Good afternoon and welcome to Diodes Incorporated Second Quarter 2019 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, Monday, August 5, 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' 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. 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 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 second 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 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, August 5, 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 statement 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 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 set new records across multifunctional metrics in the second quarter, including revenue, gross profit, EBITDA and net income. Gross margin also further expanded by 260 basis point year-over-year and 70 basis point sequentially as a result of record revenue in the automotive and industrial end markets as well as from our Pericom IC products. Additionally, we continued to successfully drive increased profitability on incremental revenue growth with the first half 2019 revenue increasing 8% over the same period last year and non-GAAP net income increasing more than 40% over the same period. Of note, our above-market performance was achieved in the current global trade environment as a direct result of our past design wins and the expanded customer content. Over the past year, we have been strategically focused on demand creation and deploying a total solution sale approach that leverage our broadened product portfolio, contributing to our consistent share gain. I believe those proven strategies will continue to sustain Diodes' future growth and outperformance of our served market, while also driving increasing profitability and cash flow. Additionally, our exceptional financial performance enabled us to aggressively reduce our long-term debt by $44 million during the quarter. We now have a $70 million net positive position of cash and short-term investments to our total debts, which provide us increased flexibility and the opportunity to consider strategic acquisitions. With that, let me now turn the call over to Brett to discuss our second quarter financial result and our third quarter 2019 guidance in more detail.

Thanks, Dr. Lu, and good afternoon, everyone. As part of my financial review today, I'll 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 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 $639,000 for the quarter, including $2 million of interest expense and $496,000 for foreign currency losses, partially offset by $1.2 million of other income and $633,000 of interest income. Income before taxes and noncontrolling 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 $0.70 per diluted share…

Thank you, Brett, and good afternoon. As Dr. Lu and Brett highlighted, second quarter revenue grew 6.5% quarter-over-quarter and 5.9% year-over-year as we continue to reach new records 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% and North America, 12%. In terms of our end markets, industrial was once again our largest representative end market at 29% of 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 another quarter of record revenue as we continue to benefit from past design win activity and expanded customer content. As I have discussed in the past, Diodes has been focused on strategically deploying a total solution sales approach that leverage our broadened product portfolio, which has been a key contributor to our consistent share gain and growth in this market. From a product perspective, we have solid revenue growth in our switching diodes, Zener diodes, hall sensor, MOSFETs, LDOs and proprietary SBR product family. These products are targeted at a variety of applications, including battery-managed system, advanced driving assistance system or ADAS, acoustic domain controllers, airbag control, lighting, body control, infotainment display and gearshift level indicators. During the quarter, we released a number of new automotive-grade products, including real-time clock, interface larger…

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

Could you talk about your progress on 8-inch capacity ramp? And is that helping gross margin?

You talk about the GFAB or...

Correct. Yes, the -- actually fab 2 in Shanghai.

Okay. That's our SFAB, okay. Our SFAB 8-inch is going to be ramped up. And so in the second quarter, we are fully ramped up, and, of course, it is creating a gross profit for us. And due to the cost, it's cheaper. And due to the coolant and the capability, it's new on area. And we are able to load it, while in the past, we have the capacity constraint on the MOSFET. So it help on the gross margin improvement.

Great. And then given the macro, which you've obviously outpaced very nicely with the 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 commentary that you can provide medium term?

Well, the economic situation is actually slowed down. We all know that, but Diodes continue increase the market share. We continue gaining the growth, gaining the revenue. If you compare even at the midpoint of our third quarter, you look at the 9 months of this year versus 9 months of last year, we actually going to grow 5.4%. And on top of 2018 both 2017, we grew 15%. So year-over-year last year, 15%. This year, 9 months, both 9 months, we're going to grow 5.4%. Therefore, even the market is soft, which everybody knows, the TAM actually going down, but our demand still there. So we -- our capacity is still utilized quite well, and thus far, [ on the KP ], we still continue somewhere around 37.5% to 37.8%, in that range. We continue improve. So I still feel good about our gross margin, and I believe we still can continue in that kind of range result. While we do have seasonality or typically price erosion, we don't need to particularly erode our price too much to gain the capacity or to utilize the capacity.

Okay. That's great. And then just last very quick one. Any color you can provide on your -- on TAM utilization rate?

Our utilization -- what is that, the front end and back end?

Oh, yes. So the utilization rate for back ends is running in the kind of mid-90s. So it's running good in terms of -- and that's what we see. So we're able to modulate some of the things we outsource. So the internal utilization has been pretty good.

Yes. You know the way we set our motto, 80% for local fab and 95% for AP consider as full because you cannot really full all the capability or all the packages. Therefore, we typically use 95% as full. That means majority of our capacities are full, but maybe here, there has some unused capacity due to special packages. So based on that, we still -- our local fab and our AP's still quite good. And that's why we are able to maintain our gross margin. And we've seen, since our revenue did not go down, our loading situation going to be the same. So we don't see a issue from that point of view.

Our next question comes from Shawn Harrison with Longbow Research.

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 a year-over-year basis versus kind of further contraction or incremental weakness?

