Good afternoon and welcome to Diodes Incorporated Third Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instruction will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded today, Tuesday, November 7, 2017. 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' third quarter 2017 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. Keh-Shew Lu; Chief Financial Officer, Rick White; Senior Vice President of Sales and Marketing, Mark King; 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 its closing procedures and customary quarterly review by the company's independent registered public accounting firm. As such, these results are subject to revision until the company files its Form 10-Q for its third quarter 2017. In addition, management's prepared remarks contain forward-looking statements, which are subject to risk 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 7, 2017. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change. 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's 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 60 days in the Investor Relations section of Diodes' website at www.diodes.com. And now I'll turn the call over to Diodes' President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.

Thank you Leanne. Welcome everyone and thank you for joining us today. I'm pleased to report that Diodes achieved another quarter of record results. Taking new heights of revenue, gross profit and operating income. Our growth continues to be broad-based across all regions and end markets. We also achieved record revenue in our computing and communication end markets complemented by 30% year-over-year growth in both automotive and industrial. In fact our automotive end market reached a record 8% of the revenue which is even more notable considering the higher revenue base. Revenue from Pericom also continued to grow from the high level achieved last quarter, with solid margin contribution as we integrate those products into our complete customer offerings. Additional, continued improvement in product mix and the utilization across our facilities, results in non-GAAP gross margin across to our target model of 35% in the quarter. We have completed wafer manufacturing at our KFAB facility and demand on track to return the property to the vendor by November 15. Consistent with our focus on driving increased profitability and expanding shareholder value. We recently established new long-term financial targets, which includes gross margin of 40% and operating margin of 20%. As a result of the strategic actions we have taken over the past few years, we have positioned the business to drive significant earnings expansion serving as a basis of introducing those increased targets. Our business is also generating significant amount of cash. We plan to continue allocating cash toward reducing our long-term debts while also maintaining the flexibility to support our future expansion initiatives, potential strategic acquisition as well as our existing buyback. Looking forward we well positioned to benefit from our solid operating leverage to deliver increased profitability and shareholder value. With that I will not turn the call over to Rick to discuss our third quarter financial results and our fourth quarter guidance in more detail.

Thanks Dr. Lu and good afternoon everyone. Revenue for the third quarter 2017 was $285.2 million, an increase of 8% from the $264.2 million in the second quarter of 2017 and an increase of 13.8% from the $250.7 million in the third quarter of 2016. The sequential increase in revenue was due primarily to continued strength across our target end markets and geographies combined with continued growth of Pericom products. GAAP gross profit for the third quarter was $96.3 million or 33.8% of revenues, including approximately $2.7 million of KFAB closure costs. Non-GAAP gross profit was $99 million or 34.7% of revenue excluding these costs. This compares to $90.1 million or 34.1% of revenue in the second quarter of 2017 and $80.6 million or 32.2% of revenue in the prior-year quarter. The increase in gross profit margin was due primarily to continued improvements in product mix and utilization combined with another strong quarter in North America and Europe as well as the Pericom business. GAAP operating expenses for third quarter 2017 were $72.6 million or 25.5% of revenue and $63.9 million or 22.4% of revenue on a non-GAAP basis, which excludes $4.7 million of amortization of acquisition related intangible asset expenses, $2 million of KFAB restructuring charges and $2 million for the impairment of fixed assets. This compares to GAAP operating expenses of $66.3 million or 25.1% of revenue in the previous quarter and $59.8 million or 22.6% of revenue on non-GAAP. Looking specifically at selling, general and administrative expenses for the third quarter, SG&A was approximately $43.5 million or 15.3% of revenue, which is our operating model. This compares to $39.7 million or 15% of revenue in the previous quarter and $38.3 million or 15.3% of revenue for the third quarter 2016. Investment in research and development for the…

