Good afternoon and welcome to Diodes Incorporated First quarter 2019 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.[Operator Instructions] As a reminder, this conference call is being recorded today, Tuesday, May 7, 2019. 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' first 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. 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 its first quarter 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 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, May 7, 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 reconciliations of GAAP to 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.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. Diodes once again had an exceptional quarter of solid financial results achieving record net income and earnings per share on both GAAP and non-GAAP basis. Revenue for the quarter grew 10% over the prior year period on continued market share gains and it was down 3.9% sequentially, which was better than typical seasonality. Notably, gross margin increased 90 basis point from the fourth quarter 2018, exceeding the upper end of our guidance range and reaching the highest level since the fourth quarter of 2010, and we expect a further increase in the second quarter. Contributing to this margin expansion was the achievement of the record revenue in Europe combined with record revenue in the automotive and industrial end markets. In automotive market, revenue grew 7% sequentially and 23% year-over-year as we continue to benefit from past design win activity. Together, these 2 end markets represented 39% of total revenue, which place us well on track to achieving our long-term target of 40%. Additionally, our Pericom business, excluding frequency control products, reached record revenue levels in the first quarter and contributed to our strong margin performance. More recently, on April 1, we announced the closing of the transaction to acquire Texas Instruments' wafer fab facility and operation located in Greenock, Scotland, GFAB. The ownership transfer has gone very smooth with no interruption to production. We are in the process of aggressively installing Diodes' processes to fully utilize the additional 8-inch capacity and capability of the fab, which will support our growth expansion initiatives and further cost reduction. As part of a 5-year wafer supply agreement, Diodes is providing foundry services to TI, which is not material to Diodes overall revenue. As we look to the second quarter, we expect to extend our growth momentum and market share gains, while further increasing gross margin and lowering operating expense as a percent of the revenue. Together, these factors will contribute to driving higher profitability and cash flow for Diodes and our shareholders. One final comment. As announced in February 22, Rick White retired as CFO as of March 1. And Brett Whitmire, who has been with the company over 8 years has assumed the CFO role. I would like to take this time to thank Rick for his many years of service to Diodes and our financial organization. I also welcome in Brett into this new position. Rick will remain with Diodes part time and serve as Corporate Secretary as well as an adviser to the company. With that, let me now turn the call over to Brett to discuss our first quarter financial results and our second quarter 2019 guidance in more detail.

Thanks, Dr. Lu, and good afternoon everyone. I look forward to meeting and speaking to each of you in the coming quarters. 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 first quarter 2019 was $302.3 million, a 3.9% decrease from the $314.4 million in the fourth quarter 2018, which is better than normal seasonality. Gross profit for the first quarter was a $112.4 million or 37.2% of revenue compared to a $114.2 million or 36.3% of revenue in the fourth quarter 2018. The sequential increase in gross margin was primarily due to the record revenue from the automotive and industrial end markets as well as from Pericom products. GAAP operating expenses for the first quarter 2019 were $70.3 million or 23.3% of revenue and $65.8 million or 21.8% 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 fourth quarter 2018 of $70.3 million or 22.4% of revenue and $65.8 million or 20.9% of revenue on a non-GAAP basis. Total other expense amounted to approximately $89,000 for the quarter, including $2.1 million of interest expense and $64,000 of foreign currency loss, largely offset by $1.2 million of other income and $0.9 million of interest income. Income from taxes and noncontrolling interest in the first quarter 2019 amounted to $42 million compared to $42.8 million in the fourth quarter 2018. Turning to income taxes. Our effective income tax rate for the first quarter was approximately 24.5%. GAAP net income for the first quarter 2019 was a record…

Thank you, Brett, and good afternoon. As Dr. Lu and Brett highlighted, first quarter revenue grew 10% year-over-year as we continue to gain increasing market share. Looking more closely at first quarter revenue, U.S. revenue was down slightly mostly driven by the Chinese New Year and weaker demand in Asia. We started to see a recovery for Diodes business for March. Europe had record high result and the North America remained strong. Distributor inventory in terms of weeks increased sequentially in the first quarter, but is within our normal range of 11 to 14 weeks. We expect distributor inventories to remain within our normal range of 11 to 14 weeks in the near term. Looking at global sales in the first quarter, Asia represented 70% of the revenue, Europe 13% and North America 13%. In terms of our end markets, industrial was once again our largest representative end market at 29% of revenue, consumer 23%, communication also 23%, computing 15% and automotive 10% of revenue. Now let me review the end markets in greater detail. As Dr. Lu mentioned, our automotive end market had a record quarter, growing 7% sequentially and 23% year-over-year and reaching a record 10% of total revenue. This continued growth is a result of our past design win activity and momentum across an expanding customer base in all application areas, particularly in our 3 focus areas of connected driving, which consists of ADAS, Telematics, and Infotainment system, comfort, style and safety, including lighting and brushless DC motor control, and Powertrain covering conventional hybrid and electric vehicles. From a product perspective, both our analog and discrete product family continue to be strong for us in the automotive market. PCI Express has become the interface of choice for the backbone transmission of engine control unit, ADAS, navigation, telematics…

[Operator Instructions] And our first question is from Shawn Harrison with Longbow.

This is Gausia Chowdhury on behalf of Shawn. Congrats on a solid quarter and guidance. First off, can you give the POS versus POP number? I think you said POS is down slightly. Could you give more details, please?

Yes. So this is Emily. So our POS is down slightly compared quarter-to-quarter. POP also down slightly quarter-to-quarter, that's based on our guidance. So that's how we look at the inventory level as well, right? So still within our range as defined normal between 11 to 14 weeks.