Well, let's separate into 2 things. One is the kilo market. Okay. We predict similar market this year is weakened compared with last year. And that's why everybody started guidance of year-over-year growth is either negative or flat. And so that is a kilo market. Okay. And -- but if you look at the Diodes, we fighting very hard during the slowdown market and able to continue keep us on the growth path. And I know it's getting harder, but we still committed to continue growth year-over-year, okay? And so automotive, actually you see -- we see the slowdown in automotive, and virtually Diodes can grow our automotive revenue by increase the content. Industrial, I said that the first half for us is very good. We have been setting the rate curve for the industrial, and we do see some slowdown in U.S. and Europe. But that's where our major one is, but 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 Asia or in China in particular. So overall, the market do slow down. Diodes, we're hoping we can continue our year-over-year growth. Especially our first half, we already grow 7% or 8%.

8%.

8%, okay? And then even including the third quarter, the 9 months of year-over-year, we are going to grow 5.4%. So we still continue push our revenue growth.

Okay. Great. And as a follow-up, Emily or Dr. Lu, the point-of-sale versus point of acquisition number for distribution. Was there a big variance this quarter? Did you see any notable destocking in distribution?

No. So as I reported, right, our channel inventory is within our normal range, 11 to 14 weeks. If I compare quarter-to-quarter, it's pretty flat. So we manage it very closely for the channel inventory. So that's really what we've been doing.

Okay. And then the last...

Yes. So for the point-of-sale, we do actually see good recovery from Asia as I reported in my script. So I think that, that's really encouraged to see. So that will be -- that's a good momentum that we want to continue.

Great. And then last from me. Why don't you just get some, I guess, an answer on the rise in your company sales? I know there's been some questions about 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 the intercompany sales is operating in more of a global supply company way in terms of how we move 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 products, where they want to receive that product and how we'll serve them. So that's the biggest changes that you see in that.

[Operator Instructions] And our next question is from Gary Mobley with Wells Fargo Securities.

Can you hear me okay?

Yes.

Let me extend my congratulations again on a solid first half of the year. I realize that there's not a whole lot of tariff headwind to your product that you're specifically selling, but you do sell heavily into the Taiwanese ODM supply chain. Much of that product 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 Taiwanese ODM customers that are trying to get ahead of these tariff implementation dates?

Okay. Number one, this strength into tariff on this 300 [indiscernible] is already talking for service volume for a while now. So we do have customer want to move their assembly or their [ CM ] outside of China. Do they talk, all in all, here and there, we do see that. And some of them actually always taking the action move to South Asia or Taiwan. They already -- some of the [ CM ] do actually take actions. Now, for our product -- and our product, we ship through the [ CM ]. So if they move, we can ship according to where they want us to ship. So we don't really see that much effect till today. Now the new announcement just announced several days ago, and so I don't have any reaction to the market or any market reaction right away. So talking -- I've been talking for a while, any particular reaction after the new announcement, I just came back from Taiwan last night, but unfortunately this was done right before the weekend. So I don't really see any reaction.

Okay. Now 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 you 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 old-world Japanese IDMs? Is it some of the former U.S. competitors that have been acquired by other U.S. companies that have left some market share for you to gain? And I know your products are great products and you probably won the design wins on your own technical merits of the products, but is it just an easy environment to take share given that other people perhaps have deemphasized products that you're promoting?

Well, Gary, I think I already talking about this for several times. And number one, I really don't like to pulling out our competitors, the names, because it's not really polite to tell them, we get the share out of them, okay? So I don't want them, the company's name, but basically our growth coming from content increase, so the increase in sales. Content increase -- you know, take automotive. Compare with 5 years ago, the electronics content on automotive do increased significantly. And therefore, since our design, our growth in automotive area is not the vehicle growth, it is really due to the content growth. The vehicle might grow some. Even back recently it actually gone down. But our content increase overcome that significantly. If you look at our automotive growth, CAGR, the last 5 years is 35%. And even this year, we are going to slow down. We're still looking at 20-something percent CAR (sic) [ CAGR ] -- the automotive revenue increase. So agreed, the market slow down. We gain it? Not. I don't want to say we take the share from company A or B. I don't want to say that. I want to say due to the content increase, we take advantage of that, and we grow our revenue. In nutshell, the same thing. We have solution sets through all the acquisition in the past, including Pericom, including BCD, even including the Zetex. We are -- acquisition give us very complete product portfolio. So Emily is able to convert our component sales into solution sales. So now we bring the whole solution to our customer and to the same application different customer to show them what is our product portfolio to get into that solution. So when we sell, we are no longer component sales. We are now a solution sales. That's the second one. The third one is really due to the past several major acquisition in the semiconductor space, we automatically provide a second-source opportunity to our customer. So by the industry consolidation, we, Diodes, is virtually -- have the good quality, good product and good solution. We will automatically to be the second source of our customer. And number four, with all of acquisition, we now can have another synergy and cross-sales to each other for the map. And so if you take in those 4 things, content increase, solution sale, major industry consolidation and our M&A, it give us the opportunity and the chance to grow better than our competitor. So it's not only one thing or take away from one customer. This is the way we can continue growth and gain the market share in the past and will continue in the future too.

Thank you. And this concludes our Q&A session for today. I would like to turn the call back to Dr. Lu 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.