded. In terms of progress on the product initiatives, our PCI Express 3 tachy-switches are winning designs across diverse applications including AI of Things, Automation Inspection, Power Plant Controller, and Test Instrument Applications. These tachy-switches enable SoCs to connect to various end-point devices such as wire, wireless network, SSD storage, and specific industrial controllers over the industrial standard PCI Express bus.
Formation inspection power plant controllers test instrument applications. This packet switches in April and S. O C to connect to various endpoint devices, such as wired wireless network SSD storage as specific industrial controllers over the industrial standard PCI.
Brad: Express bus.
We secured new design wins for a range of essential component like HDMI USB type C displayed for mid PV drivers and MX switches and commercial displays drums and robotic application.
One area of strength in the industrial market has been solar where our SBR product has gained traction in residential real solar panels, along with our real time clock using solar systems and our T V. S product being designed in for data line protection in battery management system for solar energy.
Battery cells.
Additionally, our silicon carbide MOSFET has been gaining traction in industrial motor drivers solar Inverters data centers and telecom power supplies.
Turning to computing markets fourth quarter revenue represented 25% of product revenue, which was flat to last quarter full year revenue represented 23% of total product revenue compared to 24% last year.
After a few quarters of inventory adjustment, we are seeing customer inventory levels, returning back to normal levels due to the impact of Chinese new year holiday on the first quarter revenue, we expect to see some recovery beginning in the second quarter and progressing in the second half of the year.
Emily Yang: We secure new design wings for a range of essential components like HDMI, USB Type-C DisplayPort, MIDI re-drivers, and MUX switches for commercial displays, drums, and robotic applications. One area of strength in the industrial market has been solar, where our SDR product has gained traction in residential roof solar panels, along with our real-time clock being used in solar systems, and our TVS product being designed for data line protection in battery management systems for solar energy storage battery cells. Additionally, our silicon carbide MOSFET has been gaining traction in industrial motor drivers, solar inverters, data centers, and telecom power supplies.
In terms of design win and secure new decides and rent reduction for our SBR and Schottky diodes in notebook adapters and power applications surfer as well as noble motherboard protection devices for high speed data lines are being designed into crumble to protect the type C poor and law.
Brad: T V S products are being used to protect the power sourcing in light of the solid state drive modules for data center suffered.
We have also gaining momentum for signal integrity and connectivity products for various protocol in computing applications, including workstation gaming notebook desktop docking stations and in cars. We also secured new design ins for PCI Express clock buffers crystal.
Emily Yang: Turning to the computing market, fourth quarter revenue represented 25% of product revenue, which is flat to last quarter. Full year revenue represented 23% of total product revenue compared to 24% last year. After a few quarters of inventory adjustment, we are seeing customer inventory levels returning back to normal levels. Due to the impact of the Chinese New Year holiday on first quarter revenue, we expect to see some recovery beginning in the second quarter and progressing in the second half of the year. In terms of design wings and secure new designs and ramp production for our SDRs and chassis diodes in notebook adapters and power applications, surfers, as well as notebook motherboards, protection devices for high-speed data lines are being designed into Chromebooks to protect the Type-C port, and our TVS products are being used to protect the power sourcing line of the solid-state drive modules for data center surfers. We have also gained momentum for signal integrities We also secured new design-ins for PCI Express clock buffers, crystal oscillators, and silicon carbide stocking diodes in Surface, machine learning, and for various power factor correction applications in Surface.
Brad: Also later and Silicon carbide Schottky diodes in surfers machine learning and for various power factor correction applications in surface.
And the communication markets fourth quarter revenue was 15% of product revenue, which is an increase from 12% in the third quarter revenue for the full year, representing 13% of product revenue compared to 15% last year. After a few quarters of inventory adjustment in the smartphone specifically.
We are seeing customer inventory level, returning back to normalization level in the telecom and networking market inventory rebalancing continues.
In terms of design wins in the quarter, our timing products, including clock buffers and Crystal oscillator are seeing new ways for smart Nic and connectivity products like mid PS switches and our T vs. As protection products are seeing adoption in smartphone applications.
And lastly in the consumer market fourth quarter revenue represented 19%, which is a one percentage point increase compared to last quarter similar to the inventory situation and computing market and also in smartphones. After a few quarter of rebalancing customer inventory is now.
Mostly clean following the Chinese new year holiday and the typical seasonality for consumer in the first quarter, we expect to see some recovery late in the second quarter and into the second half of the year for the full year revenue in consumer market represented 18% of product revenue compared to 19 last year.
