Good afternoon, and welcome to Diodes Incorporated's Fourth Quarter and Fiscal 2023 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, February 6, 2024. 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 fourth quarter and fiscal 2023 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes’ Investor Relations firm. Joining us today are Diodes’ President, Gary Yu; Chief Financial Officer, Brett Whitmire; Senior Vice President of Worldwide Sales and Marketing, Emily Yang; and Director of Investor Relations, Gurmeet Dhaliwal. 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 form10-K for its fiscal year ending December 31, 2023. 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, February 6, 2024. 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 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 statements during the conference call, we refer to the 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, Gary Yu. Gary, please go ahead.

Thank you, Leanne. Welcome everyone to our results conference call. I'm pleased to be joining you today as Diodes' recent appointed President, effective January 2. As announced at the end of last year, my promotion was part of Diodes' multi-year CEO succession plan. Dr. Lu will continue to serve as Chairman and the CEO until at least May 31, 2027, which is consistent with current employment agreement. As many of you may know, I have previous served as Diodes' Chief Operating Officer and have been with Diodes since 2008. I'm very excited to be serving in this new role and leading Diodes into the next stage of growth which will focus on developing a broad portfolio of innovative products to enable customer success in the market we serve. In terms of our 2023 result, this past year proved to be a challenging as the consumer computing and the communications market experienced an extended slowdown, coupled with inventory rebalancing in the industrial market late in the year as well as softness in certain area of automotive market. Despite this global weakness, we make notable progress on improving the quality and a mix of product portfolio. We continue to focus on automotive and industrial markets through expanding design wins and increased investments in new product development which result in the over 350 new automotive-compliant products. The combined revenue from those two markets expanded to 46% of product revenue in 2023 compared to 42% last year. Our product mix improvements were especially evidenced in our ability to maintain full year gross margin near 40%, meeting our target model despite lower annual revenue. Throughout the year, we continue to drive manufacturing cost reductions, operating efficiency while also further developing our process technology for expansion of our internal facility utilization. Overall, we maintain strong cash…

Thanks Gary and good afternoon, everyone. Revenue for the fourth quarter of 2023 was $322.7 million compared to $404.6 million in the third quarter 2023 and $496.2 million in the fourth quarter 2022. Full year 2023 revenue was $1.7 billion compared to $2 billion in 2022. Gross profit for the fourth quarter was $112.5 million, or 34.9% of revenue, which reflects the lower revenue impacted by product mix as well as our wafer service agreements. This compares to $155.9 million, or 38.5% of revenue in the prior quarter and $206.2 million, or 41.6% of revenue in the prior year quarter. For the full year, GAAP gross profit was $658.2 million and GAAP gross margin was 39.6%, effectively at our target model of 40%. GAAP operating expenses for the fourth quarter were $91.8 million, or 28.4% of revenue and on a non-GAAP basis were $89 million, or 27.6% of revenue, which excludes $3.8 million of amortization of acquisition-related intangible asset expenses and $1 million in a restructuring cost gain. This compares to GAAP operating expenses in the prior quarter of $102 million or 25.2% of revenue, and in the fourth quarter 2022 of $109.7 million, or 22.1% of revenue. Non-GAAP operating expenses in the prior quarter were $95.6 million, or 23.7% of revenue. Total other income amounted to approximately $7.2 million for the quarter, consisting of $4.8 million of interest income, $3.5 million of other income, $1.8 million unrealized gain on investments, a $2.5 million foreign currency loss and $0.5 million in interest expense. Income before taxes and non-controlling interest in the fourth quarter 2023 was $27.9 million compared to $60.5 million in the previous quarter and $94.8 million in the prior year quarter. Turning to income taxes, our effective income tax rate for the fourth quarter was approximately 9.9%. For…

