Q2 2019 Earnings Call
Good afternoon, and welcome to diodes, Incorporateds second quarter 2019 financial results Conference call. At this time all participants are in a listen only mode. At the conclusion of todays conference call instructions will be given for the question and answer session.
If anyone needs assistance at any time during the conference. Please press Star key followed by zero on your Touchtone telephone as a reminder, this conference call is being recorded today Monday August five 2019, I would now like to turn the call over to Leann Sievers of Shelton Group Investor Relations Leann. Please go ahead.
Good afternoon, and welcome to diodes second quarter 2019 financial results Conference call I'm Leanne Sievers, President of Shelton Group diodes Investor Relations firm.
Joining us today are diodes, president and CEO Dr. pay she Lu Chief Financial Officer, Bret Whitley, Vice President of worldwide sales and marketing Emily Yang and director of Investor Relations lower Merle.
Before I turn the call over to Dr. Lu I would like to remind our listeners that the results announced today are preliminary as they are subject to the company finalizing its closing procedures and customary quarterly review by the company's independent registered public accounting firm.
As such these results are unaudited and subject to revision until the company filed its Form 10-Q , four its second quarter 2019.
In addition, managements 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 Companys filings with the Securities and Exchange Commission, including Form 10-K and 10-Q.
In addition, any projections as to the Companys future performance represent managements estimates as of today August five 2019 diodes assumes no obligation to update these projections in the future as market conditions may or may not change except to the extent required by applicable law.
Additionally, the company's press release and management's statements. During this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms included in the company's press release are definitions and reconciliation 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.
For those of you unable to listen to the ink tire 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, Dotcom and now I'll turn the call over to diodes, President and CEO Dr. tissue Lu Dr. Lu. Please go ahead.
Thank you again.
Welcome everyone.
And there are some cool for joining us today.
Diodes once again, the new rig accruals multifunctional metrics in the second quarter.
Including the revenue.
Gross profit.
Uh huh.
And net income.
Gross margin also further expanded by 260 basis point you all you.
And assuming the basis point sequentially.
As a result of weaker revenue in the automotive and industrial end markets.
As well as from Olkaria outcome IC products.
Additionally, we continued to sell so it's a pretty sharp increase hopefully beauty on incremental revenue growth.
We the first hub to solve the 19 Raymond James.
Increasing 8% over the same period so you.
And.
non-GAAP net income increasing more than 40% over the same period.
Oh no.
Oh, well both monkey performance was achieved in the quarter and global trade involvement.
Sunday, There, we sold all of our peers with design wins and the extreme danger comps and we'll come back.
Over the past year, we has been stripped pits good any focus on demand creation.
And as I pouring a portal so new machine still approach.
That they've reached our border and pulled up before you'll.
Contributing to our consistent share again.
I think you do your goals proteins strategies will continue to substance that fuel future growth.
And Oh performs Oh, Oh, so mark you.
While also driving increasing pro for beauty and the kids full.
Additionally.
Oh exceptional financial performance.
Yeah, what I was.
To aggressively reduce our doomed them beds by $44 million during the quarter.
We now have a $17 million Mick post petition of cash and short term investments.
Our total objects.
For each.
Providing us increased flexibility and the opportunity to consider strategic.
Which is.
We did that.
Let me now turn the call over to Greg to discuss our second quarter financial results.
And also quarter cusano than 19 guidance in more detail.
Thanks, Dr. Lu and good afternoon, everyone.
As part of my financial review today, I will focus my comments on the sequential change for each of the line items I would refer you to our press release for a more detailed review of our results as well as the year over year comparisons.
Revenue for second quarter, 2019 was a record 322 million a 6.5% increase from $302.3 million in the first quarter 2019.
Due to continued strong performance in Europe , and North America, as well as the automotive and industrial end markets.
Gross profit for second quarter was a record $122 million or 37.9% of revenue compared to $112.4 million or 37.2% of revenue in first quarter 2019.