During the quarter, we have seen strong adoption of our USB type C display active cross bar MX USB type C display drivers and re timers PS PCI Express clock generators real time clock and send no condition or in various applications like tablets documents.
<unk> USB type C app to cable cable.
Sanders cameras TV and monitors we also secured design wins for our MOSFET and maybe switches and re drivers in gaming and VR applications.
In summary, although the three C market has been slower to recover and overall global demand remains soft we are encouraged by the continuous progress we have made over the past year in the automotive and industrial market. Our team remained focused on driving new product.
Brad: Production product mix improvements design win momentum as well as our focus on key account development.
Emily Yang: In the communication market, fourth-quarter revenue was 15% of product revenue, which is an increase from 12% in the third quarter. Revenue for the full year represented 13% of product revenue compared to 15% last year. After a few quarters of inventory adjustment in the smartphones specifically, we are seeing customer inventory levels returning to normalization levels. In the telecom and networking market, however, inventory rebalancing continues. In terms of design wins in the quarter, our timing products, including clock buffers and crystal oscillators, are seeing new wins for smart NIC and connectivity products like MIPI switches, and our TDS protection products are seeing adoption in smartphone applications. And lastly, in the consumer market, fourth-quarter revenue represented 19%, which is a one percentage point increase compared to last quarter.
Strong cash generation has enabled us to make investments in support of the future growth and expansion of our business that positions us well as the global market improve throughout the coming year.
Speaker Change: With that we'll now open the floor to questions operator.
Thank you.
To ask a question. Please press Star then one on your telephone keypad.
Speaker Change: If a question has already been addressed and they'd like to withdraw your question. Please press Star then two.
Today's first question comes from Matt Ramsey with Cowen. Please go ahead.
Yeah.
Thank you very much guys and good evening.
Sleep in a interesting period here.
The inventory in the industry, that's corrected what I'm, what I wanted to.
Start the conversation with is.
Oh, maybe to give a little bit more detail on where you think your sell in for the March quarter guidance is across the different segments relative to the sell through and how much inventory, we might still need to burn down if you could give any color by segment that would be helpful. And just where you think you are in terms of.
Emily Yang: Similar to the inventory situation in the shooting market and also in smartphones, after a few quarters of rebalancing, customer inventory is now mostly clean. Following the Chinese New Year holiday and the typical seasonality for consumers in the first quarter, we expect to see some recovery late in the second quarter and into the second half of the year. For the full year, revenue from the consumer market represented 18% of product revenue compared to 19% last year.
Getting to that sell in sell through balance so we can start.
Revenue Reaccelerate out in the back end. Thank you.
Okay.
Hi, Matt This is Emily let me address your question.
Emily Yang: I think from the margin of seven point of view right like I mentioned earlier.
Operator: During the quarter, we have seen strong adoption of our USB Type-C display, active crossbar mocks, USB Type-C display re-drivers and re-timers, PX PCI Express clock generators, real-time clocks, and signal conditioners in various applications like tablets, docking stations, USB Type-C active cables, cable extenders, cameras, televisions, and monitors. We also secured design wings for our MOSF In summary, although the 3C market has been slower to recover and overall global demand remains soft, we are encouraged by the continuous progress we have made over the past year in the automotive and industrial markets. Our team remains focused on driving new product introductions, product mix improvements, design wind momentum, as well as focusing on key account development.
Art with automotive what we see is the inventory rebalancing kind of started in Q4 and it will continue into the first quarter.
And then from the industrial market sentiment.
We experienced weaker demand in Q4, plus the inventory rebalancing.
Unfortunately, we've seen the weakness Rotten.
Emily Yang: And from the <unk>.
Putin point of view customer inventory is pretty clean.
I think the only concern or estimate that need to keep in mind is the Chinese new year.
So this is definitely going to impact some of our production as well as the output we.
Emily Yang: We do expect a recovery in the second quarter and progressing into the second half of the year.
Operator: Diode's strong cash generation has enabled us to remain invested in support of future growth and expansion of our business, which positions us well as the global market improves throughout the coming year. With that, we now open the floor to questions, Operator. Thank you. If you would like to ask a question, please press star then 1 on your telephone keypad. If your question has already been addressed and you'd like to withdraw your question, please press star then 2.
From a communication point of view I talk about smartphone customer inventory is pretty much normalized.
But what a typical telecom networking or enterprise point of view, we see the inventory rebalancing will continue.
So I think from the consumer market.
Because it's true the wide range of applications.
