Q1 2024 Diodes Incorporated Earnings Call
Operator: Good afternoon, and welcome to Diodes Incorporated's first quarter 2024 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 key followed by the zero on your touchtone phone. As a reminder, this conference call is being recorded today, Thursday, May 9th, 2024. I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead.
Good afternoon, and welcome to diodes, Incorporated's first quarter 2024 financial results Conference call.
Leanne K. Sievers: At this time all participants are in a listen only mode.
Leanne K. Sievers: At the conclusion of today's conference call instructions will be given for the question and answer session.
Leanne K. Sievers: Anyone needs assistance at any time during the conference call. Please press Star key followed by the zero on your Touchtone phone.
Operator: As a reminder, this conference call is being recorded today Thursday may nine 2024.
Leanne K. Sievers: I would now like to turn the call over to Leon Sievers Shelton Group Investor Relations Liane. Please go ahead.
Leanne K. Sievers: Good afternoon, and welcome to Diodes' first quarter fiscal 2024 financial results conference call. I'm Leanne Sievers, president of Shelton Group, Diodes' investor relations firm. Joining us today are Diodes president Gary Yu, chief financial officer Brett Whitmire, senior vice president of worldwide sales and marketing Emily Yang, and director of investor relations for Moot Delaware.
Operator: Good afternoon, and welcome to diodes first quarter fiscal 2024 financial results Conference call I'm Leanne Sievers President of Shelton Group diodes.
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 review by the company's independent registered public accounting firm. As such, these results are unaudited and subject to revision until the company files its Form 10-Q for its fiscal quarter ending March 31, 2024. 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. 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.
Leanne K. Sievers: Investor Relations firm joining us today are diodes, President Gary Yu, Chief Financial Officer, Brett Whitmire, Senior Vice President of worldwide sales and marketing Emily Yang and director of Investor Relations for meat Deli wall.
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 assessments as of today, May 9, 2024. Diodes assumes no obligation to update these projections in the future, as market conditions may or may not change, except to the extent required by applicable law.
Leanne K. Sievers: 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.
Leanne K. Sievers: Such these results are unaudited and subject to revision until the company filed its Form 10-Q for its fiscal quarter ending March 31, 2024. 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.
Leanne K. Sievers: The protection of the Safe Harbor for forward looking statements 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: In addition, any projections as to the company's future performance represent managements estimates as of today may nine 2024.
Leanne K. Sievers: <unk> 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.
Leanne K. Sievers: Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP to non-GAAP items, which provide additional details. Also, throughout the company's press release and management statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income.
Leanne K. Sievers: 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 released our 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.
Leanne K. Sievers: Call, we refer to net income attributable to common stockholders as GAAP net income for those of you unable to listen to the entire call. At this time, a recording will be available via webcast for 90 days in the Investor Relations section of diodes website at Www Dot diodes Dot com and now I'll turn the call over to diodes, President Gary you Gary. Please go ahead.
Leanne K. Sievers: 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. Now, I'll turn the call over to Diodes President Gary Yu. Gary, please go ahead.
Leanne K. Sievers: Yeah.
Gary Yu: As reported earlier today, first quarter revenue reflects a slower-than-expected recovery in the consumer, computing, and communication market, coupled with a typical first quarter seasonality due to the Chinese New Year holiday. However, late in the quarter, we began to see some signs of demand improvement, with distributor inventory levels starting to stabilize, supporting our belief that the first quarter should be the low point and guiding for a return to seasonal growth in the second quarter.
Gary Yu: That's a report earlier today first quarter revenue reflect the slower than expected recovery.
Gary Yu: And the consumer computing and communications market.
Gary Yu: Coupled with a typical first quarter seasonality due to the Chinese new year holiday.
Gary Yu: However, late in the quarter, we began to see some sign of improvement with the speed of inventory level starting to stabilize so boarding duopoly that the first quarter should be the low point and are guiding for our return to seasonal growth in the second quarter.
Gary Yu: In the automotive and industrial end markets, first quarter combined product revenue remained above our target model of 40% but continued to be affected by inventory adjustments and softness in certain areas. More broadly, the slower over-demand environment in the quarter contributed to reduced loading at our manufacturing facility. Both internal production, as well as from our manufacturing service agreement, temporarily impact gross margins. We expect growth margin to resume toward our target of 40% as we increase our factory loading by qualifying more products combined with increasing revenue growth for a higher margin in the automotive and industrial markets, consistent with our historical performance and a long-term growth strategy.
Gary Yu: In the automotive and industrial end market first quarter come byproduct revenue remain above our target model of 40%, but continue to be affected by inventory adjustments and the stop messing southern area.
Gary Yu: More broadly just lower overall demand environment in the quarter contribute to reduced loading at all manufacturing facility. Both in turn off production as well as from our manufacturing service agreement temporarily impact gross margin.
Gary Yu: We expect gross margin to resume to our target of 40% as we increase our factory loading by qualifying more products combined with increasing revenue growth far higher margin automotive and industrial market.
Gary Yu: With our historical performance and our long term growth strategy.
Gary Yu: In summary, with early evidence that recent pricing pressures are dying, Stiles is well-positioned with the size and the skill to support a return to growth as global demand and distributor inventory improves across RM Markets. We remain focused on operating our manufacturing facility at a high level of efficiency, as demonstrated by the steps the company has taken over the past several quarters to further develop our process technology and capabilities while lowering manufacturing costs across our operations. With that, I now turn the call over to Brett to discuss our first quarter financial results as well as our second quarter guidance in more detail.
Gary Yu: In summary, with early evidence of recent pricing pressure or stop buying.
Brett: <unk> is well positioned with our size and let's go to support a return to growth as global demand and that dispute or inventory improves.
Brett: Across our end markets.
Brett: We remain focused on operating our manufacturing facility at a high level of efficiency as demonstrated by the steps. The company has taken over the past several quarters to further develop our process technology and capabilities, while lowering manufacturing costs across our operations with that let me now turn to <unk>.
Gary Yu: Call over to Brett to discuss our first quarter financial results as well as our.
Brett: Quarter guidance in more detail.
Brett R. Whitmire: Thanks, Gary, and good afternoon, everyone. Revenue for the first quarter of 2024 was $302 million, compared to $322.7 million in the fourth quarter of 2023 and $467.2 million in the first quarter of 2023. Gross profit for the first quarter was $99.6 million, or 33% of revenue, which reflects reduced loading at our manufacturing facilities due to the lower revenue. This compares to $112.5 million, or 34.9% of revenue in the prior quarter, and $194.5 million, or 41.6% of revenue in the prior year quarter.
Brett: Thanks, Gary and good afternoon, everyone.
Brett R. Whitmire: GAAP operating expenses for the first quarter were $86.6 million, or 28.7% of revenue, and on a non-GAAP basis were $87.6 million, or 29% of revenue, which excludes $3.8 million of amortization of acquisition-related intangible asset expenses. This compares to GAAP operating expenses in the prior quarter of $91.8 million, or 28.4% of revenue, and in the first quarter of 2023 of $108 million, or 23 Non-GAAP operating expenses in the prior quarter were $89 million, or 27.6% of revenue.
Brett R. Whitmire: Revenue for the first quarter of 2024 was $302 million compared to $322 $7 million in the fourth quarter of 2023 and $467 $2 million in the first quarter 2023.
Brett R. Whitmire: Gross profit for the first quarter was $99.6 million or 33% of revenue, which reflects the reduced loading at our manufacturing facilities due to the lower revenue. This compares to $112 $5 million or 34, 9% of revenue in the prior quarter.
Brett R. Whitmire: And $194 $5 million or 41, 6% of revenue in the prior year quarter.
Brett R. Whitmire: GAAP operating expenses for the first quarter were $86 $6 million or 28, 7% of revenue and on a non-GAAP basis were $87 $6 million or 29% of revenue, which excludes $3 $8 million of amortization of acquisition related intangible asset expenses.