The 70 basis point sequential increase was primarily due to record high revenue contribution from the automotive and industrial markets as well as Pericom products.
GAAP operating expenses for the second quarter, 2019 were $73.5 million or 22.8% of revenue.
And $69 million or 21.4% of revenue on a non-GAAP basis, which excludes $4.5 million of amortization of acquisition related intangible asset expenses.
This compares with GAAP operating expenses in the first quarter 2019 of $70.3 million or 23.3% of revenue and $65.8 million or 21.8% of revenue on a non-GAAP basis.
Total other expense amounted to approximately $639000 for the quarter, including $2 million of interest expense and 496000 for foreign currency losses, partially offset by $1.2 million of other income and 633000 of interest income.
Income before taxes and non controlling interest in the second quarter 2019 amounted to $47.9 million compared to $42 million in the first quarter 2019.
Turning to income taxes, our effective income tax rate for the second quarter was approximately 23.3%.
GAAP net income for the second quarter 2019 was a record $36.3 million or 70 cents per diluted share.
Compared to $31.7 million or 62 cents per diluted share last quarter.
The share count used to compute GAAP diluted EPS for the second quarter 2019 was 51.6 million shares.
Second quarter 2019, non-GAAP adjusted net income was a record $40 million or 77 cents per diluted share, which excluded net of tax 3.7 million of non cash acquisition related intangible asset amortization costs.
This compares to non-GAAP adjusted net income of $35.4 million.
Or 69 cents per diluted share in the first quarter 2019.
EBITDA for the second quarter 2019 was a record $77.1 million.
For 23.9% of revenue.
Compared with $69.9 million or 23.1% of revenue in the first quarter 2019.
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 $40.6 million for the second quarter 2019.
Free cash flow was $8.5 million, which included $32.1 million for capital expenditures and net cash flow for the second quarter was negative $65.5 million, which includes the paydown of $44.1 million of long term debt as well as cash used to acquire Texas instruments, Greenock, Scotland fab in early April and the final payment for a building for heiress subsidiary.
Turning to the balance sheet at the end of second quarter cash and cash equivalents was short term investments totaled approximately $242 million.
Working capital was $481.2 million and long term debt, including the current portion was $171.9 million.
In terms of inventory at the end of second quarter total inventory days decreased to 100 in the quarter compared to 102 last quarter.
Total inventory dollars amounted to approximately 223 million.
Which reflects a 3.1 million increase in work in process.
A 1.8 million increase in raw materials, and a 1.5 million increase in finished goods.
After four consecutive quarters of finished good decreases finished good inventory days.
Was 26 down from 27 in the first quarter of 2019.
Capital expenditures on a cash basis for the second quarter 2019 were $32.1 million, which includes an 18.1 million final payment for a building for our air subsidiary.
Now turning to our outlook.
Building on our strong first half revenue growth of 8% over first half 2018.
During the time in which our served market was down more than 6%.
Further highlights our ability to deliver growth in a down market.
For the third quarter, we expect revenue to be approximately 324 million plus or minus 2%.
Which at the midpoint represents another quarter record and continued growth year over year as well as further outperformance of our served markets.
We expect GAAP gross margin to be 37.8% plus or minus 1%.
non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition related intangible assets are expected to be approximately 21% of revenue plus or minus 1%.
We expect net interest expense to be approximately $2 million.
Our income tax rate is expected to be 23.3% plus or minus 3% and shares used to calculate diluted EPS for the third quarter are anticipated to be approximately 52 million.
Please note that purchase accounting adjustments of 3.8 million after tax per payer calm and previous acquisitions are not included in these non-GAAP estimates.
With that said I'll now turn the call over to Emily Yang.
Thank you Brad and good afternoon.
As Dr. Lu and Brad highlights second quarter revenue grew 6.5% quarter over quarter, and 5.9% year over year as we continue to reach new record across our business and gain increasing market shares.