And in general what we seeing customer inventory is relatively clean.
Do expect more ramp up in the late second quarter or base, our usual consumer seasonality.
Emily Yang: Today's first question comes from Matt Ramsay with TD Allen. Please go ahead. Thank you very much, guys. Thank you for watching, period, to start the conversation with. I'll give a little bit more detail on it, where you think you're selling. March quarter guidance is across the different segments, relative to the. If you could give me the color of my segment, that would be great. You are, getting to that sell-in, sell-through phallus, to have revenue being celebrated. Hi Matt, this is Emily.
Emily Thank you for that I really appreciate it I guess.
As my follow up question and maybe it will be across the different business segments.
Wanted to ask about the pricing environment. So.
Emily Yang: Let me address your question. So, from the market statement point of view, right, like I mentioned earlier, start with the automotive industry. What we are seeing is the inventory rebalancing kind of started in Q4 and it will continue into the first quarter. And then from the industrial market statement, we experienced weaker demand in Q4 plus inventory rebalancing. Unfortunately, we've seen the weakness broken.
And maybe from two angles.
First of all we do hear a lot about.
Some of your larger competitors, maybe getting more price aggressive in certain end markets.
That's one element to it and then secondly, I wanted to kind of compare you guys guided to a bit about 300 million for for the March quarter.
And if you compare that to say three or four years ago. When you were at similar revenue level.
Emily Yang: And from a computing point of view, customer inventory is pretty clean. I think the only concern or estimate that we need to keep in mind is the Chinese New Year. So this is definitely going to impact some of the production as well as the output. We do expect a recovery in the second quarter and progressing into the second half of the year. From a communication point of view, I've talked about smartphones.
Maybe what the pricing is done over that period of time do you see pricing.
Pricing, obviously increased post the pandemic when the supply was all type is it coming back down rapidly or we are.
Any commentary that you have on the pricing trends would be really helpful.
Emily Yang: Customer inventory is pretty much normalized. But from the typical telecom, networking, or enterprise point of view, we see the inventory rebalancing will continue. So I think from the consumer market statement because it covers a pretty wide range of applications, but I think in general, what we see in customer inventory is relatively clean. We do expect more rent to go up in the late second quarter based on usual customer seasonality cycles, right? So that's really what we see overall in each of the market statements and the inventory situation. I really thank you for that, as my follow-up question, to ask about the pricing environment. Ladies and gentlemen, welcome to the show.
Yeah. So I think you know usually pricing, it's always a balance between demand and supply right.
When you see a weaker demand market, usually you definitely get more of the price pressure.
There's also various by you know the type of product right. If this is more differentiated you usually get a little bit less price pressure versus Mary feed commodities, which is really that you have a lot of competitors within the same arena right. So what we've been saying.
All along as we focus on product mix improvement, which really means strategically walking away from some of the key commodity area right. So so in general.
Emily Yang: First of all, we do hear a lot about Price Regrats, one. Secondly, I wanted to kind of compare it to that, which is guided to a bit above 300. And if you compare that to, say, three or four years ago when you were at civil or residential, to give you what the pricing has done over that period of time. Pricing obviously increased post the pandemic when the supply was all tight. Coming back down rapidly, are we, uh, any commentary that you have on the price? Yeah, so I think, you know, usually pricing is always a balance between demand and supply, right? So when you see a weaker demand market, usually, you definitely get more price pressure. This also varies by, you know, the type of product, right? If it's more differentiated, you usually get a little less price pressure versus very deep commodities, which is really that you have a lot of competitors within the same arena, right?
That will continue to be our focus.
And we believe with this.
Execution of the product mix initiatives continue to improve that will help overall diet was not only from the margin point of view, but also from a revenue point of view.
Speaker Change: I think the second part of your question is we guide at around 300, some range and.
Numbers.
Let me see.
I would say probably.
We'll be back to a you know two.
2000 year 2000, so that's a pre COVID-19 timeframe. That's also before the lite on semiconductor acquisition.
I just look at for example, the three Q1 2000 and that that is about 310 a quarter.
Quarterly and our margin is around 35, 9% and keep in mind that that's actually before the lite on semiconductor acquisition and that's pretty much gave us about 3% margin degradation.
So that will be representing about 32% margin.
The other difference is actually also from the under loading capacity point of view, it's a quite significantly different from what we have right now versus before so I think that's pretty much the reference point right. So if you look at the overall margin I think majority of the pressure is actually coming from the under.
Holding and that's also the area that we are driving very aggressively.