Brett R. Whitmire: This compares to GAAP operating expenses in the prior quarter of $91.8 million or 28, 4% of revenue and then the first quarter 2023 of $108 million or 23, 1% of revenue.
Brett R. Whitmire: non-GAAP operating expenses in the prior quarter were $89 million or 27, 6% of revenue.
Brett R. Whitmire: Total other income amounted to approximately $5.9 million for the quarter, consisting of $4.6 million of interest income, $1 million of foreign currency gains, $0.4 million of other income, $0.4 million of unrealized gain on investment, and $0.5 million in interest expense. Income before taxes and non-controlling interest in the first quarter of 2024 was $18.8 million, compared to $27.9 million in the previous quarter and $88.6 million Turning to income taxes, our effective income tax rate for the first quarter was approximately 18.8%.
Brett R. Whitmire: Total other income amounted to approximately $5 $9 million for the quarter, consisting of $4 6 million of interest income $1 million, a foreign currency gain zero point $4 million of other income zero point $4 million of unrealized gain on investments.
Brett R. Whitmire: And zero point $5 million and interest expense.
Brett R. Whitmire: Income before taxes and Noncontrolling interest in the first quarter 2024 was $18 $8 million compared to $27 $9 million in the previous quarter and $88 $6 million in the prior year quarter.
Brett R. Whitmire: Turning to income taxes, our effective income tax rate for the first quarter was approximately 18, 8%.
Brett R. Whitmire: Gap net income for the first quarter was $14 million, or $0.30 per diluted share, compared to $25.3 million, or $0.55 per diluted share last quarter and $71.2 million, or $1.54 per diluted share in the prior year quarter. The share count used to compute Gap diluted EPS in the first quarter was 46.3 million shares. Non-GAAP adjusted net income in the first quarter was $13 million, or $0.28 per diluted share, which excluded net-of-tax $3.1 million of acquisition-related intangible asset costs, a $0.3 million non-cash mark-to-market investment value adjustment, and a $3.8 million insurance recovery for a manufacturing facility.
Brett R. Whitmire: GAAP net income for the first quarter was $14 million or <unk> 30 cents per diluted share compared to $25 $3 million or <unk> 55 cents per diluted share last quarter, and $71.2 million or $1.54 per diluted share in the prior year quarter.
Brett R. Whitmire: The share count used to compute GAAP diluted EPS in the first quarter was $46 3 million shares.
Brett R. Whitmire: non-GAAP adjusted net income in the first quarter was $13 million or 28 cents per diluted share, which excluded net of tax $3 $1 million of acquisition related intangible asset costs.
Brett R. Whitmire: <unk> zero point $3 million noncash mark to market investment value adjustment and a $3.8 million insurance recovery for a manufacturing facility.
Brett R. Whitmire: This compares to $23.4 million, or $0.51 per diluted share, in the prior quarter and $73.4 million, or $1.59 per diluted share, in the first quarter of 2023. Excluding non-cash share-based compensation expense of $4 million net of tax for the first quarter, both GAAP earnings per share and non-GAAP adjusted EPS would have increased by $0.09 per diluted share, respectively. EBITDA for the first quarter was $48.3 million, or 16% of revenue, compared to $58.4 million, or 18.1% of revenue in the prior quarter, and $121.8 million, or 26.1% of revenue, in the first quarter of 2023. We have included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income and GAAP net income to EBITDA, which provides additional details.
Brett R. Whitmire: This compares to $23 $4 million or 51 cents per diluted share in the prior quarter and $73 $4 million or $1.59 per diluted share in the first quarter of 2023.
Brett R. Whitmire: Excluding noncash share based compensation expense of $4 million net of tax for the first quarter, both GAAP earnings per share and non-GAAP adjusted EPS would have increased by nine cents per diluted share respectively.
Brett R. Whitmire: EBITDA for the first quarter was $48 $3 million or 16% of revenue compared to $58 $4 million or 18, 1% of revenue in the prior quarter and $121.8 million or 26, 1% of revenue in the first quarter 2012.
Brett R. Whitmire: Three.
Brett R. Whitmire: 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.
Brett R. Whitmire: Cash flow used in operations was $31.1 million for the first quarter. Free cash flow was a negative $51.5 million, which included $20.4 million for capital expenditures. The net cash flow was a negative $47.9 million. Turning to the balance sheet, at the end of the first quarter, cash equivalents, restricted cash, plus short-term investments totaled approximately $280 million. Working capital was $824 million, and total debt, including long-term and short-term, was approximately $70 million. In terms of inventory, at the end of the first quarter, total inventory days were approximately 184 as compared to 160 last quarter.
Brett R. Whitmire: Cash flow used in operations was $31 $1 million for the first quarter free cash flow was a negative $51 $5 million, which included $24 million for capital expenditures.
Brett R. Whitmire: Net cash flow was a negative $47 $9 million.
Brett R. Whitmire: Turning to the balance sheet at the end of the first quarter cash cash equivalents restricted cash plus short term investments totaled approximately $280 million working capital was $824 million in total debt, including long term and short term was approximately $70 million.
Brett R. Whitmire: In terms of inventory at the end of the first quarter total inventory days were approximately 184 as compared to 160 last quarter.
Brett R. Whitmire: Finished goods inventory days were 67 compared to 49 last quarter. Total inventory dollars increased $39.6 million from the prior quarter to $429.4 million. Total inventory in the quarter consisted of a $40.2 million increase in finished goods, a $1.6 million increase in work in process, and a $2.1 million decrease in raw materials. Capital expenditures on a cash basis were $20.4 million for the first quarter, or 6.7% of revenue, and within our target range of 5-9%. Now, turning to our outlook.
Brett R. Whitmire: Finished goods inventory days were 67 compared to 49 last quarter.
Brett R. Whitmire: Total inventory dollars increased $39.6 million from the prior quarter to $429 $4 million.
Brett R. Whitmire: Total inventory in the quarter consisted of $42 million increase in finished goods a $1.6 million increase in work in process and a $2 $1 million decrease in raw materials.
Brett R. Whitmire: Capital expenditures on a cash basis were $24 million for the first quarter or six 7% of revenue and within our target range of 5% to 9%.
Brett R. Whitmire: For the second quarter, 2024, we expect revenue to be approximately $316 million, plus or minus 3%, representing a 4.6% sequential increase at the midpoint and reflecting a return to typical seasonal growth. Gap gross margin is expected to be 33.5%, plus or minus 1%, reflecting a lower mix of revenue from the automotive and industrial markets as the 3C markets recover. Non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition-related intangible assets, are expected to be approximately 28.5 percent of revenue, plus or minus 1 percent.
Brett R. Whitmire: Now turning to our outlook for the second quarter 2024, we expect revenue to be approximately $316 million plus or minus 3%, representing a four 6% sequential increase at the midpoint and reflecting a return to typical seasonal growth.
Brett R. Whitmire: GAAP gross margin is expected to be 33, 5% plus or minus 1%, reflecting the lower mix of revenue from the automotive and industrial markets as the three C markets recover.
Brett R. Whitmire: non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition related intangible assets are expected to be approximately 28, 5% of revenue plus or minus 1%.
Brett R. Whitmire: We expect net interest income to be approximately $3 million. Our income tax rate is expected to be 18.5%, plus or minus 3%. And shares used to calculate EPS for the second 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.
Brett R. Whitmire: We expect net interest income to be approximately $3 million. Our income tax rate is expected to be 18, 5% plus or minus 3% and shares used to calculate EPS for the second quarter are anticipated to be approximately $46 5 million.
Brett R. Whitmire: 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.
Emily Yang: With that said, I will now turn the call over to Emily Yang. Thank you.
Emily Yang: Thank you, Brett, and good afternoon. Revenue in the first quarter was down 6 percent sequentially and slightly below the midpoint of our guidance due to a slower recovery in the 3C market than originally expected. Our first quarter global POS decreased slightly due to the Chinese New Year in Asia, but it has recovered since March and continues to grow into the second quarter. This also drove channel inventory value to decrease, even though remaining above our defined normal range of 11 to 14 weeks.
