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Diodes Inc (DIOD 1.93%)
Q3Â 2019 Earnings Call
Nov 4, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon and welcome to Diodes Incorporated Third Quarter 2019 Financial Results Conference Call. [Operator Instructions] At the conclusion of today's conference call instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder this conference call is being recorded today Monday November 4 2019.
I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne please go ahead.
Leanne Sievers -- Investor Relations.
Good afternoon and welcome to Diodes' third quarter 2019 financial results conference call. I'm Leanne Sievers President of Shelton Group Diodes' Investor Relations firm. Joining us today from Taiwan are Diodes' President and CEO Dr. Keh-Shew Lu; Chief Financial Officer Brett Whitmire; Vice President of Worldwide Sales and Marketing Emily Yang; and Director of Investor Relations Laura Mehrl. Before I turn the call over to Dr. Lu I'd like to remind our listeners that the results announced today are preliminary as they are subject to the company finalizing the 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 the third quarter of 2019.
In addition management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission including Forms 10-K and 10-Q. In addition any projections as to the company's future performance represent management's estimates as of today November 4 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 statements during this conference call will include discussions of certain measures in financial information and GAAP and non-GAAP terms. Included in the company's press release or 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. 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.diode.com.
And now I'll turn the call over to diodes President and CEO Dr. Keh-Shew Lu Dr. Lu please go ahead.
Keh-Shew Lu -- President & Chief Executive Officer
Thank you Leanne. Welcome everyone and thank you for joining us today. Diodes achieved another quarter of record financials resulting in increased profitability and cash flow from operations. Our nine month revenue grew 5.4% over the same period last year while earning increased over 30%. This growth is especially notable at the time during which our served market was down more than 6.5%. EBITDA also set a new quarterly record and represent the second consecutive quarter to see a $300 million annual run rate as it approached 25% of total revenue. Further gross margin remains above 37% of revenue as product mix continue to benefit from record revenue in the automotive end market which remain at 10% of total revenue as well as our Pericom brand IC product. I would also like to take this time to provide an update on our proposed acquisition of Lite-On Semiconductors.
As recently announced Lite-On Semiconductor shareholders approved the proposed acquisition at a special meeting of shareholders on October 25. Diodes has also made a necessary regular filing in U.S. Taiwan and China. In China especially we are waiting feedback from the government and at this time are not aware of any issues that will delay the closings expected date in April 2020. To conclude I'm very pleased with our year-to-date performance as we carefully navigate the seasonal softness and the inventory adjustment that are typical of our industry as we approach year-end. Long-term I believe Diodes remains well positioned to continue delivering constant profitability growth with ongoing on in high growth area such as connected car high-end servers and storage 5G as well as IoT.
With that let me now turn the call over to Brett to discuss our third quarter financial results and our fourth quarter 2019 guidance in more detail.
Brett R. Whitmire -- Chief Financial Officer
Thanks Dr. Lu and good afternoon everyone. As part of my financial review today I will focus my comments on the sequential change for each of the line items and 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 the third quarter 2019 was a record $323.7 million compared to $322 million in the second quarter 2019. Gross profit for the third quarter remained a record $122 million or 37.7% of revenue compared to the prior quarter of $122 million or 37.9% of revenue. GAAP operating expenses for the third quarter 2019 were $73.3 million or 22.7% of revenue and $68.8 million or 21.3% of revenue on a non-GAAP basis which excluded $4.5 million of amortization of acquisition related intangible asset expenses. This compares with GAAP operating expenses in the second quarter 2019 of $73.5 million or 22.8% of revenue and $69 million or 21.4% of revenue on a non-GAAP basis. Total other income amounted to approximately $20000 for the quarter including $2.6 million of other income $272000 of interesting time largely offset by $2 million of interest expense and $822000 of foreign currency losses. Income before taxes and non-controlling interest in the third quarter 2019 was a record $48.7 million compared to $47.9 million in the previous quarter. Turning to income taxes our effective income tax rate for the third quarter was approximately 21.8%. GAAP net income for the third quarter 2019 was a record $38.1 million or $0.73 per diluted share compared to net income of $36.3 million or $0.70 per diluted share in the second quarter of 2019.
The share count used to compute GAAP diluted EPS for the third quarter of 2019 was 51.9 million shares. Non-GAAP adjusted net income in the third quarter was a record $41.9 million or $0.81 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 $40 million or $0.77 per diluted share in the second quarter 2019. EBITDA for the third quarter was a record $78.3 million or 24.2% of revenue compared to $77.1 million or 23.9% of revenue in the prior quarter. We've 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 $67.2 million for the third quarter 2019. Free cash flow was $41.8 million which included $25.4 million for capital expenditures and net cash flow in the third quarter was a negative $17.1 million which includes a pay-down of $52.6 million of long-term debt.