<unk> some other catastrophes improved their utilization in the near future right. So I would say that's really the second part of your question I Hope I answered it.
No no. Thank you Emily I really do appreciate that I'll jump back in the queue. Thanks.
Emily Yang: So what we've been saying all along is we focus on product mix improvement, which really means strategically walking away from some of the deep commodity areas, right? So in general, that will continue to be our focus. And we believe with this, execution of the product mix initiative continues to improve, and that will help overall buyers, not only from the margin point of view but also from the revenue point of view. I think the second part of your question is, we guided around 300, some range, and if I just look back to the historical... numbers. Let me see. I would say probably back to, you know, 2000, the year 2000.
Thank you and our next question today comes from Gary Mobley with Wells Fargo Securities. Please go ahead.
Hey, everyone. Good afternoon, Thanks for taking my question.
And Emily Thanks for the detailed response to Matt's question, and that's where I want to just pick up and it start.
So you covered the pricing dynamic see underutilization, but let me ask a question on gross margin in a different way given that Q1 should represent the seasonal low point at least in the near term would you expect the first quarter gross margin to be the bottom for year end.
Emily Yang: So that's a pre-COVID timeframe. It's also before the light-on semiconductor acquisition. You know, I just look at, for example, the three huge, 22,000, and that is about 310 revenue per quarterly, and our margin is around 35.9%. And keep in mind that that's actually before the light-on semiconductor acquisition, and that pretty much gave us about 3% margin degradation. So that will be representing about a 32% margin. The other difference is actually from the underloading capacity point of view. It's quite significantly different from what we have right now versus before. So I think that's pretty much the reference point, right?
Maybe more pointedly do you expect.
What do you expect for gross margin for the full year and within that how much of a headwind does the wafer service agreements represent.
Yes, Gary So let me answer the first portion of the question and then I'll, let Brent or Gary answered manufacturing surface agreement right. So you.
Emily Yang: So if you look at the overall margin, I think the majority of the pressure is actually coming from the underloading, and that's also the area that we are driving very aggressively to, you know, backfill some of the capacities, improve the utilization in the near future, right? So I would say that's really the second part of your question. I hope I answered it. No, thank you, Emily.
Definitely Q1 with our guidance.
Revenue.
Decrease about five 5% matching pretty much our seasonality right. The market is extremely dynamic and definitely we are not ready to guide the second quarter, but based on the usual seasonality usually second while there will be a growth quarter and then.
The third quarter.
Because the lack of I would say over all of the stability what.
Gary Mobley: Thank you. And our next question today comes from Gary Mobley with Wells Fargo Securities. Please go ahead. Hey everyone, good afternoon.
What we truly believe the second half is definitely going to be stronger than the first half right. I think we just need to continue to monitor the overall market as we grow from the revenue point of view as we also have time to really qualify and supporting additional products into our internal.
Emily Yang: Thanks for taking my question, and Emily, thanks for the detailed response to Matt's question, and that's where I want to pick up and start. So you covered the pricing dynamics and underutilization, but let me ask a question on gross margin in a different way. Given that Q1 should represent, you know, a seasonal low point, at least in the near term, would you expect the first quarter gross margin to be the lowest for a year? Maybe more pointedly, what do you expect for growth margins for the full year? And in that, how much of a headwind does the wafer service agreement represent? Yes, Gary, so let me answer the first portion of the question and then I'll let Brett or Gary answer the manufacturing service agreement, right?
Our fab utilization will continue to improve right. So you know it's difficult for us to forecast the whole year. That's also not something we usually provided but I think with the expectation of the second half will be stronger than the first half.
With the product mix initiative, we continue to drive with a total solution sales approach that we're confident that our gross margin will improve overtime.
Got it appreciate that Emily before I ask my follow up I did want to congratulate Gary on this new role I forgot to mention that.
Emily Yang: So, you know, definitely to work with our guidance, our revenue decreased about 5.5%, matching pretty much our seasonality, right? The market is still extremely dynamic, and, you know, definitely we're not ready to guide the second quarter, but based on the usual seasonality, usually the second quarter will be a growth quarter and then the third quarter. Because of the lack of, I would say, overall visibility, what we truly believe is the second half is definitely going to be stronger than the first half, right?
Well, thank you Gary.
My honest.
Craig you want to talk a little bit about the manufacturing.
Gary I would just add to what Emily said regarding.
Well, we would expect transitional <unk> on margin.
Acted to the revenue expectation that we're not guiding but from a seasonal perspective, that's what we would expect and then full wafer service agreement.