Emily Yang: Thank you Brett and good afternoon.
Emily Yang: In the first quarter was down 6% sequentially and slightly below the midpoint of our guidance due to a slower recovery industry C market than originally expected our first quarter Global P. O S decreased slightly due to the Chinese new year in Asia, but it has to be coffers since March and continue.
Emily Yang: To grow into the second part of this also drove channel inventory value to decrease even that would be meaning about or define normal range of 11 to 14 weeks.
Emily Yang: As Gary mentioned, we are beginning to see improvement in demand going into the second quarter with a stronger book-to-bill ratio. In fact, this is the first time we've seen a positive book-to-bill ratio since the mid of 2022, further supporting our expectation of the first quarter being the low point in the cycle. Assuming no major macroeconomic changes in the market, given the stronger backlog and better book-to-bill ratio and healthier inventory level in the 3C segment, we feel optimistic about second quarter revenue improvement and a stronger second half of the year than the first half.
Emily Yang: As Gary mentioned, we are beginning to see improvement in demand going into the second quarter with stronger book to Bill ratio. In fact this is the first time, we've seen a positive book to Bill ratio seen submit all 2022 further supporting our expectation after first quarter being the low point in the site.
Emily Yang: <unk>.
Emily Yang: Assuming no major macro economic change in the market do you think the stronger backlog and book to Bill ratio and healthier inventory level industry sentiment, we feel optimistic about second quarter revenue improvement and stronger second half of the year than the first half.
Emily Yang: Looking at global sales in the first quarter, Asia represented 75% of revenue, Europe 16%, and North America 9%. In terms of our end markets, industrial was 23% of Diodes product revenue, automotive 18%, computing 25%, consumer 20%, and communication 14%. Our automotive industrial end market combined totaled 41% of the first quarter product revenue, representing the eighth consecutive quarter above our target model of 40%. Now, let me review the end markets in greater detail.
Emily Yang: Looking at the global South in the first quarter Asia represented 75% of revenue you were up 16% and North America, 9%.
Emily Yang: In terms of our end markets industrial was 23% of diode product revenue automotive, 18% computing, 25% consumer 20 per cent and communication and 14% of product revenue, our automotive and industrial end market combined totaled 41 person.
Emily Yang: After the first quarter product revenue, representing the eighth consecutive quarter above our target model of 40% now let me review the end markets in greater detail.
Emily Yang: Starting with the automotive market, revenue was 18% of our total product revenue, which was flat to last quarter on a percentage basis. The slowdown in demand, along with inventory rebalancing, continued in the first quarter, and we expect this will continue into the second quarter.
Emily Yang: Starting with automotive market revenue was 18% of our total product revenue, which was flat to last quarter on a percentage basis.
Emily Yang: Slowdown in the demand along with inventory rebalancing continued in the first quarter and we expect this would continue into the second quarter.
Emily Yang: But our demand creation momentum continued with expanding design-in and design-win across multiple applications. Our focus on connected driving, comfort, style, safety, and electrification continued as we introduced 44 new automotive products in the first quarter with a focus on applications such as EV protection, high speed and high bandwidth automotive Ethernet network protection, battery management system, Wi-Fi telecommunication, and infotainment. We're also expanding our solutions within electric and hybrid electric vehicle subsystems, including battery chargers, onboard chargers, high-efficiency DC-DC converters, motor drivers, and traction inverters.
Emily Yang: But our demand creation momentum continued with expanding besides E N design wins across multiple applications.
Emily Yang: Our focus on the connected driving comfort style safety and electrification continued as we introduce 44, new automotive products in the first quarter with a focus on applications such as E V protection high speed and high bandwidth automotive Ethernet network.
Emily Yang: Texan battery management system, Wifi telecommunication and infotainment.
Emily Yang: We're also expanding our solutions with the electric and hybrid electric vehicles sub systems, including battery Chargers onboard Chargers high efficiency D. C. D C converters motor drivers and traction Inverters.
Emily Yang: Additionally, the adoption of Diodes USB Type-C re-drivers, Display Alternative Active Crossbar Muxes, and MIPI switches has increased significantly in the rear seat entertainment, smart cockpit, ADAS, and camera monitor systems. And our PCI Express Gen 6 clock generators, crystal oscillators, and TVS products are being designed into various ADAS platforms. We also continue to see momentum and design wins for rectifiers, switches, diodes, and DC products in infotainment, ADAS, and telematics. Also, within automotive, our linear LED drivers are designed in headlights and EV high beam, low beam applications, while our TVS products are being designed in for power line protection in the headlights, steering control modules, and daylight running lights.
Emily Yang: Additionally, the adoption of the highest USB type C. Retry first display alternative active crossbar Max's and me piece switches have increased significantly in the rear seat entertainment smart cockpit, eight deaths and camera monitoring systems and our PCI Express Gen six.
Emily Yang: Clock generators Crystal oscillators and T V. S products are being designed into various Adas platforms. We also continue to see momentum and design win for our rectifiers switches stylus and D. C. D C product in infotainment Adas and telematics.
Emily Yang: Also within automotive our lenient L. E D. Dry first when do you size in headlights and E V high been lobbing applications, while our T. V. S products are being designed in for power line protection into headlight staring control modules and daylight running lights are hall switches and Lexus.
Emily Yang: Our hall effect switches and latches continue to gain design in, design win, and revenue growth momentum for cooling water pumps and window lift controls. In the industrial market, first quarter revenue represented 23% of total product revenue, which was also flat to the last quarter, but down in terms of revenue, as the inventory rebalancing continued during the quarter, and this may last into the second half of the year, despite the slowdown.
Emily Yang: To gain design E design wins and revenue growth momentum for cooling water pumps and window lift controls.
Emily Yang: In the industrial market first quarter revenue represented a 23% of the total product revenue, which was also flat to the last quarter, but down in terms of revenue as the inventory rebalancing continues during the quarter and this may last into the second half of the year.
Emily Yang: Despite the slowdown we continue to focus on expanding our design pipeline and application opportunities specifically doing the quarter R. L. D. O has continued to gain traction in fence power tools and E metering applications, well rectify our switching diodes silicon carbide power MOSFET.
Emily Yang: We continue to focus on expanding our design pipeline and application opportunities, specifically during the quarter. Our LDOs continue to gain traction in fans, power tools, and e-meter applications, while rectifier and switcher diode silicon carbide power MOSFETs are being used in power tools, power storage, solar inverters, and high-efficiency LED backlighting. We also continue to win designs with our PSO driver portfolio in smoke detectors and alarm applications. In the industrial market, we're seeing adoption of HDMI MUXes and DisplayPort, HDMI re-drivers, and LED drivers in commercial displays, highway signs, and conference TV applications. We're also seeing traction for silicon carbide products in HVAC, energy storage systems, power factor correction, and server power supplies. Additionally, our compact image sensor has new design ways in automated optical inspection applications.
Emily Yang: Being used in the power tools power storage solar Inverters and high efficiency L. E. D. By late teens. We also continued to win designs with our P. A so dry for a portfolio in smoke detectors and alarm application.
Emily Yang: Also in the industrial market, we are seeing adoption of H D M Imax's and display Port HDMI Retry first and Al you do dry first in the commercial display highway size and conference TV applications. We're also seeing traction for silicon carbide products in H V AC energy Star.
Emily Yang: <unk> system power factor correction and surfer power supplies.
Emily Yang: Additionally, our compact image sensor had new design waste and automated optical inspection applications.
Emily Yang: In the computer market, like I mentioned earlier, inventory is healthy, and we expect to see a gradual improvement in revenue, especially in the AI server areas, with signs of stronger backlog in Asia. From a design momentum point of view, our signal integrity and connectivity products continue with increased adoption of HDMI, USB-C, MIPI, EDP redrivers and switches, along with USB-C power switches and TVS in applications including workstations, gaming, notebook, desktop, docking stations, and tablets.