Thank you, Brett and good afternoon. Revenue in the fourth quarter was down 20% sequentially and slightly below the midpoint of our guidance. Our global POS decreased in the quarter and our distri inventory increased slightly, remaining above our defined normal range of 11 to 14 weeks. Looking at global sales in the fourth quarter. Asia represented 78% of revenue, Europe 14% and North America 8%. For the full year of 2023, Asia represented 71% of revenue, Europe 17% and North America 12%. In terms of our end markets, industrial was 23% of Diodes fourth quarter product revenue, automotive 18%, computing 25%, consumer 19% and communication 15% of product revenue. Our automotive and industrial end markets combined total 41% of the fourth quarter product revenue, representing the seventh consecutive quarter above our target model of 40%. For the full year, industrial was 27%, auto 19%, computing 23%, consumer 18% and communication 13%. Auto and industrial revenue in 2023 reached a record 46% of product revenue compared to 42% last year. Now let me review the end markets in greater detail, starting with the automotive markets. In the fourth quarter, automotive was 18% of our total product revenue, which is a slight decrease from the last quarter, 19%. We began seeing some slowdown along with inventory rebalancing in Q4 and believe this will continue into the first quarter. For the full year, revenue reached a record 19% of product revenue compared to 15% last year, which represented a 28% compounded annual growth rate from our initial launch into the auto market in 2013, which was only about 3% revenue at that time. Over this time period, our contact per car increased from $28 in 2013 to over $160 in 2024 and Diodes focus will continue to be on the compact expansion…

Thank you. [Operator Instructions] Today's first question comes from Matt Ramsay with TD Cowen. Please go ahead.

Thank you very much guys. Good evening. It's obviously been an interesting period here as the inventory and the industry have corrected. What I wanted to start the conversation with is maybe to give a little bit more detail on where you think your sell-in for the March quarter guidance is across the different segments relative to the sell-through and how much inventory we might still need to burn down. If you could give any color by segment, that would be helpful. And just where you think you are in terms of getting to that sell-in, sell-through balance so we can start to have revenue reaccelerate out the back end? Thank you.

Hi, Matt. This is Emily. Let me address your question. So I think from the market segment point of view, right, like I mentioned earlier, start with automotive. What we are seeing is the inventory rebalancing kind of started in Q4 and it will continue into the first quarter. And then from the industrial market segment, we experience weaker demand in Q4 plus the inventory rebalancing. Unfortunately, we've seen the weakness broaden. And from the computing point of view, customer inventory is pretty clean. I think the only concern or estimate that need to keep in mind is the Chinese New Year. So this is definitely going to impact some of the production as well as the output. We do expect the recovery in the second quarter and progressing into the second half of the year. From communication point of view, I talk about smartphone, customer inventory is pretty much normalized. But for the typical telecom, networking or the enterprise point of view, we see the inventory rebalancing will continue. So I think from the consumer market segment because it's pretty wide range of applications. But I think in general, what we see in customer inventory is relatively clean. We do expect more ramp up in the late second quarter based on usual consumer seasonality cycles, right. So that's really what we see overall by each of the market segments and the inventory situation.

Emily, thank you for that. I really appreciate it. I guess as my follow-up question, and this maybe will be across the different business segments. I wanted to ask about the pricing environment and maybe from two angles. First of all, we do hear a lot about some of your larger competitors maybe getting more price aggressive in certain end markets. So that's one element to it. And then secondly, I wanted to kind of compare you guys guided to a bit above $300 million for the March quarter. And if you compare that to, say, three or four years ago when you were at similar revenue levels, maybe what the pricing has done over that period of time. Do you see pricing obviously increased post the pandemic when the supply was all tight? Is it coming back down rapidly? Are we – any commentary that you have on the pricing trends would be really helpful? Thanks.

Yes. So I think usually pricing is always a balance between demand and supply, right. So when you see a weaker demand market, usually you definitely get more of the price pressure. This also varies by the type of product, right. If it's more differentiated, you usually get a little bit less price pressure versus very deep commodity, which is really that you have a lot of competitors within the same arena, right. So what we've been saying all along is we focus on product mix improvement, which really means strategically walking away from some of the key commodity area, right. So in general, that will continue to be our focus. And we believe with this execution of the product mix initiative continue to improve. That will help overall Diodes, not only from the margin point of view, but also from the revenue point of view. I think the second part of your question is we guided around 300 some range. And if I just look back to the historic numbers, let me see. I would say probably back to 2000 – year 2000, so that's a pre COVID time frame. That's also before the Lite-On Semiconductor acquisition. I just look at, for example, the 3Q [indiscernible] quarterly and our margin is around 35.9%. And keep in mind that that's actually before the Lite-On Semiconductor acquisition. And that pretty much gave us about 3% margin degradation. So that will be representing about 32% margin. The other difference is actually also from the underloading capacity point of view, it's quite significantly different from what we have right now versus before. So I think that's pretty much the reference point, right. So if you look at the overall margin, I think majority of the pressure is actually coming from the underloading. And that's also the area that we are driving very aggressively backfill some of the capacities, improve the utilization in the near future, right. So I would say that's really the second part of your question. I hope I answered it.