Thank you Rick, and good afternoon. As Dr. Lu and Rick highlighted third quarter revenues set another record, up almost 8% sequentially on top of a 12% increase last quarter. Our growth continues to be driven by strong sales in all regions and end markets including record revenue in both Asia and Europe and the best quarter in North America since Q3 2010. Distributor POS set records both globally and regionally was up 12.9% while distributor inventory rose 5.6% in support of expanded POS. Channel inventory days at the end of Q3 are down from Q4 2016 and well within our target range. As indicated by our record sales, customers activity in the third quarter was strong in all regions with increasing design activity and design wins. We continue to penetrate our key customer base with an expanded sales footprint, broader product line and see significant cross-selling opportunities with the Pericom products. We set revenue records on nine products during the quarter including MOSFETs and CMOS LDOs, hall sensors, protection, timing, switching, interface ICs, connect basic and battery management. These record results reflect past design wins on new products ramping into production. We expect to drive continued revenue growth and momentum with our expanding new product introductions and design wins. Turning to global sales in the quarter, Asia represented 79% of revenue, Europe 11% and North America 10%. In terms of our end markets, consumer represented 26% of revenue, communications 24, industrial 23%, computing 19 and automotive 8% of revenue. Let me now provide more detail within each of our end markets. In the consumer market, our ultralow power CMOS LDOs and audio products continue to gain strong acceptance in the IoT area. Our next generation ultralow quiescent current CMOS LDOs supported the pilot run of an advanced new bio…

[Operator Instructions] Our first question comes from the line of Tristan Gerra with RW Baird.

Looking at your Q4 revenue guidance, obviously strong year over year growth, but also more or less seasonal sequentially, which is also what you've mentioned on the call. Trying to reconcile on my end the strengths that we're seeing in terms of end markets with your guidance that's just seasonal, particularly in the context of the recent lead time expansion that we've seen in analog. So are you supply constrained or are there any specific end markets that perhaps is striking it a little bit bigger than expected in Q4?

I would say that everything is tracking - I would say, obviously, the consumer marketplace will see the softest Q4. I think some of the supply constraints will be alleviated in the fourth quarter. We still have some packages and certain products that will be pretty relatively tight, but I think we're in pretty good shape in that area.

And then what percent of your products currently have lead times above 12 weeks and when do you expect lead times to return to normal levels?

Tristan, I don't really look at the lead times that way, I can't say. We think that things will normalize probably after the Chinese New Year somewhat because the timing and some of the late launches of certain things, but we expect certain products will be difficult into mid next year, maybe some of our MOSFET products will remain tighter into mid next year, but we, based on our CapEx, we've prepared for - to catch the marketplace in this thing and position ourselves for 2018. So we think we're in pretty good shape to level out the supply.

Okay. And then just one quick last one, if you could give us the utilization rates in Q3 and also both for the whole company and also where BCD2 is currently?

Okay. The assembly test facilities in China, both in Shanghai and CAT were 96%. I'm going to leave KFAB out, since it's being shut down. OFAB, which is the fab in Manchester, England was at 95%. SFAB1 was at 97% and SFAB2 was at 80%.

Thank you. And our next question comes from the line of Gary Mobley with Benchmark Co.

Dr. Lu, what would revenue have been in the third quarter if you weren't capacity constrained and how much revenue might have thrown out of the third quarter because of that constraint into the fourth quarter.

Well, I don't really have that data for you, but we are really in the third quarter still surprised limitation and certainly the limitation and actually even through the fourth quarter, we are in similar situations. Now, with seasonality, we do come down, but just cynical, but if you go to look at, we still are cynical than the history.

Okay. Help me explain how you expect the gross margin to increase sequentially, albeit modestly despite based on the midpoint of your revenue guide of 5% sequential revenue decline. Is that a function of the product produced in the third quarter flowing through the fourth quarter P&L or is it a function of the switchover in cheaper manufacturing away from KFAB?

Well, it's all above, but KFAP expect its best, okay, but majority is really coming from utilization, product mix and new products and new packaging technology. All those is really excess or improve our margins.

Okay. In the past, you talked about maybe a benefit in the gross margin, once manufacturing is fully switched over away from KFAB, I think it might have been 100 basis point impact or so. Could you clarify the amount of the benefit and when you might start to see the positive influence on the overall gross margin?