Emily Yang: In the computer market like I mentioned earlier inventory is healthy and we expect to see a gradual improvement in revenue.
Emily Yang: Especially in the AI surfer areas with signs of stronger backlog in Asia from a design momentum point of view, our signal integrity and connectivity products continue with increased adoption of HDMI and USB C. Meet P. E. D. P V dry first and switches along with you.
Emily Yang: S. B C power switches and T V S in applications, including workstation gaming notebook desktop docking stations and tablets.
Emily Yang: We also saw new design ins and production ramping for PCI Express Gen 3 packet switch, PCI Express clock buffers, TVS, rectifier, and switch diodes in Surfer, artificial intelligence surfers, and data center applications. We also secured design wins and revenue growth for Hall effect latch switches in DC fans, LED drivers in keyboard lighting, and contact image sensor for multi-function printers. Turning to the communication market, on the enterprise side, due to slower than expected demand, the inventory depletion rate has been slow, and we expect this may last into the second half before returning to healthy levels.
Emily Yang: We also saw new designs and production ramping for PCI Express Gen. Three packet switch PCI Express clock buffers T V S wretched fire and switches styles in surfer artificial intelligence surfers and datacenter applications. We also secured design wins and revenue growth.
Emily Yang: Hall effect latches switches in D C fence L E D drivers and keep our lighting and contact image sensors for Multifunction printers.
Emily Yang: Turning to communication market on the enterprise side due to slower than expected demand the inventory depletion rate has to be slow and we expect this may last into the second half before returning to a healthy levels on the smartphone side, even though inventories clean that recovery.
Emily Yang: On the smartphone side, even though inventory is clean, the recovery is likely to be gradual over the coming quarters. On the design side, our camera-fresh LED driver rectifiers, cloud buffers, and LDOs are designed into and ramping up in the smartphone and 5G equipment, while TVS products are being designed into smartphone battery protection applications. We have several design wings for crystal oscillators in optical transceiver modules and Hall effect switches in true wireless stereo technology for earbuds.
Emily Yang: It will likely to be gradually over the coming quarters.
Emily Yang: For the Dci side, our camera a fresh L. E D driver Rectifiers club buffers and L. D. O is with the signing and ramping up in the smartphone and five G equivalents well T. V. S products are being designed into smartphone battery protection applications. We have several design wins for Crystal oscillators.
Emily Yang: In optical transceiver modules and how you fast switches in true wireless stereo technology for ear box.
Emily Yang: And lastly, in the consumer market, similar to the PC market, inventory is relatively clean. Even though overall demand is not as strong as we expected, we still expect some of the new designs will start to ramp up in Q2 and peak in Q3. Our buck converters, LED drivers, and MOSFETs are being designed into several smart home, IoT, and virtual reality projects, while our LDOs saw new design wins in smart watches. Also, our rectifiers, switch diodes, load switches, and buck converters were designed in and ramped up during the quarter in televisions and monitors.
Emily Yang: And lastly in the consumer market similar to the PC market inventory is relatively clean even though the overall demand is not as strong as we expected we still expect some of the new design wins start to ramp in Q2 and peak in Q3.
Emily Yang: Buck converters L E D drivers and MOSFET are being designed into Sepharose smart home I O T and virtual reality projects well R. L. D O solid new design wins in smart watches also our retro fires switched iOS and low switches and Buck converters with Esign E.
Emily Yang: And ramping up during the quarter in TV and monitors. We are also seeing traction for USB type C. D. P re timers in USB type C. After cable and docking station applications.
Emily Yang: We are also seeing traction for USB Type-C DP retimers in USB Type-C active cable and docking station applications. In summary, as indicated by our second quarter guidance, we are expecting a return to seasonal growth based on the demand improvement and channel inventory stabilization that we have begun to see, specifically in the 3C market. As demand improves further across all our end markets, we expect growth margin to benefit from increased loading of our internal facilities as we qualify more products, while also benefiting from our product mix improvement initiatives by expanding revenue contribution from our higher-margin automotive and industrial solutions as those markets recover and resume growth. With that, we now open the floor to questions, Operator.
Emily Yang: In summary, as indicated by our second quarter guidance, we are expecting a return to seasonal growth based on the demand improvement and channel inventory stabilized station that we'd begin to see.
Emily Yang: Specifically industry C markets.
Emily Yang: As the demand improves further across all our end markets. We expect gross margin to benefit from increased loading of our internal facilities as we qualify more product while also benefiting from our product mix improvement initiatives by expanding revenue.
Emily Yang: From our higher margin automotive and industrial solutions as those markets recover and we assume growth with that we now open the floor to questions operator.
Emily Yang: Yeah.
Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. And if you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw a question, please press star, then 2. At this time, we will pause just momentarily to assemble our roster. And our first question today will come from David Williams of Loop Capital. Please go ahead.
Speaker Change: We will now begin the question and answer session.
David Neil Williams: To ask a question you May press Star then one on your telephone keypad.
David Neil Williams: And if youre using a speakerphone please pick up your handset before pressing the keys.
Operator: To withdraw your question. Please press Star then two.
David Neil Williams: At this time, we will pause momentarily to assemble our roster.
Operator: Okay.
Operator: And our first question today will come from David Williams with loop capital. Please go ahead.
David Neil Williams: Hey, it's actually David from Benchmark, but thank you. So, I appreciate you taking the time to answer the question here.
David Neil Williams: Hey, Thanks, Dave benchmark, but thank you so.
David Neil Williams: Taking the question here I guess one of the things I wanted to ask about is just on the gross margin.
David Neil Williams: I guess one of the things I wanted to ask about is just the gross margin. And I know last quarter, 34 was kind of what we thought it would be. I thought that'd be the bottom.
David Neil Williams: Last quarter 34 was kind of what we thought it would be I thought that would be the bottom and it felt like there was a healthy level of utilization charges that were baked into that but it seems like we saw a little bit more pressure. So I guess, if you were looking at the puts and takes there on the margin how much of that was utilization versus pricing.
David Neil Williams: And it felt like there was a healthy level of utilization charges that were baked into that, but it seems like we saw a little bit more pressure. So I guess if you were looking at the puts and takes there on the margin, how much of that was utilization versus pricing in the quarter?
David Neil Williams: In this in the quarter.
Emily Yang: Yeah, Dave, this is Emily. I think in general, we've seen the pricing stabilize, right? So the majority of the contribution of the challenge is really from the underloading pressure, both due to the decrease in revenue. So it naturally decreased some of the loadings to our own factory, as well as the manufacturing service agreement.
David Neil Williams: Yeah. So state. This is Emily I think in general we see the pricing stabilized right. So Oh majority off the contribution of the challenge is really from the under loading pressure. Both you know due to the decrease of revenue. So naturally decrease some of the loadings.
Emily Yang: Through our own factory as well as the manufacturing surface agreement.
David Neil Williams: Okay, but you sound like you're fairly confident in that returning to that 40% kind of target over time. I guess, can you talk about how quickly that can return and how much utilization will help you in the next quarter as we kind of think about that revenue beginning to grow?
Emily Yang: Okay.
Dave: Felt like you're fairly confident in that returning to that 40% kind of target over time I guess can you talk about how quickly that can return in and how much utilization will help you in the next quarters, we kind of think about that revenue beginning to grow.
Emily Yang: Yeah, so I think, you know, a couple of factors driving the margin improvements, right? So obviously, you know, driving underloading utilization is one of the key initiatives. As the markets start returning revenue, that would naturally improve some of the loading. We also have been talking about aggressively importing and qualifying some products into our own factory to really improve the overall load, supporting our hybrid manufacturing model, right? So that is definitely ongoing on track.
David Neil Williams: Yeah. So I think there's a couple of factors driving the margin improvement right. So of yes, you know driving the under loading utilization is one of the key initiative as the markets start returning revenue improve that would naturally improve some of the loading. We also have been talking about aggressively our porting.