No, thank you, Emily. I really do appreciate that. I'll jump back in the queue. Thanks.

Thank you. And our next question today comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Hey everyone, good afternoon. Thanks for taking my question. And Emily, thanks for the detailed response to Matt's question. And that's where I want to pick up and start. So you covered the pricing dynamics, the underutilization, but let me ask a question on gross margin in a different way. Given that Q1 should represent seasonal low point, at least in the near term, would you expect the first quarter gross margin to be the bottom for the year? And maybe more pointedly, do you expect – what do you expect for gross margin for the full year? And within that, how much of a headwind does the wafer service agreements represent?

Yes, Gary. So let me answer the first portion of the question and then I'll let Brett or Gary answer the manufacturing service agreement, right. So definitely Q1 with our guidance, our revenue decreased about 5.5%, matching pretty much our seasonality, right. The market is still extremely dynamic and definitely we are not ready to guide the second quarter. But based on the usual seasonality, usually second quarter will be a growth quarter and then the third quarter because lack of, I would say overall visibility, what we truly believe the second half is definitely going to be stronger than the first half, right. I think we just need to continue to monitor the overall market as we grow from the revenue point of view. As we also have time to really qualify importing additional products into our internal fab, the utilization would continue to improve, right. So it's difficult for us to forecast the whole year. That's also not something we usually provided. But I think with the expectation of the second half will be stronger than the first half. With the product mix initiative we continue to drive with a total solution sales approach that we're confident that our gross margin will improve over time.

Got it, got it. Appreciate that, Emily. Before I ask my follow up, I did want to congratulate Gary on his new role. I forgot to mention that.

Well, thank you, Gary. It's my honor.

Brett, you want to talk a little bit about the manufacturing?

Yes, I would just. Gary, I would just add to what Emily said regarding what we'd expect transitionally on margin connected to the revenue expectation that we're not guiding. But from a seasonal perspective that's what we would expect. And then from a wafer service agreement, we believe we've absorbed that transitionally and going forward, hopefully what we would see is that would kind of be a neutral to tailwind for us as we continue to work on technology qualification and the ability to port our product into these locations, as well as ability to ramp revenue and that capacity being available to us.

Got it. Thank you for that. It looks like you're bringing down your non-GAAP operating expenses by about 12%, 13% from where they were a year ago. How much of that is variable versus structural? And the reason I'm asking the question is to try to get a sense of by how much operating expenses improve when revenue improves?

Yes. So basically what you see in that is a combination of things. So we have taken – we continue to take action connected to variable things, as you mentioned. But we're also doing actions that provide restructuring inside the company to drive efficiency. We've also impacted with the performance we've had that's been an impact on variable pay and we continue to look at where our investments are. I think what you'll see is our continued focus on R&D and that investment being kind of flat or tied with revenue growth. And from an SG&A perspective, continuing to look for opportunities to bring that down to drive structural efficiency and then not bring it up any more than some portion of what the revenue growth would be.

Thanks, Brett.

And our next question today comes from David Williams with Benchmark. Please go ahead.

Hey, good afternoon and let me add my congratulations to Gary.

Thanks, David.

Absolutely. So a lot of my questions were around the gross margin, but maybe just on the order velocity, if you can provide any color there, it sounds like it's still a mixed bag, but inventories are clearing in a few places. So just as you think about your order velocity through the quarter and maybe how those have trended so far into this first quarter here?

Yes. So I think we definitely seen improvement from the book-to-bill ratio point of view. And so I think there's a lot of positive signals on the inventory side. I talk about within the three Cs, it's getting cleaner than ever before. So I think this is all positive. I think the unknowns really the actual demand, especially after the Chinese New Year, right. I think the China recovery is still extremely slow than anybody's expectation. So I think overall, unfortunately still weaker from the visibility point of view. We just need to continue to monitor it very closely. But definitely, there's some good positive signs as well.