Looking more closely at second quarter revenue.
Point of sales revenue was up driven by the strong demand recovery in Asia.
Distributor inventory in terms of lease was flat in the second quarter and remains within our normal range of 11 to 14 weeks.
Looking at the global sales in the second quarter Asia represented 74% of revenue Europe , 14% in North America, 20%.
In terms of our end markets industrial was once again, our largest representative end market at 29% revenue communications, 23%.
Consumer, 22% computing 16, and automotive 10% of revenue during the same period in 2018 industrial was 27% communications was 23% consumer was 25% computing was 16% and automotive was 9%.
Now, let me review the end markets in greater detail.
Start with automotive market, we achieved on the quarter of record revenue as we continue to benefit from past design win activity and expanded customer contact.
As I have discussed in the past diodes has been focused on strategically deploying a total solution sales approach that leverage our broad product portfolio, which has been a key contributor to our consistent share gains and growth in this market.
From a product perspective, we had solid revenue growth in our switching diodes, Zener diodes Hall sensor mosfets and videos and proprietary SBR product families.
These products are targeted at variety of applications, including battery management system advanced driver assistance system, our eight das acoustic domain controllers air back control lighting body control infotainment display and gear shift level indicators.
During the quarter, we release, a number of new automotive grade products, including real time clock interface largely left will shift occurs and hall sensors, we saw the signings in brushless DC motor Walter Palm power window electro horn infotainment.
Wireless charges for portable equipment like mobile phones are peaking becoming a popular feature of we get colors are low boutique gate driver will be a easy Q quantified is designed into several automotive modules. We also continue to see adoption of into automotive OE.
Lighting statements, especially in France site, where site and interior lighting, where we are winning designs for our LCD drivers with a number of automotive customers with a record increase of electronics in today's highly connected cars robust SD protection is becoming increasingly more important we are seeing excellent design win momentum in the connected driving applications for protection products in applications, such as Das telematics and infotainment.
Similar to automotive market. We also continue to set new records revenue industrial end market as well.
Growing 13.7 year over year.
Together with automotive this to end market represented 39% of total revenue.
We are gaining increasing momentum in smart connected lighting and commercial spotlighting applications for our SGT mass technology, and LCD drivers Dropless and Lessdrops or skin are also driving growth in the industrial end markets for our Zener diodes, and also continue to secure more design ins with DC applications for regular transistors, eight drivers and bipolar transistors.
With a record adoption of high speed interface across multiple applications in the IOTV Marcus please.
SD protection is getting more importance what data links as well, we see multiple design wins for our data line platform, which offer best in class PSV clamping voltage performance, where our minocycline capacitance loading on the data line.
Also during the quarter, we added new products in similar package with DC to DC converter that are suitable home applications power tools and other industrial applications. Our newly released why in our Dsos are gaining strong momentum in this market, especially for E meters and detector applications as well as DC to DC converters in solar inverter applications and high voltage Hall sensor in power tools.
Turning to consumer market diodes protection products continue to gain traction all type of panel applications, our new miniature Super high surgical saumen to protect our product has been designed into year falls, where both portable devices Tvs smart speakers.
We also saw significant revenue growth, what BGT products, driven by TV and monitor design wins.
We also secure increasing design wins for our standard recovery ratified.
Low voltage hall sensors, and TV products in large panel TV.
Cloud based cameras robotic vacuum and lawnmower Wow switching diodes has solid growth in white goods home appliances are zener diodes also designed into smart thermostat as well as power its phone system.
I will also continue to gain strong momentum in quick charger and direct charger application with our U.S. power delivery solutions, which help reduce the charging time of batteries.
We also continued to gain increasing traction in virtual reality applications, where our newly released and first in the market integrate to high speed Maxpoint Usdthree Dot one and you asked me to that all are seen new design wins.
In the communication marquee attraction from Threeg to Fourg and Dan Fourg to Fiveg has become the major trend to meet the requirement of significant speed upgrades and large amount of bandwidth.