Emily Yang: And some products into our own factory to really improve the overall loading supporting our hybrid manufacturing model right. So that is definitely ongoing on track and so we believe with all this going all right. It definitely would naturally improve the under loading situation at the same time.
Emily Yang: And so we believe with all this going on, right, it definitely would naturally improve the underloading situation. At the same time, product mix improvement has been a key initiative, right? There are a couple of ways to look at it.
Emily Yang: And product mix improvement has been a key initiative right. There's a couple of ways to look at it we talk up all new product introduction, Oh, just 2023 alone we introduced a lot of the automotive customer automotive products and we want to continue to expand our portfolio that would naturally continue to have.
Emily Yang: We talk about new product introductions. You know, in just 2023 alone, we introduced a lot of automotive products. We want to continue to expand our portfolio. That would naturally continue to help us to support our market expansion, right? And also content expansion.
Emily Yang: Help us support our market expansion right and also compound expansion are we also talk about and the law and power discrete that will continue to be the key focus you.
Emily Yang: We also talk about analog and power discrete. That will continue to be the key focus. You know, of course, a lot of new products also concentrated their focus in this area. We also talk about Paracon Semiconductor products, which will continue to be a key focus for us. So that's kind of part of the analog plus the power discrete focus. In a different area, we talk about the auto-industrial focus, right? So I will also talk about it.
Emily Yang: You know of course, a lot of new product also a concentrated focus in this area. We also talk about Paragon semiconductor products that will continue to be a key focus for us that's kind of part of the N of law plus a powered just discrete focus from a different area, we talk about auto industrial focus right.
Emily Yang: So we I also talk about it it's 41% by the end of last quarter, which is eight consecutive quarters above the 40% model when the auto industrial AR inventory rebalancing getting improve our you know we strongly believe that with the momentum in the pipeline we have.
Emily Yang: It's 41% by the end of the last quarter, which is eight consecutive quarters above the 40% model. When the auto-industrial inventory rebalancing gets improved, you know, we strongly believe that with the momentum and the pipeline we have in place, that will continue to drive the percentage improvement in this area. So if we continue to do all this, plus the manufacturing efficiency improvement, including cost downs and stuff like that, we are confident that the margin will go back to the right momentum, right?
Emily Yang: Up in place that will continue to drive the percentage improvement in this area. So if we continue to do all this and plus and manufacturing efficiency improvements, including the cost downs and stuff like that you know we are confident that the margin will you know going back to the right momentum right.
David Neil Williams: Fantastic. Thanks for all the color.
Speaker Change: Okay. Thanks for all the color just one quick last one if I may are you seeing any demand impact in the China region, specifically from some of the.
David Neil Williams: Domestically sourced component quotas, if they've initiated is that.
Speaker Change: What's happening down your demand are you seeing anything in that area yet. Thank you.
David Neil Williams: Just one quick last minute, if I may, are you seeing any demand impact in the China region specifically from some of the domestically sourced component quotas that they've initiated? Is that happening to your demand? Are you seeing anything in that area yet? Thank you.
Speaker Change: So Dave can you repeat are you, saying, China Cotai I want to make sure I hear it correctly.
Emily Yang: So, Dave, can you repeat that? Are you saying China quota? I want to make sure I hear it correctly.
David Neil Williams: Yeah, just the quota in terms of domestically sourced components. We're hearing that from a couple of other companies and just curious if you're seeing that or if that is something that's impacted your business.
Emily Yang: Yeah, just the quota in terms of domestically sourced components.
Dave: We're hearing that from a couple of other companies and just curious if youre seeing that or if that is something that's impacted your business here at all yet.
Emily Yang: Yeah, I think, you know, I mean, definitely, we talk about the competition from China, directly or indirectly related to the quota, right? So I think at the end of the day, if our product doesn't really have a strong differentiation, if it's not the features and functions, and then we end up with a lot of competitors from the other region, these are the products and also business, you know, will face or continue to face a lot of challenges, right?
Dave: Yeah, I think you know I mean definitely we talk about the competition from China. So rally are indirectly related to the Cotai right. So I think at the end of the day, if our product doesn't really have a strong differentiation. If it's not the feature functions and then we ending up with a lot of competitors from the other region.
Emily Yang: This are the products and also business.
Emily Yang: We will face or continue to face a lot of challenge right. So you know our strategy specifically in China has been more focusing all the technology and the product differentiation I don't really believe all the American company are impacted it's all down to the level of the product.
Emily Yang: So, you know, our strategy specifically in China has been more focused on technology and product differentiation. I don't really believe all American companies are impacted. It's all down to the level of the product and the technology, right? So I would say, you know, definitely, there is some impact, but I would say it's probably more on a small scale. Right, right, right, right. Actually, you know, as you know, the total revenue of China really, you know, especially like China, local, local does not really take a bigger, bigger percentage of Taiwan's total revenue.
Emily Yang: And the technology right. So I would say you know definitely there are some impact, but I would say, it's probably more on the small scale right right right right actually you know as you know the total revenue out of a China I really you know, especially about China and local local desk and I'm ready to take a bigger and bigger percentage dropped how everybody was total revenue so the.
Emily Yang: So the impact is relatively small because, you know, we have a lot of customers in China, but they produce the product; it's really an OEM or like an international transfer business. So I do believe in this area we're pretty firm in our position.
Emily Yang: You can pass through yes, relatively small because you know we have a lot of customers in China, but they produce that product is really OEM are lagging international no transfer of business. So I do believe in this area, we're pretty firm our position.
Speaker Change: Thank you.
Emily Yang: Yeah.
Operator: And our next question will come from Gary Mobley with Wells Fargo. Please go ahead.
Emily Yang: And our next question will come from Gary Mobley with Wells Fargo. Please go ahead.
Gary Wade Mobley: Hey everyone, thanks for taking my question. I wanted to start with a clarification request and then a related question. So when you speak of the qualification of new products to become more vertically integrated, I assume you're talking about the qualification at the Portland FAB, which you picked up from ON SEMI, and the Greenwich facility you picked up from TI. Is that correct? And then related to the MSAs that you have with those two particular parties, can you give us a sense of how those will evolve over time, how you will slowly transition those facilities over to your own internal manufacturing, and maybe what some of the minimums are with those parties and how those minimums will go down over time?
Gary Wade Mobley: Hey, everyone. Thanks for taking my question.
Gary Wade Mobley: Where to start with a clarification.
Gary Wade Mobley: A clarification request and then a related question.
Gary Wade Mobley: So when you speak of the qualification of new products to become more vertically agree I assume you're talking about.
Gary Wade Mobley: The.
Gary Wade Mobley: The.
Gary Wade Mobley: Qualification at the Portland, Fab, which you picked up for more in Sydney and the granite facility you picked up from Ti.
Gary Wade Mobley: Is that correct and then related to the Msas that you have at those two particular parties can you give us a sense of how those evolved over time, how you will slowly transition those facilities over to your own internal manufacturing and maybe what the some of the minimums are.
Gary Wade Mobley: With those parties and how those minimum go down overtime.
Gary Yu: Hi Gary. This is Gary.
Gary Wade Mobley: Hi, Gary This is Gary So I think I know for years, we have been we have a manufacturing service agreement in place for our OEM customer in both a T and a hungry survey so the only limit on the foundry service just want make sure. It makes sure that we understand that.
Gary Yu: So, I think, you know, for years, we have a manufacturing service agreement in place to support our OEM customers in both AT and the foundry service. So, not only limited to the foundry service; just want to make sure that we understand that. And, you know, their loading can be adjusted, you know, time to time by their end demand and inventory status. With that, we do see some impact on revenue and GP from the third quarter last year, but, you know, not much we can control that. I cannot disclose too much detail about that, just in case you have any questions related to that kind of demand or not.
Gary Yu: And you know theyre loading can be a Jeff you know time to time by their end demand. It embodies this with data we do see some impact on revenue N. G. P from third quarter last year, but you know not much we can control that but you know I cannot disclose too much detail about that just in case you have any classroom. They took that kind of demand or not however, you know what we're working very hard in the past.