Okay, thank you. And then can you reconcile your view on the auto and industrial strength that you're seeing given the weakness that was cited by some of your peers, and then also your view on Pericom within these markets. Are you still bullish for 2019? Any further detail will be helpful. Thank you.

Right. So if we look at automotive market, overall, the consensus is actually from the demand point of view is down. So where Diode is actually gaining is really based on the past demand creation effort and also the contract extension. So even the overall market is down, we're still seeing very good growth rate, 7% quarter-over-quarter, 23% year-over-year growth. So that's specific related to the automotive. And then related to the Pericom, we're also seeing a significant growth contributed to our Q1 revenue and we expect that growth will continue into 2019 and the rest. This is really based on the demand creation pipeline and also the information that we received from the contract extension point of view.

[Operator Instructions] And our next question is from Tristan Gerra with Baird.

Dr. Lu, during the earnings call, I think it was in October of last year, Rick was highlighting the potential for Diodes to reach 38% gross margin by the second half of this year. And then it sounded like your outlook for gross margin early this year was more muted to about 36%. Today, your Q2 gross margin guidance is 38%, that's even ahead of last year expectation. And at that time, one could [ contend ] that the end-to-end environment was stronger than what you're seeing today. So I know you mentioned Europe and automotive but could you go more into details about the catalyst for gross margin? What makes it better than you saw it earlier this year? Maybe quantify how big Pericom is as a percent of revenue and how sustainable you think this gross margin outlook is into the second half?

Okay. Tristan, if you know, I've been emphasizing if we grew the automotive and industrial revenue, automatically the gross margin will be improving better than our expectations. And so you can see the result, automotive, while the market went down, our sequential still go up 7% and year-over-year is at 20s high -- 28%. So you can see the effort due to the past design win plus the company increase as I have been mentioning to you several times. This strong growth has enabled us to reach 10%, now 20% of our revenue and we continue to improve the automotive performance. And that is the one key thing to improve the gross margin better than expected. Another one is the industrial. Now this quarter, industrial is 29% of our total revenue. It is an indication of a significant growth in the industrial area for Diodes. While the market kind of slowed down and that's you're seeing through other people's earnings conference call, industrial is actually slowed down a little bit, but for Diodes, we continue gaining the market share. So if you look at my long-term strategy, I've been talking about I want to improve the industrial and automotive to 40% of our revenue. We already reached to 39% and we'll continue our long-term role of getting higher and higher automotive, industrial applications and this will enable us to continue improve our gross margin. One more thing, due to our Pericom acquisition, our Pericom products result in the frequency control or those kind of the IC products contribute a significant growth, contribute to our margin. If you remember, our Pericom products typically have a 50% GP or higher. And so if that sector growth pretty faster, then it again enable us to exceed our gross margin guidance. And if you look at the Pericom product consensus on the data center, cloud computings and servers and automotive applications, all those is good and big growth effort for us and contribute better than average growth in Diodes' business. So I'm still very confident we will continue effort to benefit from these 3 key areas, reaching high GP and change our product mix towards the high GP products. Even with get some pressure from the low-end commodity type of product and the price pressure is there but due to our effort on the other market segments I mentioned, then our TP still able to continue improving.

That's very useful. Thank you. And then as a quick follow-up, the market share gains, we can certainly see that and understand it's in automotive because your ramp started or your exposure in autos have been smaller than some of your peers but in industrial, you do have a very meaningful percent exposure. So what would you say at a high level is driving the share gain? Is that packaging? Is it pricing? Any particular sector that you could emphasize.

Right, I think -- this is Emily, let me address the question, right. I think it's really about contract extension, right? So even the market may not be growing from the total demand point of view but we've seen significant contract extension within that industrial area, right? The leverage between the values and also the Pericom product line that we've seen are significant push in this area for us.

Packaging is one of the help, but that right now we are not just -- depend on the packaging. The real reason is to which we start to focus on solution provider. Since through all different acquisitions, our product line now is very completed and has enabled us to provide to our customer a total solution. So with [indiscernible], we now focus on providing our customer the total solution. And this is the difference from the past.

[Operator Instructions] And we have a follow-up from Shawn Harrison with Longbow.

Can you talk a little bit about the TI fab acquisition? What is associated with that within your guidance? And then any details you might be able to provide on the expected accretion or impact to margin or OpEx would be helpful. And then also having to do with the acquisition, how does the fab affect your CapEx profile?

Okay. The TI acquisition, one of the agreement is we will provide TI with some wafer supply agreement, but it's material is not mature. So it's not been compared with our Diodes' revenue, okay? Second, we kept emphasized if accretive, even then margin is not as high as our average but is accretive to our business. And we're going to use and we are, like I mentioned, we [indiscernible] now to quantify our own process because we want to use it to support our future growth, okay? So we are kind of pretty tight on our wafer supply and we have a lot of wafer need to our side and control by other foundry people. So what we want to do is increase, again all on supply. So you're helping us in the future for the growth.

The other question is on CapEx. So this is we think our CapEx model.

Yes. I [indiscernible], we may be missed here and there for some of the equipment needed for our process, okay? But the most of the equipment is already there. So with the TI fab and therefore is still within our CapEx most of 5% to 9% of our revenue. So you won't increase our CapEx requirement.

Thank you. And I'm not showing any further questions in the queue. I would like to turn the call back to Dr. Keh-Shew Lu for his final remarks.

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

Thank you, everyone for participating today's conference. This concludes the program and you may all disconnect. Have a wonderful day.