We believe we've absorbed that transitional Lee and going forward hopefully what we would see is that wood.
Kind of be a neutral to tailwind for us as we continue to work on technology qualification and the ability to put our product into these locations as well as the ability to ramp revenue and that capacity being available to us.
Gary Mobley: I think we just need to continue to monitor the overall market. As we grow from the revenue point of view, as we also have time to really qualify importing additional products into our internal fab, utilization will continue to improve, right? So, you know, it's difficult for us to forecast the whole year. That's also not something we usually provide, but I think with the expectation that the second half will be stronger than the first half, and with the product mix initiative we continue to drive with a total solution sales approach, we're confident that our growth margin will improve over time. Before I ask my follow-up question, I did want to congratulate Gary on his new role. I forgot to mention that. Well, thank you, Gary. It's my honor.
Got it thank you for that.
It looks like you're you're bringing it down excuse me our non-GAAP operating expenses.
<unk>.
12, 13% from where they were a year ago.
How much of that is variable versus structural and the reason I'm asking the question is just trying to get a sense of.
By how much operating expenses approved when revenue improves.
Yes, so basically what you see in that is a combination of things. So we have taken.
We continue to take action connected to.
Variable things as you mentioned, but we're also doing.
Gary Mobley: Brian, do you want to talk a little bit about manufacturing? Oh yeah, Gary, I would just add to what Emily said regarding what we would expect transitionally on margin, you know, connected to the revenue expectation that we're not guiding, but from a seasonal perspective, that's what we would expect. And then for the wafer service agreement, you know, we believe we've absorbed that transitionally and going forward. Hopefully, what we would see is that would kind of be a neutral to tailwind for us as we continue to work on technology qualification and the ability to port our product into these locations as well as the ability to ramp revenue and that capacity being available to us. Thank you for that.
Actions that provide restructuring inside the company to drive efficiency.
We've also impacted.
Impacted are with the performance we've had that's been an impact on variable pay and.
And we continue to look at where our investments are I think what Youll see is our continued focus on R&D and that investment been kind of flat or tied with revenue growth and from an SG&A perspective, continuing to look for opportunities to bring that down.
To drive structural efficiency, and then not bring it up.
Brett R. Whitmire: It looks like you're bringing down your non-GAAP operating expenses by about... 12-13% from where they were a year ago. But how much of that is variable versus structural? And the reason I'm asking the question is to try to get a sense of how much operating expenses improve when revenue... Yeah, so basically, what you see in that is a combination of things so we have taken and we continue to take action connected to variable things, as you mentioned. But we're also doing, you know, actions that provide restructuring inside the company to drive efficiency. We've also, you know, been impacted by the performance we've had; that's had an impact on, you know, variable pay. And we continue to look at where our investments are.
More than some portion of what the revenue growth would be.
Thanks, Brett.
Yeah.
Next question.
Excuse me. Our next question today comes from David Williams with Benchmark. Please go ahead.
Hey, good afternoon, and let me, let me add my congratulations to Gary.
Thanks, David.
Absolutely.
Brett R. Whitmire: I think what you'll see is our continued focus on R&D and that investment being kind of flat or tied to revenue growth. And from an SQ&A perspective, continuing to look for opportunities to bring that down to drive structural efficiency and then not bring it up any more than, you know, some portion of what revenue growth would be. And our next question today, excuse me, our next question today comes from David Williams with Benchmark. Please go ahead. Hey, good afternoon. And let me, let me add my thanks again.
Yeah. So I think you know we definitely see improvement from the book to Bill ratio point of view.
And so I think there's a you know a lot of.
Positive signals on the inventory side I talk about you know within the three CS it's getting cleaner than ever before so I think this is a positive I think the unknown is really the actual demand, especially after the Chinese new year right.
Emily Yang: So a lot of my questions were around the growth margin, but maybe just on the order of velocity. It's still a mixed bag, just as you think about your order of the law............. Yeah, so I think, you know, we've definitely seen improvements from the book-to-bill ratio point of view. And, you know, so I think there are, you know, a lot of positive signals on the inventory side. I talked about, you know, within the three Cs, it's getting cleaner than ever before. So I think this is all positive. I think the unknown is really the actual demand, especially after the Chinese New Year, right? I think the Chinese recovery is still extremely slow compared to anybody's expectations.
I think the China recovery still extremely slow than anybody's expectation. So I think overall you know unfortunately feel weaker.
We can hear from the business visibility point of view, we just need to continue to monitor it very closely but definitely there. So there's some good positive signs as well.