Okay. Number one, we are shifting down but we've not rented out yet in that respect. Now, some of the demand actually go to subcom and more to OFAB. The one thing to offer is probably in Q4 is start to see some surprise, but if not, there in the third Q of the year. And also SFAB portion, we are qualified that SFAB, but we're waiting for the equipment shutdown from KFAB probably shutdown in the end of September and then we are moving now to SFAB and into that incumbent. So you really cannot see the ramp until the first quarter of next year and then you create or rented out, because we see a need to customer qualification and acceptance. So the one point in subcom which already qualified, that you can see some benefit in third quarter, into the third quarter, but majority of the KFAB effect, the benefit accounting from KFAB effect is not showing up here until next year. Okay. You start to see some in 1Q, but it won't fully benefit it until probably second half of next year.

Okay. And kind of ping you down on any quantifiable benefit in the gross margin?

Yeah. We've said previously that we think it's going to be somewhere about $3 million a quarter, $12 million a year, something like that.

Yeah. I think we said 10 to 15. 10 to 15 is what said and we said it's when we fully rent, okay and that effect, we've always been fully ramped until second half of next year.

[Operator Instructions] And our next question comes from the line of Shawn Harrison with Longbow Research.

The increase to the gross margin target of 40% from - it looks like you'll be at 35% this quarter. Let's say a point of that is tied to the KFAB closure and transfer, but the remaining 400 basis points, how much of that is a function of mix verses, I'm assuming, we're in a better pricing environment if you comment on that versus other factors, pushing up your long term margin targets.

I think it has a lot to do with what our long term focus is going to be and driving the proper mix. And of course as we drive that focus in the product areas at better pricing discipline within our organization and so forth and work to really get the value out of our products and so forth and focus in that area. So I think you'll see over time, we'll be a less commodity based. We'll still be a broad light supplier, but our focus is going to be on key products within our key end equipments and our key customers and that will drive us in that direction.

And you know when I visit in September, this is our investor and analyst, I do mention we come to advance our market segment, okay? Currently, if you look at our automotive and industrial, it's probably somewhere around 30 something percent and it's actually improved from our - 10 years ago. I think I mentioned 80% of our revenue coming from consumer, computer, communication and only 20% coming from industrial and automotive. And I said from the long term, we want to continue focus on industrial and automotive. And today, industrial already on 25%, 26% in average, so it's already up to that and I think today, talking about in the third quarter, our automotive now is 8% of overall revenue. And if we continue to focus on our industrial and automotive, then I am hoping it's in the near term we get to 40% of our revenue coming from automotive and industrial. These two market segments tend to give you higher gross margin than the other three of the consumer, computer, communication. And therefore, by focusing on the right or the higher gross margin market segment, then we should be able to change the mix and accomplish the 40% goal, what I'm really trying to change our focus from 35% to 40%.

And two follow-ups if I may. I know next year's far enough out still, but if we look at capital spending for next year, you'll be at 11% of sales for this year. Do you believe it will drop down in to that 5% to 9% range for 2018 or will you need to be above that kind of normalized range still to add capacity?

I think right now, I didn't say yet, but I think next year, we're hoping we go back to 7% to 9%. This year, we have been - last year, we got down, but this year, due to the shortage, the capacity shortage and due to, we're going to continue a big growth and therefore we're putting our CapEx in high performance new packaging type areas. So I think we will continue and by the money, we spend the money in the 8-inch capacity with respect to as I mentioned in the past. Those are the reasons costs, that the CapEx slightly higher than what I'd like to have of 5% to 9%, midpoint 7%.

And then lastly, Rick, AR days are I think down 10 or so days year-over-year, maybe a little bit more than that and your cash cycle is down pretty precipitously year-over-year as well. I guess maybe the first question is what drove some of the gains and are there further gains being made in the cash cycle or kind of where you're at right now a good to go forward number?

Well, I think where we are right now is a pretty good number. You're right. It's gone down over the last three or four quarters. And so - also you have the US and Europe being strong; North America being strong and their paying terms are less than Asian payment terms. But I think going forward, you will probably won't see it, a huge reduction in the amount of AR days.

Thank you. And I'm showing no further questions at this time. So I'd like to return the call to Dr. Lu for any closing remarks.

Thank you for your participation on today's call. Operator, you may now disconnect.