Turning to the balance sheet at the end of third quarter cash and cash equivalents plus short term investments totaled approximately $226 million working capital was $465 million and long-term debt including the current portion was $119 million. In terms of inventory at the end of third quarter total inventory days increased to 104 in the quarter compared to 100 last quarter. Total inventory dollars amounted to approximately $230.8 million which reflects a $5 million increase in raw materials $2.8 million increased in finished goods and $100000 increase in work in process. Finished goods inventory days was 27 in the quarter compared to 26 in the second quarter 2019. Capital expenditures on a cash basis for the third quarter 2019 or $25.4 million or 7.9% of revenue and within our target model a 5% to 9% of revenue. Now turning to our outlook. For the fourth quarter we expect revenue to be approximately $300 million plus or minus 2% which at the midpoint represents an annual growth of 2.8%. Even in the overall weak market environment and continued outperformance of our served market. We expect GAAP gross margin to be 36.5% 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 22% of revenue plus or minus 1%. We expect net interest expense to be approximately $2 million. Our income tax rate is expected to be 21% plus or minus 3% and shares used to calculate diluted EPS for the fourth quarter are anticipated to be approximately 52.5 million. Please note that purchase accounting adjustments of $3.7 million after tax for Pericom and previous acquisitions are not included in these non-GAAP estimates.
With that said I will now turn the call over to Emily Yang
Emily Yang -- Senior Vice Persistent, Sales and Marketing
Thank You Brett and good afternoon. Looking more closely at third quarter revenue POS revenue was up driven by strong demand in Asia. Distributor inventory in terms of weeks was down in the quarter and within our normal range of 11 to 14 weeks which is where we expected to remain near-term. Global sales for the third quarter Asia represented 74% of revenue Europe 17% and North America 9%. In terms of our end markets industrial was once again our largest representative end market at 28% of revenue consumer 24% communication 22% computing 16% and automotive 10% of revenue. Now let me review the end markets in greater details. Starting with our automotive market revenue reached another record as we continue to gain increasing traction and content in this key focus area for Diodes. We also expanded our product portfolio by introducing exciting new products for multiple product line including mouse MOSFETs crystals LED drivers TVS Zener Diodes protection products bipolar junction transistors SBR and sensors. Diodes also recently released our XRQ family of crystal qualified to AECQ 200 grade one requirements targeting auto applications the demand frequency accuracy under harsh environments. Additionally Diodes leading PCI Express 4.0 Solution and USB type C solutions for signal maxing and signal integrity continue to see growth in emerging automotive applications like instrument cluster infotainment and assisted driving information. In fact PCI Express has become the interface of choice for the backbone transmission of engine control units ADAS navigation telematic and infotainment systems.
Diodes is well positioned to address this need with a variety of products designed to support the PCI Express protocol. Diodes is the only supplier to offer PCI Express 4.0 clock generators and clock buffers with AECQ grade two 105C ambient temperature support. Also in the automotive market we continue to see success with our proprietary SBR technology as well as MOSFET designings. This product is suitable for a wide range of applications in connected driving ADAS telematics and infotainment power train covering conventional hybrid electric vehicles and battery management system. In addition we saw new design wins for our gate drivers ICs for in car charging system for portable equipment such as phones and tablets. We also saw growth in our TVS product in cameras and ADAS system and for our multi-chip array products using engine diagnostic test systems. Diodes also have multiple design wins and revenue growth from our newly introduced LED driver in rear light and air filter applications. In our largest representative end market of industrial our momentum continued with new design win activities across many applications such as metering DC fence power tools and power supply as well as home appliances including e-lock applications.
Our glass preservation process rectifier and bridge rectifier product experienced strong growth in applications including pumps mixers irrigation systems and measurement system. In the third quarter revenue increased for our linear mode discrete LED drivers in various commercial and industrial lighting applications. Bipolar transistors also continue to be in demand for industrial applications where they are often used for voltage regulation and driving the gate of power devices such as MOSFET and IGBT. Additionally we continue to expand our market position in industrial PC by expanding designing activities with our low power PCI Express 2.0 package switch. Our process low power performance gives Diodes a leading position in the small link COM port expansion applications. We are also seeing USB type-C adoption into medical equipment with our HDMI over the Type-C crossbar switch design in for transporting video image to monitor over USB-type C interface. Diodes also introduced during the quarter our universal high speed crossbar switch that supports the latest protocols such as PCI Express 4.0 Thunderbolt 3 Super Speed USB 20 gigabit per second and 10G based KR. It provides an almost universal solution to routing high speeds signals up to 20 gig per second.