Okay, Great Yeah, and then David This is Gary I would've put some come in on that too. So you know where I know, we're going to put a lot of air parochial about key account focus that's being said I'm going to put that in our sales effort to work with key it kind of created that they manage.
<unk>, you know where do you see that shortening time to your continuing increasing during this kind of peer it and are we kind of work with the dispute or to put the right inventory in there you know.
Emily Yang: So I think overall, you know, unfortunately, it's still weaker from the visibility point of view. We just need to continue to monitor it very closely. But, you know, definitely, there are some good positive signs as well. And David and Sierra, I will make some comments on that too.
The warehouse to make sure. They can handle just high shortly been surely kind of appeal in times like basis.
Speaker Change: Okay great.
And I guess do you get a sense that your customers.
Gary Mobley: So, you know, I know we are going to put a lot of effort into the key account focuses. You know, that being said, we're going to put a lot of skills into working with key accounts to create demand. At the same time, you know, when you see the short-term P.O.
That they are being fairly rational with their inventories and taking them to normal levels or do you get a sense that maybe those are being brought down too low and you might get a bit of a snap back because of replenishment there.
Gary Mobley: continue to increase, you know, during this kind of period, and we kind of work with the distributors to put the right inventory in their, you know, in their warehouse to make sure they can handle this kind of short-time, you know, short-time P.O. in time, like I said. And I guess, do you get a sense that your customers are being pretty radical? Yeah, I think that's a really challenging question, David.
Yeah, I think that's a really challenging question, David I think it's really down to the actual customer and their experience as well as their view. Sometimes also involved are financial cash flow situation. So it is a little bit dynamic right. So what we see.
I think what Gary mention is we start to see more urgent orders.
Emily Yang: I think it's really down to the actual customer and their experience as well as their view. Sometimes it also involves their financial cash flow situation. So it is a little bit dynamic, right?
She is really driven by probably not enough of the inventory buffer that they built into their formula right. So because the customer base. The areas of law that also varies a lot as well right. So that's really where the challenge, but I think just like Gary mentioned, we focus more.
Emily Yang: So what we've seen, I think what Gary mentioned, is we're starting to see more urgent orders, which is really driven by probably not enough of the inventory buffer that they're building into their formula, right? So because the customer base varies a lot, that also varies a lot, right? So that's really where the challenge is.
Onto the quality of the products on the shelf. So we can actually pretty much quickly adjusting our ASO or to the customers with this kind of very sure.
Emily Yang: But I think, just like Gary mentioned, we focus more on the quality of the product on the shelf so we can actually pretty much quickly adjust our support to the customer with this kind of very short lead time orders, right? So that's really pretty much what we focus on and will continue to focus on for the next few quarters as the market continues to evolve.... Any other questions? Hello? I know; I just went silent.
You know lead time orders right. So you know that's really pretty much what we focused on and will continue to focus for the next few quarters.
The market continue to evolve right.
Thanks, so much I appreciate the help.
Okay.
Yeah.
Speaker Change: Okay.
Okay.
Any other question.
Okay.
Hello.
Yeah.
That was it for me.
[laughter] went silent.
Yeah.
Although these everyone on our next question today comes from William Stein with True Securities. Please go ahead.
Emily Yang: Apologies, everyone; our next question today comes from William Stein with True Securities. Please go ahead. Great, thanks for thinking of my questions. Also, Gary, I wanted to ask him if I could... I'm hoping you can talk about the split of revenue that went direct versus the Channer quarter. Yeah, so for the fourth quarter, and our split by the channel is actually 65% distribution and 35 direct. This number usually varies a little from quarter to quarter and depends on customer demand and some of the order situation. I usually say the rule of thumb is probably about two-thirds distribution, one-third the direct portion.
Great. Thanks for taking my questions.
Also Gary I wanted to ask.
Thank you so much rail.
I'm, hoping you can talk to the split of revenue.
Went direct versus channel this quarter.
Yeah, so for.
For the fourth quarter.
About two third distribution, one third that the Rep question.
Speaker Change: Great. Thank you.
Also I wonder to what degree the inventory build.
Emily Yang: Great, thank you. Also, I wonder to what extent the inventory bills... I have a question that relates to a question I'll ask concurrently with this, and that is utilization. Can you tell us what fab utilization was in the quarter, what you expect it to be next quarter, and then also the... The dynamic that I expect occurred in Q4, which is when you build inventory like that, normally it's a boost to gross motion if you can quantify that. Thank you.
Yes.
Gross margin for the quarter usually would.
