Good afternoon and welcome to Diodes Incorporated first quarter 2020 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, Monday, May 11, 2020. 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 2020 financial results conference call. I am 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 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 files its Form 10-Q for its first quarter 2020. 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 SEC, 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 11, 2020. 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 are 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.diodes.com. And now, I will 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 want to start by saying that I hope everyone and their family are staying safe in this unprecedented time for our economy and Diodes. Our top priority remains our people. And Diodes has taken proactive measures to protect the safety, health and well-being of global associates. Our employees are successfully working remotely and remain in close contact with out suppliers, customers and partners. Our first quarter results were in line with our original expectation and included the delayed start of our manufacturing production following the extended Chinese New Year holiday. Our results further reflected the temporary closure of our U.K. wafer fabs in the late part of March in response to the global COVID-19 pandemic. Our operations in China has since gradually returned to full production, with our U.K. facility also resuming full production as of today. Combined North America and Europe revenue grew more than 12% from 4Q to 1Q, while Asia revenue declined 12% sequentially because of slower than expected customer manufacturing manpower recovery due to COVID-19. With revenue being only slightly below typical seasonality and limited only by customer demand, our first quarter results serve as further testament to our long track record of successfully managing through challenging environments. Highlighting the quarter was our continued growth in the automotive end market, in which revenue grew sequentially and year-over-year to 11% of revenue as a result of our increased content gains across an expanding customer base, including a significant new design win in Asia. Additionally, our Pericom IC products had the second highest revenue quarter since the 2015 acquisition due to strong demand in the computing end market for our products used in high-end server, storage, data center and notebook. Our close engagement with customers…

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 will 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 of 2020 was $280.7 million, as compared to $301.2 million in the fourth quarter 2019. Gross profit for the first quarter was $95.8 million or 34.1% of revenue compared to the fourth quarter 2019 of $109.4 million or 36.3% of revenue. GAAP operating expenses for the first quarter 2020 were $70 million or 24.9% of revenue and on a non-GAAP basis were $65.4 million or 23.3% of revenue, which excluded $4.2 million of amortization of acquisition related intangible asset expenses and $400,000 of acquisition related costs. This compares to non-GAAP operating expenses in the prior quarter of $65.2 million or 22% of revenue. Total other expense amounted to approximately $896,000 for the quarter including $1.2 million of interest expense, partially offset by $273,000 of interest income and $76,000 of other income. Income before taxes and non-controlling interest in the first quarter 2020 was $25 million compared to $59.6 million in the previous quarter. Turning to income taxes. Our effective income tax rate for the first quarter was approximately 18.3%. GAAP net income for the first quarter 2020 was $20.2 million or $0.38 per diluted share, compared to GAAP net income of $47.2 million or $0.90 per diluted share in the fourth quarter 2019. The share count used to compute GAAP diluted EPS for the first quarter 2020 was 52.4 million shares. Non-GAAP adjusted net income in the first quarter was $23.9 million or $0.46 per diluted share which excluded, net of tax, $3.5 million…

Thank you Brett and good afternoon. In the first quarter, revenue decreased 6.8% sequentially. POS revenue in Asia was down due to the impact of Coronavirus in January and February, followed by a strong recovery in March. POS in both North America and Europe was up in the quarter. Distributor inventory in terms of weeks was slightly above our targeted range of 11 to 14 weeks. Both Europe and North America inventory days decreased in first quarter and Asia inventory days increased due to the slower than expected end customer manufacturing capacity recovery. Looking at the global sales in the first quarter. Asia declined 12% sequentially to 75% of the total revenue and Europe and North America combined increased 12% over the prior quarter to represent 17% to 8% of the revenue, respectively. In terms of f our end market, industrial end market represented 26% of revenue, communications 23%, consumer also 23%, computing 17% and automotive 11% of revenue. Now let me review the end markets in greater details. Starting with automotive. Diodes continue to gain market share in this end market, growing both sequentially and year-over-year to 11% of the total revenue. This accomplishment is even more noteworthy in the current backdrop of the market and decrease related to the COVID-19 pandemic. Our consistent growth in this market is the direct result of our content expansion focus and new design win effort over the last few years, which most recently resulted in a significant new design win in Asia during the quarter. We also secured across design win across a number of new products, including various MOSFET, SASP, automotive grade TVS, in-motor control, lighting, powertrain and connected driving including ADAS, infotainment and telematic application. With a rapid increase of electronics in today's highly connected cars, robust ESD protection is…

[Operator Instructions]. Our first question comes from the line of Gary Mobley from Wells Fargo. Your question, please.