Gary Yu: However, you know, what we've been working very hard on in the past couple of years is continuing to offload our outside loading from our partner, you know, in the different foundries and continue to qualify internally and get our key customer approval. But, as you know, you're absolutely correct about those kinds of SPFAT, you know, and GFAT for TI, and we are doing our best to qualify our technology and our product over there.
Gary Yu: A years is continue to low offload all outside loading found the our partner you know in the DRAM foundry and continued qualifying turnover and they get all key customer approval, but as you know in that Youre, absolutely correct for those kind of F T spot.
Gary Yu: Semi and E T I and we are doing our best to qualify our technology in a part of our Dear, but you know at the same time, we do need to have our customer to prove our P. C. Yet to change wafer fab that take a little bit longer time, now, especially after the Kobe and that demand you know something that at this moment you know the cost about willingness.
Gary Yu: But, you know, at the same time, we do need to have our customer approve our PCN to change wafer fat. That takes a little bit of a longer time, you know, especially after COVID and the demand, you know, softening at this moment. You know, the customer willingness to change, you know, the PCN or change a different wafer fat or site will be much slower than the time we have a shortage area. Okay, this is what you need to understand.
Gary Yu: The attention you know the PCN I'll check that different what's up at our site will be much slower than that time, we have a shortage area. Okay. That's the way you need to understand but the sofa or progress in trying to call up which means very good and we do see some project a head up our drill schedule as I can tell you at this point. So so just like Emily starting now.
Gary Yu: But so far, overall progress, internal cooperation is very good, and we do see some projects ahead of our original schedule, as I can tell you at this point. So, just like Emily said, you know, at this moment, we do see the loading, you know, risk, you know, on those two wafer fats, as well as some loading in our assembly site. But in the near future, I do believe, and I have very high confidence, those new products can be qualified at both our site and our customer site at Star Rampart.
Gary Yu: We do see that the loading you know risk you know those two wafer stop and smell some loading in somebody side, but you know the only future I do believe and I do have a very good confidence those new product can be qualify in both of our site and all customer site and start ramp up.
Speaker Change: Okay. Thanks for that Gary.
Gary Yu: As a follow-up, I do have another clarification question with respect to the green shoots of improving demand. Should I assume that it's primarily on the 3C side of the market as inventories have been normalized there? And given that those businesses, you know, are your most seasonally sensitive businesses and you're seeing green shoots of that demand, would you expect this normal second half seasonal pattern where the third quarter's up maybe high single digit percent sequentially, and the fourth quarter down mid-single digit percent sequentially? Yeah, so, Gary, this is...
Speaker Change: As a follow up I do have another clarification question.
Gary Yu: With respect to the green shoots of improving demand.
Gary Yu: Should I assume that's primarily on the three CS side of the market is as inventories have been normalized there.
Gary Yu: And given that those businesses are you most seasonally sensitive businesses and you're seeing green shoots in demand would you expect the normal second half seasonal patterns, where the third quarter's up maybe.
Gary Yu: Maybe high single digit percent sequentially, the fourth quarter down mid single digit percent sequentially.
Emily Yang: Yeah, Gary, this is Emily. Let me answer the question, right? So I think I talked about it before, right? So what we're seeing is an automotive inventory rebalancing will probably continue into the second quarter because it's not across the board. Customer, part, and program vary a lot. So it's not going to be like one way or the other. It's going to evolve, right? Change.
Gary Yu: Yeah. So Gary this is Emily let me answer the question right. So I think I did talk about it before right. So why are we seeing is automotive inventory rebalancing will probably continue into the second quarter, because it's not across the board customer and part in programs. There is a lot. So.
Emily Yang: It's not going to be like one way or the other so it's going to gradually change industrial because it's a broad market. So most likely the correction was you know laughs at into the second half of the year right three see from the computing point of view inventory is clean.
Emily Yang: And we do expect you know the second quarter as well as the second half stronger than the first half from the consumer side I think overall demand still so lower than our expectation, but we still expect it some of the new program will start ramping in the second quarter and peak in the third quarter right and then.
Emily Yang: From the consumer side, I think overall demand is still slower than our expectations, but we still expect some of the new programs will start ramping in the second quarter and peak in the third quarter, right? And then, because of the holiday bill, usually the fourth quarter, maybe only half a month or a month only benefit from this market segment. And then from the communication point of view, right, the networking, the telecoms, I think the demand is more on the slow side, so the inventory correction is actually slower to digest the inventory, and it will probably last into the second half of the year. It depends on the customers as well.
Emily Yang: Because of holidays big deal, usually fourth quarter, maybe only have months and months only benefit from this market segment.
Emily Yang: And then from the communication point of view right of networking the telecoms I think that demands more on the slow side. So the inventory correction is actually a slower to digest the inventory and it will probably laughing until the second half of the year depends on the customers as well.
Emily Yang: On the smartphone side, I think it's driven by demand, and, you know, overall, I would say the demand is still slower than expected. But all adds up, we actually strongly believe that Q2 will be a stronger quarter than Q1. That's the reason we actually guided 4.6%. We also believe the second half of this year will be better than the first half, right? So that's still, you know, we actually, based on what we have as a backlog, we look at the book-to-bill ratio, we look at different factors, you know, so I would say yes to your question.
Emily Yang: On the smartphone side I think it's driven by the demand and our you know overall I would say the demand is still slower than the expectation, but with all adds up we actually strongly believes that Q2 will be a stronger quarter than Q1. That's the reason we actually guided for six.
Emily Yang: We also believe second half of this year will be better than the first half right.
Emily Yang: So that's still a you know we actually based on what we have as a backlog we look at the book to Bill ratio. We'd look at different factors are you now so I would say, yes to your question. The second half will be stronger than the first half we are not here to call out the percentage off the <unk>.
Emily Yang: The second half will be stronger than the first half. We are not here to call out the percentage of the improvement, right? Because I think there's still a lot of uncertainty going on in the market, but if you combine both, the second half is better than the first half for sure.
Emily Yang: Proof man right, because I think there's still a lot of uncertainty going on in the market, but if you combine both second half is better than the first half for sure.
Speaker Change: Thank you.
Operator: And again, if you have a question, you may press star, then 1 to join the queue. Our next question will come from Tristan Gerra with Baird, please go ahead.
Emily Yang: And again, if you have a question you May press Star then one to join the queue.
Tristan Gerra: Our next question will come from Tristan <unk> with Baird. Please go ahead.
Tristan Gerra: Hi, good afternoon. Are you able to quantify the percentage of the product that you're migrating to internal manufacturing on the front end? What is the percentage that you're currently outsourcing? What will that percentage be as you qualify more product internally? And is that mostly for your analog product as opposed to discrete?
Tristan Gerra: Hi, Good afternoon are you able to quantify the percentage of the product that you're migrating to internal manufacturing on the.
Tristan Gerra: And what is the percentage that you are currently outsourcing.
Tristan Gerra: What that percentage will be as you qualify more product eternity and is that mostly for you ended up product as opposed to discrete.
Tristan Gerra: Yeah.
Brett R. Whitmire: Tristan, on this one, I think what you'll see is what we're doing, it's a blend of both our analog and our discreet that we're bringing inside. What we're really trying to do is, you know, the technology nodes that run at a decent volume that are right down the fairway, making sure we have flexibility inside and out. And as we've been doing in the past, really, we look at wanting to be able to insource between 50 to 60%, you know, and during softer times, we'd like to run that higher.
Speaker Change: Oh interesting on this one I think what you'll see is what were it's a blend of both our analog and our discrete that we're bringing inside what we're really trying to do is.
Brett R. Whitmire: Two technology nodes that run at a decent volume that are right down the fairway, making sure we have flexibility inside and out and as we've been doing in the past really we look at wanting to be able to in source between 50% to 60% you know enduring softer times, we'd like to run that higher and we'd want to make sure.