It's really a question of Alaskan.
Concurrently with this.
And that is utilization can you tell us what fab utilization was in the quarter. What you expect it to be next quarter and then also the <unk>.
The dynamic that I expect occurred in the in the Q4, which is would you build inventory like that normally.
It's a boost to gross margin.
Brett R. Whitmire: Well, I think what you saw, Will, in terms of our, you know, we've talked about strategically putting availability in place, both from a kind of finished goods availability, but also from the availability as we procure, you know, about half of our wafers on the outside, you know, so that we can have flexibility in mix to build what we need. And so as you look at that, you look at utilization, and then you also look at typically in fourth quarter, we're building in anticipation and preparing for Chinese New Year. And so when you look at the combination of that.
If you could quantify that thank you.
Speaker Change: Well I think what you saw will in terms of our we've talked about strategically.
Putting availability in place both from a kind of finished goods availability, but also from.
The availability as we procure you know about half of our wafers on the outside.
We can have flexibility in mix to build what we need and so as you look at that and you look at utilization and then you also look at typically in fourth quarter, we're building.
Building in anticipation and preparing for Chinese new year, and so when you look at the combination of that.
Brett R. Whitmire: What we saw from the utilization perspective was something that was pretty consistent. We continue to run below where we want to be, and we believe that is something that's going to help us as we go forward as revenue starts to hopefully strengthen, and we're in a position to be able to drive more inside the factory. It is all related, but as we look at the fourth quarter, it wasn't something we drove utilization up in order to deliver those results. Thanks. Thank you. And our next question today comes from Tristan Gerra, with Baird. Please go ahead.
What we saw from a utilization perspective.
With something that was pretty consistent.
We continue to run below where we want to be.
And we believe that as something that's going to help us as we go forward as revenue starts to hopefully strengthen and we're in a position to be able to drive more inside the factories. So we didn't really obviously.
It is all related but as we look at fourth quarter. It wasn't something we drove utilization up in order to deliver those results.
Yeah.
Thanks.
Thank you and our next question today comes from for some girl with Baird. Please go ahead.
Operator: Hi, good afternoon. So just going back on gross margin, what's the impact on utilization in terms of debt? Sorry if I missed, if you quantified what the utilization rates are currently, and then, is there a way to break down how much of the underutilization is from the service agreements, where I know you're qualifying new products for sales capacity as opposed to just general retail? Well, what we've talked about, Tristan, is that from an overall utilization perspective, we ran pretty consistent from third to fourth quarter, but we continue to run below where we want to be.
Yeah.
Hi, good afternoon Hum.
So just going back on the on gross margin, what's the impact of the under utilization in terms of bibs and sorry, if I missed if I. If you quantified what the utilization rates are currently.
And then is there a way to break it down how much of the under utilization is for the service agreements, where I know you're quantifying your products to fill capacity as opposed to just general weakness.
Brett R. Whitmire: You know, in doing that, we have, I think, successfully been able to get better availability in place to support the short-time ordering that we're seeing. We've also been able to address getting our hybrid manufacturing model services about half of our wafers outside the company, so we've put some more availability in place on that. But that's not something that really drives up our utilization.
Eaton demand.
Speaker Change: Well.
What we've talked about Tristan was we talked about the fact that from a overall utilization perspective, we ran pretty consistent from third to fourth quarter. We continue to run below where we wanted to be.
Brett R. Whitmire: And we believe that from a wafer service contract perspective, we've pretty much absorbed the negative impacts in transition, and we believe going forward that's a kind of neutral to positive thing. As we continue to qualify our technologies internally, we can bring loadings internal, and we can help enable revenue growth. But in total, we're running below where we want to be, and we have been in that place for, you know, really all of this year, and we continue to be there in anticipation for things to strengthen, as Emily has kind of gone through, and what we anticipate kind of going into 24.
And doing that we have I think successfully been able to.
Get better availability in place to support short time ordering that were seen we've also been able to address.
Getting our hybrid manufacturing model services about half of our wafers outside the company. So we've put some more availability in place on that that's not something that really drives up our utilization and we believe that from a wafer service contract perspective, we've pretty.
Pretty much absorbed the negative impacts in transition and we believe going forward. That's a kind of a neutral to positive thing as we continue to qualify our technologies internally, we can bring loadings internal and we can help enable revenue growth there, but in total we're running below where we wanted to be and we have been.