Our products are well aligned to this trend with our clock buffer solutions currently being designed into Fiveg base stations.
This product or use as Chris critical Sir on call off with a base band units and remote radio units.
Bias diverse client portfolio and separate just her performance art that key technical factor for this application.
In addition, we see tractions in Fiveg applications with discrete power management and connectivity products, including U.S., the real drivers and switches and are also gaining traction other communication applications, such as new voice over IP phone telecom power product as well as data network and gateways.
Also in the communication market mobile fill and portfolio applications continue to grow gross.
For our protection and power switch products. Our gate drivers has been successfully designed into latest wireless charging transmitter module wire at SB art and shockey products continue to gain increasing penetration T mobile and smartphone market by offering product with has seen their profile and compact dimensions.
Design wins are also being achieved with high variety bit rate products for applications, such as PR surfer power and data center.
Lastly, in the computer market revenue increased 13.5% sequentially as a result of increasing traction from Pericom products family power density efficiency, a few in the development of the high volume share and dialysis actively engage in this market with Ldmos in DC DC power conversion and I'll turn load ROM Pmall will know switch for battery management in computing application.
During the quarter, we saw strong revenue growth for STENDRA recovery rectifier, instead for nice rectify functional array products in surfer power and sent application along with this trend. We also saw growth while our power switch.
Why we LDL in notebooks and the high current Lpos in Saar for applications. Additionally, our protection product along with timing signal integrity, you SB PISCES switches re drivers charging and power management product I see significant activity in notebooks tablets and PC applications.
Further our focus and momentum in the car computing salmon continues as our new products with timing signal integrity and switching are being designed into surfer and datacenter applications.
In summary, our achievement of record results in the second quarter underscore diet solid positioning across our global customer base as well as the benefits from our past recycling activities and new product initiatives. Additionally, we continue to gain increasing content at customers with our expanded product portfolio, including our Pericom products Sam.
Our consistent performance team used to set dilo subpar, especially during the current market environment, we look forward to providing our continued progress next quarter.
With that we'll now open the floor to questions.
Operator.
Thank you and ladies and gentlemen, if you have a question at this time just press Star then the number one key of your touched on telephone. If your question has been answer or you wish to be removed from the Q Trust account fee again to get in the queue. Just press Star then one one moment.
And our first question is from Tristan Gerra with Baird.
Hi, good afternoon.
Could you talk about your progress on the eight inch capacity ramp and is that the.
Helping gross margin.
You were talking about these achieved there.
Oh, okay.
It is quite get you the aided the actually fab two in a in Shanghai.
Okay Thats helpful. Thanks.
Okay, 50 cents, each is going to be ramping up.
And so in the second quarter we.
40, you went to China and of course, if these 18 gross gross profit.
And do you know.
Of course, it's cheaper and.
Moving to the next call then and that capability.
This new area and that we are able to roll these while in the past we have capacity constraints.
On the most.
So.
On the gross margin improvement.
Great.
And then given the macro which you've obviously outpaced very nicely with share gains how should we look at your gross margin trajectory medium term do you feel that.
You can sustain gross margin at current level any any commentary that you could provide year media medium term.
Well the economic.
Alright situation decent activity slowdown, we all know that but.
Don will continue.
Increase the market share we continue gaining the growth going into maybe if you compare even at the mid point of our full quarter, let's get to it.
Nine months of this year versus.
Nine months now here, we actually going to grow up 5.4%.
And on top of all 2018, both 2017, we grew since.
So you all were you asking your 15% VCM nine months versus nine months, we're going to blow by thanking [laughter]. Therefore, even if the market is the salt.
Hey, we want to know the Tim activity moving down.
But.
Although the mid stream so we.
Outlook.
Hello capacity, if you will.
Quite well and thus far on CP, we see continued somewhere around 30.
Third 1.15 to 37.8.
In that range, we continue to improve so.