Further with the rapid adoption of high speed interfaces across multiple end applications in the IoT industry ESC protection is becoming more and more important for such data links. Multiple design wins in third quarter confirmed Diodes leading position in ESC protection devices. Turning to consumer this market continues to be strong area for Diodes SBR Schottky and GPP rectifier growing both sequentially and year-over-year. We saw increased momentum for new applications like smart speakers wireless chargers gaming PC power white goods protection circuit modules for reverse polarity protection and IP phone market.
Low leakage CSP product are increasingly used in the battery pack for portable devices to boost battery life. Also in the quarter Diodes protection product continue to gain traction in various panel applications such as mobile panels TV panels monitor panels and notebook panels. In the communication market as reported last quarter we continue to see design win expansion of our products in the 5G applications like CPE small cell base station baseband units and remote radio units for higher speed increased bandwidth and improved power density. We also saw additional design wins in 5G applications for discrete power management clocks and connectivity products including USB redrivers and switches. Power density is one of the key concerns for 5G smartphones and Diodes has been actively engaged in this market with a comprehensive small footprint DFN and CSP MOSFET portfolio. Also in the communication market we continue to see revenue growth from mobile handset applications for our products like Tight Tolerance Zener Diodes high voltage fast switching dials low leakage signal diodes and fast recovering GPP rectifier. In addition our protection products continue to be our key growth area driven by USB type-C adoption in mobile phone applications.
Lastly in the computing market revenue growth in notebook PC applications for our TVS products high current LDOs Tight Tolerance Zener Diodes rectifier and small signal fast switching diodes. Our signal integrity solutions continue to maintain a leadership position as they are well recognized by CPU partners. With the adoption of USB type-C in notebook and PC applications we are seeing this area as the next big growth engine for protection and connectivity product from our Pericom product line. Speaking of our Pericom IC product line as Dr. Lu mentioned in his comments we once again achieved another quarter of record revenue from this product which is a testament to Diodes ability to leverage our global sales channel and cross selling opportunities we have been able to achieve across our customer base. We also achieved strong revenue growth for low switches in PC and mobile applications combined with increasing design wins for our high breakdown voltage products for our applications such as Power over Ethernet server power and data center. In summary our achievements of record results in the third quarter is a further testament to Diodes' consistent execution and the increasing benefit from our total solution sales approach and content expansion at key customers. Further as indicated by our fourth quarter guidance we expect full year revenue to grow 2.8% over 2018 which is further evidence of our continuous outperformance of our served markets. We look forward to the additional opportunities afforded by the proposed acquisition of Lite-On Semiconductor in terms of broaden product offering as well as wafer and packaging capacity to further support our future growth.
With that we are now open the floor to questions. Operator?
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from Gary Mobley with Wells Fargo Securities. Your line is now open.
Gary Mobley -- Wells Fargo Securities -- Analyst
Hey everyone. Thanks for taking my question. Wanted to start asking about the gross margin assumption for the fourth quarter with gross margin expected to decrease about 120 basis point quarter-over-quarter. I'm curious to know how much of that is underutilization of manufacturing versus pricing on a like-for-like basis for products?
Keh-Shew Lu -- President & Chief Executive Officer
Well Gary majority actually is coming from under utilizations. We right now our module is 95% for AT and we could probably go down another 5% for utilization of AT and probably 5% to 10% for wafer fab. Our ASP actually is quite stable. You would remember we use in the module as 1.5% down to 2% per quarter ASP 1.5% to 2% down per quarter that's our modules. And we are looking at probably about the same kind of the rate. But-so basically the reason for ASP point of view can be within the model is really for a commodity in down more. But if I look at the automotive and Pericom IC in third quarter they all have the record from automotive and from Pericom IC and also the high GP products. So from-we expect that kind of product area will continue. And therefore commodity or the commodity yes go down but the higher GP product going up therefore our ASP is within the model.
Gary Mobley -- Wells Fargo Securities -- Analyst
Okay. So follow up question I want to ask about seasonality for the first quarter typically in the first calendar of any calendar and fiscal year you see similar a bit of a 3% sequential revenues decline just given what you know today about timing to Chinese New Year and maybe demand trends or whatnot. How would you call the seasonal trends in the first quarter relative to revenue? And then with respect to OpEx one would think that you would show an increase in OpEx sequentially in the first quarter because of payroll taxes and whatnot but in recent years you've basically trended flat in the first quarter on a sequential basis. So how would you call the OpEx change as we look into Q1 Brett?
Keh-Shew Lu -- President & Chief Executive Officer
Okay Gary from a seasonality point of view our 1Q typically is a 5%. And so we expect this year similar to that kind of drop but we are not sure yet. But from the market point of view what we can see probably similar to that kind of drop it's about 5%. From the operational costs point of view actually it going to become more coming from under royalty cost. Now from the-that with GP and from the salary and operational costs salary yes we have to close that point one is in July which is more for the direct-or more for the indirect employee like our engineer and our managers that typically is in the July 1st of July then for the operator or operation point of view manufacturing then its in 1 January of right within the Chinese New Year so it would be in 1Q. So yes that one operation will be down operation cost would be up slightly.