Good afternoon everybody. Thanks for taking my question. Hope everybody is staying safe. I want start off by asking about the linearity of bookings during the quarter and as well through the first here of the second quarter. I appreciate the fact there has been a lot of moving parts and a lot of things you have had to navigate over the last four months. But have you seen any sort of recovery in your end markets, here in the early part of the second quarter? Or are we waiting for some North American or European manufacturing facilities to open more fully? Any color you can give there would be helpful.

Okay. Hi Gary. This is Emily. So let me address your question. So in the beginning of April, we definitely see strong backlog across all region, including Europe and North America and Asia. I would say, the second week of April, we definitely starting seeing a change from the backlog situation and the bookings situation for Europe and North America. We are still seeing Asia pretty strong carry through the momentum. But definitely there is a slowdown for North America and Europe, I would say, second half of April and also May. And this is exactly like what you mentioned. This is really due to some of the factory shut down in North America and Europe that we see. There are some scheduled for the factory to resume, whether it's a percentage and by when, that's still we have to wait and see. But overall, Asia, we are seeing the strength but Europe and North America definitely are weaker than we expected.

Okay. And Brett, I am curious to know, how much of an impact to gross margin underutilization and COVID-19 related efficiencies? How much that influenced gross margin in the first quarter and as well how much of that is influencing your guidance for the second quarter?

Well, the biggest thing that impacted us in first quarter was, you had basically the time-off for Chinese New Year, which is usually a week. It ended up being more like two weeks. And so that was the biggest impact we had in the first quarter. And I think we will see that recover consistent with our demand and as we move into second quarter.

Okay.

Well, the first quarter, not just the Chinese New Year delay and actually another problem is the men, the people return to work slow than the previous several years. Previous several years when the Chinese New Year people return to work, the first week, we probably get 50% of people who come back, then probably 60%, 70%. In about one month, you almost get back to normal productions. But this year, due to the quarantine of the people, so when they started in February 10, other than people from Shanghai, if they return to work, they cannot really report to work, mainly to quarantine for 14 days before they can report to work. So when people take longer as longer long as possible, after February 10, they cannot report to work. And then all the worker we have from the Wuhan or Hubei province, they cannot even return to work. Therefore, when we start in February 10, in the first week, only like 30% instead of 50% could worker come back. It take almost until end of March to get other people we suppose to be have to fully report to work. So this is much worse than the previous several years of the first quarter. And therefore, our capacity utilization or I should say, our negative PV due to underloaded is much worse than before. That's why we are, our GP is in low than before.

Okay. And Dr. Lu, I did not quite catch everything you said about the pending Lite-On acquisition. Correct me if I am wrong, but we are just waiting for final approval from China. And so did you comment that you expect the acquisition to close at the very end of calendar year 2020? Or within your previously disclosed window of the second half of this calendar year?

No. What we expect is, during the second half of 2020 to close in on the Lite-On acquisition, Gary.

Yes. They have two date. Once called the outside date. And typically, outside means if you bypass that, no deal, okay. So we set an outside date originally is in May, we now set it to end of December. But that's not how we expect to the closing date. The closing date, we believe, now is somewhere in the 4Q or we said now it's 4Q, okay. So that's different. One is closing date. One is outside date.

Okay. All right. Thank you guys. I will concede the floor. Thank you.

Thank you. Our next question comes from the line of Tristan Gerra from Baird. Your question, please.

Hi. Good afternoon.

Hi Tristan.

Hi. Can you hear me?

Yes.

Okay. Great. What is your expectations for point of sale in Q2? And how do you see inventory levels changing at distis? Do you expect distributors to reduce inventory levels? And as such the POS will be actually above the POP which you just guided? And what also will be the implication for Q3, if there is some inventory deleveraging in Q2?