Brett R. Whitmire: And we want to make sure that we have SP Fab and the Green Up Fab being able to carry the brunt of that because they're kind of our foundational fabs across the two different platforms we have. And that's really where the initiative is, not being so dispersed and spread out but really getting integrated into those factories and really trying to drive leverage, both from a cost and scale perspective, and being able to drive both revenue opportunities as well as cost over time. So that's kind of what we see. Right? And also, I want to...
Brett R. Whitmire: That we have S P fab and the green Dot fab being able to carry the brunt of that because they are kind of our foundational fabs across the two different platforms, we have and that's really where the initiative is just not being so dispersed and spread out, but really getting integrated into those factories and really trying to buy.
Brett R. Whitmire: Leverage both from a cost and scale and being able to be able to drive both revenue opportunities as well as cost over time. So that's kind of what we see right and also I want to clarify that you send out the hunter person phone those to face a transfer from outside to inside we do have a newer technology really tape out in those two wafer fab you know starting from zero. So that's really good news.
Gary Yu: Right, and also, I want to clarify, Tristan, that it's not 100% from those two phases to transfer from outside to inside. We do have a newer technology really taken out in those two wafer phases, you know, starting from zero. So, that's really good news for us. So, when we say that, you know, it does not mean 100%. No, we are uploading from the outside boundary factory. So we do have our internal technology and product taped out and released in these two particular wafer fabs.
Gary Yu: So when we say that you know it does not mean, 100% no. We are uploading found that the outside voluntary factory.
Gary Yu: So we do have our internal technology on product tape out and their belief in this particular wafer fab.
Tristan Gerra: And then just following up on the commentary about inventories, in the Q2 guidance that you're providing, do you expect to build additional inventories on your books, or do you think that as you reduce your utilization rates in the quarter, you're now building in line with actual land demand? And then, secondarily, could you talk about what point of sale, at this stage, is embedded in your Q2 revenue guidance?
Speaker Change: Great. That's very useful and then just following up on the commentary about the inventories.
Tristan Gerra:
Tristan Gerra: In the in the Q2 guidance that you're providing do you expect to build additional inventories on your books or do you think that as you reduce your utilization rates.
Tristan Gerra: In the quarter Youre now building in line with actual end demand.
Tristan Gerra: And then secondarily could you talk about at what point that sales force.
Tristan Gerra: This piece is embedded you our Q2 revenue guidance.
Brett R. Whitmire: Yeah, I'll make a couple of comments, Tristan, and then let Emily run with some others. Is that what I'd say on the inventory front is that we basically have done some things in the first quarter that address needing to make sure we have availability in place, addressing uncertain order patterns, addressing the fact that Chinese New Year came in February, which is a much more difficult time to manage that across the quarter and have availability in place.
Speaker Change: Yeah, I'll make a couple comments Tristan and then let Emily run with some others is that what I'd say on the inventory front is that we basically have done some things in first quarter that address needing to make sure we have availability in place addressing uncertain order patterns addressing them.
Brett R. Whitmire: Fact that Chinese new year came in February which is a much more difficult time to manage that across the quarter and have an availability in place and as we look out in second quarter.
Brett R. Whitmire: And as we look out in the second quarter, what we expect is essentially to be running at a level of what we expect demand to be. I don't expect to be building inventory internally. And what we certainly don't expect to be building inventory externally. We continue to expect to make progress there. And we continue to see good activity from a PLS perspective. And maybe I'll see if Emily wants to extend that comment at all. Yeah,
Brett R. Whitmire: What we expect is essentially to be.
Emily Yang: Running at a level of what we expect demand to be I don't expect to be building inventory internally and what we certainly don't expect to be building in turn inventory externally. We continue to expect to make progress there and we continue to see good activity from a P O S perspective and maybe.
Brett R. Whitmire: I'll see if Emily wants to extend that comment at all yeah. So Tristan to answer your question. When we provided Q2 guidance guidance, we do consider the point of Dallas, our forecasts as well as the channel inventory situation. So and then that coupled with the backlog and then some other.
Emily Yang: Yeah, so Tristan, to answer your question, when we provide the Q2 guidance, we do consider the point of sale forecast as well as the channel inventory situation. So, and then that, coupled with the backlog and then some other things that we've seen. So, yeah, it is included in our estimate.
Emily Yang: Things that we see so yeah. It is included into our estimate.
Tristan Gerra: Okay, and then maybe a quick third and last question. I'll go back in the queue, but can you say where your utilization rates are currently at the front end and what type of internal inventory days you need to see on your book before you start ramping up utilization rates again? Well, I would say...
Speaker Change: Okay, and then if I could.
Speaker Change: Maybe a quick third and last question.
Speaker Change: Otherwise I'll go back in the queue, but can you say where your utilization rates are currently at the fault and.
Tristan Gerra: And what type of internal inventory days you'd need to see on your book before you start to ramping utilization rates again.
Speaker Change: Thank you.
Tristan Gerra: Well I would say that.
Brett R. Whitmire: Well, I would say that, um... We haven't really been communicating our utilization rates, but, relatively speaking, what I would say is that, you know, we like to run our assembly tests in the mid-90s, and we like to run the fabs in the mid-80s, and we're not in that place on either one. We're significantly below that, and we believe that as things pick up and we continue to see, you know, strength, that's going to be a tailwind for us, being able to load our factories.
Tristan Gerra: We haven't really been communicating our utilization rates, but relatively speaking what I would say is that you know we like to run our assembly tests in the mid Ninety's when we like to run the Fabs in the mid eighties, and we're not in that place on either one we're significantly below that and we believe that as things pick up.
Brett R. Whitmire: And we continue to see strength, that's going to be a tailwind for us as being able to load our factories. That's not something we've been we have not maintained our utilizations across the period over the last year as we've seen the softness as we think about the utilizations over time, what we are.
Brett R. Whitmire: That's not something we've been, we have not maintained our utilizations across the period over the last year as we've seen this softness. As we think about utilization over time, what we will be, our strategy is going to be to maintain utilization consistent with demand as we move. We think we have availability in a good place. We're trying to make sure we're opportunistic. We think that's what we're going to win with that, and so that's the approach we're taking from the factory side.
Brett R. Whitmire: There will.
Brett R. Whitmire: It will be our strategy is going to be the maintain utilization consistent with demand as we move we think we have availability in a good place we're trying to make sure. We're opportunistic we think that's what we're going to win with that and so that's the approach we're taking from a factory side.
Speaker Change: Great. Thanks again.
Brett R. Whitmire: Yeah.
Operator: And our next question will come from William Stein with True Securities. Please go ahead.
Brett R. Whitmire: And our next question will come from William Stein with true Securities. Please go ahead.
William Stein: Great, thanks for taking my questions first. Perhaps I'll take another whack at the inventory question. There was a big build, again, sequentially, dollars and days. Can you remind us what the long-term inventory target is and when you'd expect to get there, approximately?
William Stein: Great. Thanks for taking my questions.
William Stein: First.
William Stein: Perhaps I'll take another whack at the inventory question there was a big build again sequentially.
William Stein: Colors of days.
William Stein: Can you remind us what the long term inventory target is and when you would expect.
William Stein: To get there approximately.
Brett R. Whitmire: I'd say on inventory, what we're looking at is trying to, when we look at our portfolio of 50,000 parts and the availability and the mix, one of the things that we were never able to do is really get availability across the breadth of our portfolio in place, especially on some of the more critical products and some of our most premium products. And so, we would actually be constrained on some of our best products in terms of availability in the near term.
William Stein: My favorite inventory, what we're what we're looking at is trying to when we look at our portfolio of 50000 parts and the availability and the mix one of the things that we were never able to do is really get availability across the breadth of our portfolio in place, especially off.
Brett R. Whitmire: Some of the more critical products in some of our most premium products and so we would actually be constrained some of our best products in terms of availability near term and so what we've done across this period and you can see it you know last couple of quarters as we start to get a feeling that we're coming out.