Gary Mobley -- Wells Fargo Securities -- Analyst
Thank you for that.
Operator
[Operator instructions] Our next question comes from Sean Harrison with Longbow Research. Your line is now open.
Sean Harrison -- Longbow Research -- Analyst
Hi everybody and congratulations on the strong results.
Keh-Shew Lu -- President & Chief Executive Officer
Yes thank you Sean.
Sean Harrison -- Longbow Research -- Analyst
If you look at the guidance in terms of the sequential change for the December quarter are there any end market verticals that you anticipate to perform better or worse than the implied sequential decline?
Keh-Shew Lu -- President & Chief Executive Officer
Well I still believe our Pericom IC and our automotive is still going to be performed quite strong OK. We target 10% this year and so far we continue and in 10% and we even have the record. So in third quarters. So I still expect we will continue very strong. I don't see a reason or a trend to go in weaker in automotive and Pericom IC.
Emily Yang -- Senior Vice Persistent, Sales and Marketing
Right. So let me just add a little bit more. So overall automotive market is definitely not growing and it's actually quite slow. So majority of the growth coming from Diodes is really coming from the content expansion that we've been really focusing on. So again overall market is definitely not growing is definitely not that positive. But overall our result has been pretty positive really driven by the focus we've been focusing on for the last few years.
Sean Harrison -- Longbow Research -- Analyst
And so I guess the takeaway would be the underperforming areas would be within consumer electronics communications and PC is just seasonality plus maybe a little weaker market trends not trying to put words in your mouth but.
Emily Yang -- Senior Vice Persistent, Sales and Marketing
Okay sorry I assume you're talking about the Q4 revenue guidance?
Sean Harrison -- Longbow Research -- Analyst
Correct. I was wondering if...
Emily Yang -- Senior Vice Persistent, Sales and Marketing
Okay.
Sean Harrison -- Longbow Research -- Analyst
What would be maybe the weaker end markets.
Emily Yang -- Senior Vice Persistent, Sales and Marketing
Right. So I think overall our revenue guidance is mainly driven by more than usual our year inventory adjustment especially in Europe and North America. But if you look at our overall business in 3Q our POS is actually up our channel inventory is down we actually performed better than our served market right. So even with our Q4 guidance whole year estimate was still growing about 2.8% which is still much stronger than our peers. So I think overall if you look at the business we're very confident that we are actually in good shape.
Sean Harrison -- Longbow Research -- Analyst
It's very helpful. And then follow-up tax rate has continued to decline here which is nice to see as we look out over the next 12 to 18 months how much further can that decline?
Brett R. Whitmire -- Chief Financial Officer
Well I would expect to continue to see some improvement there. It's hard to say exactly what that is but we're guiding into fourth quarter to continue that momentum down and I would expect to continue to see momentum as we go into 2020. We've been working toward a model and we haven't gotten full entitlement of that yet.
Sean Harrison -- Longbow Research -- Analyst
Okay. And then last if I may just is China the big regulatory approval here that is the one that you need to see get cleared to get the deal closed in April or is there something else I'm missing?
Keh-Shew Lu -- President & Chief Executive Officer
China antitrust is the key item for us to be able to consolidate AOIC. We don't see they're going to turn it down it might just the timing. We believe they will approve it that just may not be the time we expect. So that is the key.
Brett Whitmire -- Chief Financial Officer
That's what we understand from our attorneys that are handling this for us. We basically addressed everything that's been asked. We provide all the information. It's just a matter of timing working through their process and we're just trying to keep everybody updated on that.
Keh-Shew Lu -- President & Chief Executive Officer
And we applied per the requirement. So just we do take order action apply per order government requirement.
Brett R. Whitmire -- Chief Financial Officer
That's right.
Sean Harrison -- Longbow Research -- Analyst
Okay thank you.
Operator
Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Dr. Keh-Shew Lu for any further remarks.
Keh-Shew Lu -- President & Chief Executive Officer
Thank you for your participation on today's call. Operator you may now disconnect.
Operator
[Operator Closing Remarks]
Duration: 35 minutes
Call participants:
Leanne Sievers -- Investor Relations.
Keh-Shew Lu -- President & Chief Executive Officer
Brett R. Whitmire -- Chief Financial Officer
Emily Yang -- Senior Vice Persistent, Sales and Marketing
Brett Whitmire -- Chief Financial Officer
Gary Mobley -- Wells Fargo Securities -- Analyst
Sean Harrison -- Longbow Research -- Analyst