Gary Mobley: Yeah, and the one comment I would like to put is just in this theory, and when we're fixing serial key account customers, you know, they're kind of talking about the utilization of internal wafer staff, you know. I think that's really kind of thinking about it is, like, in future growth, they really want to make sure that they have the kind of capability to support their growth in the future. So, I would say, like, we're still, you know, kind of under the utilization level as a brand mission, but that's for the future. As long as we qualify our product and process into our own internal fab, we should have the kind of capability to support more business from our customers. Okay, that's great.
At that place for you know the really all of this year and we continue to be there in.
In anticipation for things to strengthen as Emily kind of gone through and what we anticipate kind of going into 'twenty four yeah. No. One comment I would like to put it just this is scary and when were you fishing in several key account customer you know that kind of talked about Regulus Asia, all internal wafer fab you know that's I.
I think that's the right kind of think about the future growth there.
Really want to make sure I have this kind of capability can support and grow in the future. So I would say like a way of doing the kind of under you know utilization level as Brad mentioned about but that's for the future as long as we qualify our product and our process into our our own internal fab and I wish you have the same capability to support more business to our customer.
Okay, that's great and then for my follow up.
Most of your pricing agreements or in automotive.
So outside of the automotive in terms of your revenue that's not locked into a pricing agreement I mean, what type of feedback you're getting from customers.
Emily Yang: And then for my follow-up question, I believe most of your pricing agreements are in the automotive industry. So, outside of the automotive industry, in terms of your Wagoneer that's not locked into a pricing agreement, what type of feedback are you getting from customers about people, you know, trying to ask for better pricing, or is it relatively stable, and how do you think that evolves for the rest of the year? Yeah, I think Tristan, it really varies a lot and depends on the end market, right?
Are people trying to ask for better pricing or is it relatively stable in and how do you think that evolves through the rest of this year.
Yeah, I think Tristan it really varies a lot depends on the end market right. So you're absolutely right usually in the automotive market is something that we actually have a longer time price matrix type of agreement with the customers and you know.
Emily Yang: So you're absolutely right; usually, in the automotive market statement, we actually have a longer-term price matrix type of agreement in place with the customers. And, you know, for example, in the consulting market statement, it's going to be a lot more function and feature, you know, protocol-driven discussion than some of the others. Of course, price competitiveness is different, right? If we take extremes in the consumer market because, you know, the overall cost is very sensitive, and demand is weaker, you tend to get more of the pricing discussions, right? So I think it varies a lot.
By example in the computing market that man is going to be a lot more function and feature.
Call driven discussion.
And then some of the others of course, our price competitiveness, if you skip it right.
If we take more extreme in the consumer market because you know the overall cost is very sensitive to demand weaker you tend to get more off the pricing discussions right. So I think it varies a lot.
Emily Yang: It also varies from customer to customer. But in general, right, definitely as demand is weaker, you definitely get a little bit more price pressure. It's almost going back to my discussion earlier. It depends on the product type. If it's a function, feature, risk type of product, you get less competition. If it's a big commodity, you get more.
So it varies from customer to customer, but in general right definitely ask the immense weaker you definitely can't other than more price pressure, it's almost going back to my discussion earlier.
It depends on the product type.
If it's a function feature rich type of product you get less of the competition. If it's a deep commodity you get more and just keep in mind that pre COVID-19 diodes actually had a one 5% to 2% field E quarterly price reduction so we actually definitely structure.
Emily Yang: And just keep in mind that, pre-COVID, we actually had a 1.5 to 2% build-in corporate price reduction. So we actually definitely structured our company to support this kind of, overall pricing, I would say, trend. And, you know, the way to really focus on is actually improve manufacturing efficiency and the cost down to really balance this kind of pressure that we've seen in the market.
To support this kind of.
Overall pricing I would say trend and you know.
The way to really you know.
No.
Focus on its actually improve the manufacturing efficiency and the cost down to really balance this kind of a pressure that we're seeing in the market.
Emily Yang: Okay, great, that's very useful. Thank you very much. Thank you. And this concludes today's question and answer session. I'd like to turn the conference back over to the company's president, Gary Yu. Thank you everyone for participating on today's call. We look forward to reporting our progress on next quarter's conference call. Operator, you may now disconnect. Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Yeah.
Okay, great that's very useful thank you very much.
Thank you.
Today's question answer session I would like to turn the conference back over to the company's President go to you.
Thank you everyone for participating on today's call. We look forward to reporting our progress on next quarters Conference call. Operator, you may now disconnect.
Thank you Sir This concludes today's conference call we.
Thank you all for attending today's presentation.
Now disconnect your lines and have a wonderful day.
Yeah.