Brett R. Whitmire: And so, what we've done across this period, and you can see it, you know, in the last couple of quarters, is as we start to get a feeling that we're coming out, seeing light at the end of the tunnel, making sure we're in a position that from availability within that, you know, you know, six to eight weeks, we want to have a reasonable mix of product off the shelf. And that is something we're actively working on.
Brett R. Whitmire: Seeing light at the end of the tunnel, making sure we're in a position that from availability within that you know six to eight weeks. We wanted to have a reasonable mix of product off the shelf and that is something we're actively working on we're actively both our shelf where actually work and availability.
Brett R. Whitmire: We're actively, both ourselves, and we're actually working on the availability mix with our distributor. We see progress on that, and Emily mentioned it. And I think from weeks of inventory at finished goods, that's not something we're strategically planning to increase. As we actually see things start to lift, our goal would be to try to maintain that as we move through maintaining utilization with demand and be able to basically have an advantage in availability. We think our service will be an advantage over time, and certainly if we have availability there, we think that's going to be an opportunity to gain share and to get momentum as demand picks up.
Brett R. Whitmire: With our distributor we see progress on that and then when you mentioned it and I think from a.
Brett R. Whitmire: Weeks of inventory of finished goods, that's not something we're strategically play.
Brett R. Whitmire: Planning to increase as we actually see things start to lift up our goal would be to try to maintain that as we move through maintain utilization with demand and be able to basically have an advantage on availability, we think our services as an advantage over time and certainly if we have availability there we think that's going to be.
Brett R. Whitmire: Our opportunity to gain share and to get momentum.
Brett R. Whitmire: As demand picks up.
Gary Yu: Yeah, actually, you know, we do see more and more surely time PO coming in and really the demand we saw starting from the end of the first quarter. So if we put the right mix of our inventory in our house, then we have a much better chance to support this kind of rush order.
Speaker Change: Yeah actually you know, we do see more and more surely tying P O coming in it's really that they may and we saw it starting from end of first quarter or so so if we put the right mix of our inventory in our house and we got much better chance with support is kind of a rush odor.
William Stein: Just before I go on to my next question, I just want to make sure I understand what you're saying. You're running at about 190 days of inventory. Is that – it would be, I guess, sort of unusual to hear a company at this point in the cycle say that they want to maintain that level of inventory. But maybe that's, maybe that's a great strategy. Can you just confirm my understanding, or are you meaning on a dollar basis whereby the days would shrink pretty precipitously if revenue rebounded?
Gary Yu: Uh huh.
Speaker Change: Just before I go on to my next question I, just want to make sure I understand what youre, saying youre running at about 190 days of inventory is that.
William Stein: It would be I guess sort of unusual to hear the company at this point in the cycle say that they want to maintain that level of inventory but.
William Stein: But maybe that's maybe that's a great strategy can you just confirm my understanding are you, meaning on a dollars basis, whereby the days would would shrink pretty precipitously if revenue rebounded.
Brett R. Whitmire: I think what we're saying, Will, is if you look at the mix of that by finish level across time, this has not been something that's really changed significantly in terms of the dollar investment that we've made on the raw materials side. That's something that kind of feeds our factory as well as we outsource.
Speaker Change: I think what we're saying we'll is if you look at the mix of that buy finish level across this across time. This is not been something that's really.
Brett R. Whitmire: Changed significantly in terms of the dollar investment that we've made on the raw.
Brett R. Whitmire: Raw material side, that's something that kind of feeds our factory as well as we outsource from a work in process perspective, that's something that's really kind of been adjusted as we see demand, but from a finished good perspective, we have strategically try to put a availability in place takeout.
Brett R. Whitmire: From a work in process perspective, that's something that's really kind of been adjusted as we see demand. But from a finished goods perspective, we have strategically tried to put availability in place to have a better mix of products. As demand picks up, I would imagine that at some point, that will slip away from us. But for some period of time, we're going to try to maintain that kind of six to eight weeks of finished goods availability on average.
Brett R. Whitmire: A better mix of product what would as demand picks up I would imagine at some point that that strips away from us but for some period of time, we're going to try to maintain that kind of six to eight weeks of finished goods availability on average I think that's not something we have across all the parts that we're trying to.
Brett R. Whitmire: I think that's not something we have across all the parts. The portfolio is large and broad, but I think that's what you see us trying to do. And when I say trying to maintain, I think we're going to try to hold on to the fact that we believe that having good availability is going to give us a benefit to grow on some of our most premium accounts and premium parts.
Brett R. Whitmire: The portfolio is large and broad, but I think that's what you see is trying to do and when I say trying to maintain I think we're going to try to hold on to the fact that we believe that having good availability.
Brett R. Whitmire: Is going to give us a benefit to grow them on some of our most premium accounts and premium parts.
Brett R. Whitmire: That's really helpful. I had a couple of maintenance questions. Normally, I've asked about the DISTI versus direct split, but you provided that in the presentation. I appreciate it. One of the other sort of maintenance questions is the year-over-year change in ASP, which you always have in the 10-Q. Also, I was wondering if perhaps you'd start disclosing what book to bill is in the quarter and what backlog is in the quarter. Thank you. Yeah, so let me, Will, answer the question.
Speaker Change: That's really helpful. I had a couple of maintenance question normally.
Will: Asked about the Disney versus direct split, but you provided that in the presentation I appreciate it.
Brett R. Whitmire: One of the other sort of maintenance questions is the year over year change in Asps, which you always have been.
Speaker Change: Q also.
Will: I was wondering if perhaps you'd start disclosing.
Will: What book to Bill is in the quarter and what backlog is in the quarter. Thank you.
Emily Yang: Yeah, so let me answer the question, right. So direct and distribution is 39% versus 61%. What we usually still use two-thirds versus one-third as a rough estimate because some of the quota change a little bit here and there.
Will: Yeah. So let me well, let me answer the question right. So threat and distribution is 39% versus 61%, what we usually still using to serve versus one third as a rough estimate some of the clutter of change a little bit here and there specifically you see 16.
Emily Yang: Specifically, you see 61% of the distribution for Q1. This is also reflected in my earlier discussion that we actually saw the channel inventory value decrease by the end of Q1, right? So on the weighted ASV change from year-over-year point of view, it actually dropped slightly more than 25%, but there's definitely a mixed change in there as well, right? So when we start seeing auto-industry as an example of the percentage decrease, that's actually directly impacting the weighted average, you know, price as well, right?
Emily Yang: For example, a distribution for the Q1 also reflected in my you know discussion earlier that we actually seen the channel inventory value will decrease by the end of Q1 right. So on the weighted you know S E change from year over year point of view it actually dropped slightly.
Emily Yang: More than 25%, but there's definitely a mix change.
Emily Yang: Change in there as well right. So when we start seeing auto industrial as an example from the percentage decrease that's actually that really impacting the way the average you know.
Emily Yang: Price as well right. So if we look from the mix independent point of view you know, we did actually built in a one 5% to 2% per quarter cost degradation.
Emily Yang: So if we look from the mixed independent point of view, you know, we did actually build in 1.5 to 2% per quarter cost degradation. What we've seen is actually the mixed independent ASV change is actually pretty small and definitely within the range within our estimate, right. And then how do we really balance that is really driving some of the cost down manufacturing efficiency that I mentioned earlier, right?
Emily Yang: What we've seen is actually a with the mix independent ASP changes actually I'm pretty small and definitely within the range within our estimate right and then how do we really are balanced out that's really driving some of the costs down manufacturing efficiency that I mentioned earlier right.
Speaker Change: Okay. Thank you.
Gary Yu: And this concludes our question and answer session. I'd like to turn the conference back over to Gary Yu for any closing remarks.
Emily Yang: And this concludes our question and answer session I would like to turn the conference back over to Gary <unk> for any closing remarks.
Operator: 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.
Gary Yu: 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.
Operator: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.
Gary Yu: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect your lines.