I still feel good about overall gross margin and not be BD, we still can continue.
So that kind of range, we sell it all.
Well, we do have seasonality or typically.
Price erosion, but we still need to particularly gross on price too much to gain the capacity.
For the past.
Okay. That's great and then just the last very quick one any color you can provide on your small town utilization rate.
Oh utilization Oh for one.
The London and button.
Oh, yes.
So the utilization rate for our back end this is running.
In mid kind of mid Ninetys, so try and get in terms and that's what we see so we're able to modulate some of the things, we outsource or the internal utilization has been been pretty good.
Yes, you know the way, we said on our mobile 80% local fair and 95% for peak season.
Because you cannot really full order pick a BBB or older. The packages. Therefore, we typically use a 95%.
[laughter] gummies majority or idle capacity. So maybe this year there has some unused capacity due to space you will pick it seems so based on that.
We view all along.
Okay.
A few questions.
And Thats why we are able to maintain our gross margin and lease.
Great. Thank you very much.
Thank you. Our next question comes from Shawn Harrison with Longbow Research.
Hi, Good afternoon, my congratulations everybody.
Thank you Hi, huh.
If we look into the September quarter, or even the back half of the year, either dr. Lu or Emily.
What end markets are you seeing continued strength either on a sequential or year over year basis versus kind of you know further contraction or incremental weakness.
Well that's separate it into two things one was the Q all market. Okay. We PD similar market this year.
We we kind of compared with last year.
And that's why you know every body.
I'll start with guidance.
Year over year growth is either negative or.
And that full cheap so not to middle market, Okay, and but if you look at the titles.
Oh, we are fighting very hard.
During the slow down market and able to continue on the growth picked.
And I know, it's getting harder, but we still are committed to continue.
Growth year over year.
Okay, and so automotive activity you see we see the slowdown in automotive and virtually title can grow our automotive revenue by increasing the content.
Industrial ethic that first.
Well prepared for US is very good we have been setting the record for the industrial and there we do see some slowdown in U.S. and Bureau.
Okay, and that's where our major one is that we don't have very strong industrial in Asia.
But automotive we do have very strong in Asia, and we still continue increase our revenue in.
You should have in China in particular.
So overall the market do slowdown title, we're hoping we can continue our year over year growth, especially our first ahead, we ought to grow seven or 8%.
Hi.
8%, Okay, and then even including the third quarter the nine month.
Our year over year, we we are going to grow 5.4%. So we still continue to push our revenue growth.
Okay, great as a follow up Emily Dr. Lu the point of sale versus plenty of acquisition number for distribution was there a big variance. This quarter did you see any any or notable destocking at distribution.
No as I reported Ray our channel inventories within our normal range.
11 to 14 week, if I compare quarter to quarter, it's pretty flat. So we.
Manage it very closely for the channel inventory sell you know that that's really what we've been doing.
Okay, and then lastly.
Yes, so for the point is that we do actually see a good recovery from Asia as I reported in my script.
So you know I think that that's really encouraged to see so you know definitely that that's a that's a good momentum that we want to continue.
Great and then last for me.
Wanted to just get some.
I guess an answer on the rise in or a company sales I know there has been some some questions about that how that's changed.
Over the past 12 months and I don't know if that's a factor of moving fabs around other issues at work, but if you could just speak to kind of the rise of.
Intercompany sales that we've seen over the past 12 months.
The biggest change in intercompany sales is operating in a more of a global supply company way in terms of how we live our product and interact with our.
Internal and external manufacturers you also see some optimization occurring with our customers regarding how they want to take product, where they want to receive that product and how will serve them. So.
Thats the biggest changes that you see in that.
Great. Thanks, Brett.
Thank you.
And ladies and gentlemen at 79, there. If you have a question or comment just press star and want to get into Q.
And our next question is from Gary Mobley with Wells Fargo Securities.
Hi, everyone can hear me, Okay, all right, Yeah, Hi, Gary.