Well, I will let Emily to answer you the POS questions.

Right. So Tristan, I think overall we feel is that Asia would have a good momentum for Q2 because we actually see the strength both from the backlog and booking as well as the POS point of view. The big question is really North America and Europe. We are definitely seeing some slow down. It really depends on how soon the end customer factory recovery will happen. And so I think you know we definitely included everything that we know already into our guidance. And so, our guidance is actually better than I think most of our peers, as you can see. So that's really based on the knowledge that we have. But inventory days that we definitely continue to monitor closely and our ideal range is 11 to 14 weeks and that has still continued to be our goal. A lot of time, the last few days of the quarter kind of dynamically changed the situation but that still remain the goal. I think it really depends on the recovery of the market and a little bit higher inventory definitely can help us with faster lead time and short delivery quick turn as well. So we are seeing benefit of that. I think, for Q3 it's kind of difficult to estimate at this moment and we are not in a position to provide a guidance. But in general we definitely hope the market will start seeing some recovery in Q3.

Okay. Great. And then given the continued market share gains that you have experienced in automotive, will you say that the automotive end market in China, which I think may be around 40% of your total automotive exposure, has that stabilized quarter-on-quarter? Or is it still declining sequentially? From a unit standpoint, so not your dollar content but actual automotive units in China?

Right. I think overall automotive unit definitely declined, not only in China, right. That's overall the market. So we definitely are seeing that as well. So our automotive gained market share, like I mentioned, is really focusing on the content expansion. And also past few years on the demand in design win effort and we started seeing some results. So market is one thing, our content is other thing. So that has been the philosophy and focus for Diodes is really continue to expand on the demand creation, continue to expand the sockets, right. So yes, you are right, we overall are seeing the demand decrease from the unit point of view, not related to Diodes and that's really how we have been focusing on, is really like I said content expansion and also releasing quite a number of new product targeting in this area continues to drive the technology improvement as well.

So even in automotive market slowed down or weak quite a lot. But we still, year-over-year and quarter-over-quarter, our revenue still grow. That's really very good compare with our peers because we are able to accomplish that due to the past design win, past customer engagement.

Great. Thank you.

[Operator Instructions]. Our next question comes from line of Tianyan Goellner from Sidoti. Your question, please.

Yes. Thank you for taking my questions. So first one, just on the clarification, well, a little bit color on OpEx. So it looks like R&D and SG&A also came a little bit higher as a percentage of revenue compared to the most recent quarters. So I am wondering how much of those increase was driven by just the Coronavirus? What else drove the increase? And how should we think in the near future?

I think our R&D and SG&A actually in the fourth quarter last year compared with third quarter last year actually dropped 5% or 6%, right, so 5% or 6%. And that's because 4Q is the holiday in U.S. and Europe, the Christmas holidays. And then you go to 1Q, we are almost flat between 4Q and 1Q. And that 1Q is in Chinese New Year. So Asia expenditure for R&D and SG&A is slowdown but U.S., Europe is up. So they are above, totally 4Q to 1Q is above that. And therefore we don't really expect that go to 4Q, we think it's slightly going down, because all the traveling restrictions no more and people working from, well in U.S. and Europe, most of the people working from home. But Asia, they can travel but we don't encourage them to travel, okay. So with this, the traveling expenses go down some but we don't expect a major reduction on operational expense R&D and SG&A.

Okay. Thank you. And probably next one would be just some color on the industrial. Emily, if you can help me to understand, it looks like industrial really, I know the general market is weak, but can we just talk about how should we think about for 2020? And just some color would be very appreciated.

Okay. So I think overall, just like you said, right, industrial overall segment is actually a down segment. So it's similar to our automotive segment. Overall market is down but we have been continued to focus on demand creation, driving the content expansion, design win. Design win effort is actually, in the past few years, helping us to continue to increase the revenue in this market. So I think there is definitely different segments within industrial. I think the key is really continuing to focus on the expansion of the content. If we have more cars selling to the same customer on the same application and that's really where we actually gain the revenue improvement.

Okay. Thank you. That's it for me, yes.

Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back to Dr. Keh-Shew Lu for any further remarks.

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

Thank you. And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. Everyone have a great day.