Let me extend my congratulations again on a solid first half of the year.
I realize that.
I realize that.
There's not a whole lot of terror headwind to your product that you're specifically selling.
But you do sell heavily into the Taiwanese OEM supply chain.
But should that part is consumer oriented.
And we have various tariff.
Implementation dates the most recent of which is coming up here. The first day of September .
And so have you been seeing any pull forward of demand from your tiny sodium customers. They're trying to get ahead of these these tariff implementation date.
Okay number one.
So these slipped into context on this 300 billion is already talking points that one offline. So we do have a customer wants to move their assembly.
Although this year outside of China.
Well the top and all in all there we do see that.
And some of them actually already picking up that it should move to salsa issue or Taiwan. They ordered some of the cm do actually pick actions now for all Paula.
And our product we shipped two.
The PM. So if they move we just ship according to where they want to ship. So we don't really see that much affect fuel today now.
The new announcement, just announce several days ago and.
So I don't have any.
Any reaction to the market or any market reaction right of way.
Okay. So talking that bill talked in a while any particular with action after the new announcement.
I just came back from Taiwan not now.
But unfortunately this was done before.
The weekend, so I don't really see any any reaction.
Okay.
Now I know you guys have obviously taken a lot of market share in the first half of the year, probably the most notable share gain period that youve had in the company's history.
And so I was wondering if you could.
Talk about the types of competitors that you're taking share from is it the.
The old World Japanese Idmc is it some of the former US competitors that have been acquired by other us companies.
Some some market share for you to gain and I know your products are a great products and probably one the design wins on the on technical merits of the products, but is it is it just an easy environment to take share given that other people perhaps it.
Have deemphasized products that you're you're promoting.
Well, Gary I think I already talking about these poor several times and number one I really don't back too.
Pulling out our competitor the names because if it's not really.
All right two till then we pick kept the sheer amount of them. Okay. So I don't want to then the company's NIM, but basically.
Although growth coming from.
Content increase solutions segments.
Okay content, including you know pickup automotive.
Compared to twice a month ago that unit towards content on automotive do increase significant city in the country and do four since our defense although growth in automotive AMIA is not the we call growth, it's really due to the content growth the vehicle might grow some even that the recently you actually go down but our content.
Our increased overcome that significantly if you took out automotive growth CHG out of the last five years is 35%.
And even this year, you're going to slowdown we still did commit 20 something percent CPR.
The the automotive revenue increase so I believe the market slowdown we can if not I don't want to say, we tend to see a phone company a or b I don't want to say that I want to say due to that content increase we take advantage of that and we go along.
In much the same thing we have solutions sales through all the acquisition in the past, including pale counts, including BCD, even including the GTECH. We're.
Acquisition give us very complete product portfolio. So.
Henry is able to convert our hour.
Component sales into solutions sales. So now we bring the whole solution to our customer.
And to the same application different custom to show them, what is our product portfolio to get into that solution. So we sale. We are no longer component sales. We are now a solution sales that's the second.
The total one.
Is really due to the parent several major competition in the semiconductor clues, we automatically to Viber second source opportunity to our customers. So by the industry industry consolidation. We title is Fortunately had a good quality good Paula and good solution will automatically to be the second source of our customer.
And number four with all those.
Not a position we now can have another synergies and cross sells to each others are toward our now and so if you will in multiple things.
In our company inquiries solution sale.
Apogees major industrial customer consolidation and our M&A it give us.
That opportunity.
And the chance to grow better than our competitor. So it's not only one thing all pick away from one customer. This is the way we can continue to grow and gain market share in the face.
And we will continue.
If you choose to.
Okay, well thanks for the detailed document.
Thank you.
And this concludes our Kiani session for today I would like to turn the call back to Dr. Lou for his final remarks.
Thank you for your participation on today's call.
Operator, you may now disconnect.
Thank you everyone for joining our call today you may now disconnect have a wonderful day.