Okay. Great.

And David, and this is Gary, I will put some comment on that too. So I know we are going to put a lot of effort to the key account focus, that's being said, we're going to put a lot of sales effort to work with key account to create a demand. At the same time when you see the short lead time appeal continue to increase during this kind of period, and we kind of work with the distributor to put the right inventory in their warehouse to make sure they can handle this kind of short lead time appeal in timely basis.

Okay, great. And I guess, do you get a sense that your customers, that they are being fairly rational with their inventories and taking them to normal levels, or do you get a sense that maybe those are being brought down too low and you might get a bit of a snap back because of replenishment there?

Yes, I think that's a really challenging question, David. I think it's really down to the actual customer and their experience, as well as their view, sometimes also involves their financial cash flow situation. So it is a little bit dynamic, right. So what we see, I think what Gary mentioned is, we start to see more urgent orders, which is really driven by probably not enough of the inventory buffer that they built into their formula, right. So because the customer base varies a lot, that also varies a lot as well, right. So that's really where the challenge. But I think just like Gary mentioned, we focus more onto the quality of the products on the shelf, so we can actually pretty much quickly adjusting our support to the customers with this kind of very short lead time orders, right. So that's really pretty much what we focus on and will continue to focus for the next few quarters as the market continue to evolve, right.

Thanks so much. I appreciate the help.

Any other questions?

Any other questions? Hello?

That was it for me.

It just went silent.

Apologies, everyone. Our next question today comes from William Stein with Truist Securities. Please go ahead.

Great. Thanks for taking my questions. Also, Gary, I want to offer my congratulations.

Thank you so much, Bill.

I'm hoping you can talk to the split of revenue that went direct versus to the channel in the quarter?

Yes, so for the fourth quarter and our split by the channel is actually 65% distribution and 35% direct. This number usually varies a little from quarter-to-quarter depends on the customer demand and some of the order situation. I usually say rule of thumb is probably about two-thirds distribution, one-third the direct portion.

Great. Thank you. Also, I wonder to what degree the inventory build helped gross margins in the quarter. Usually when – it relates to a question I’ll ask in the – concurrently with this, and that is utilization. Can you tell us what fab utilization was in the quarter? What you expected to be next quarter? And then also the dynamic that I expect occurred in the Q4, which is when you build inventory like that, normally it’s a boost to gross margin, if you can quantify that. Thank you.

Well, I think what you saw will, in terms of our – we’ve talked about strategically putting availability in place both from kind of finished goods availability, but also from the availability as we procure about half of our wafers on the outside so that we can have flexibility in mix to build what we need. And so as you look at that and you look at utilization, and then you also look at typically in fourth quarter, we’re building in anticipation and preparing for Chinese New Year. And so when you look at the combination of that, what we saw from a utilization perspective was something that was pretty consistent. We continue to run below where we want to be and we believe that is something that’s going to help us as we go forward, as revenue starts to hopefully strengthen and we’re in a position to be able to drive more inside the factory. So we didn’t really – obviously it is all related, but as we look at fourth quarter, it wasn’t something we drove utilization up in order to deliver those results.

Okay. Thanks.

Thank you. And our next question today comes from Tristan Gerra with Baird. Please go ahead.

Hi, good afternoon. So just going back on gross margin, what’s the impact of underutilization in terms of bps? And sorry if I missed, if you quantified what the utilization rates are currently? And then is there a way to break down how much of the underutilization is from the service agreements where I know you’re qualifying new products to fill capacity as opposed to just general weakness in demand?

Well, what we’ve talked about, Tristan, was we talked about the fact that from an overall utilization perspective we ran pretty consistent from third to fourth quarter. We continue to run below where we want to be. In doing that, we have, I think successfully been able to get better availability in place to support short time ordering that we’re seeing. We’ve also been able to address getting – our hybrid manufacturing model service is about half of our wafers outside the company. So we put some more availability in place on that. That’s not something that really drives up our utilization. And we believe that from a wafer service contract perspective, we’ve pretty much absorbed the negative impacts in transition. And we believe going forward that’s a kind of neutral to positive thing as we continue to qualify our technologies internal, we can bring loadings internal and we can help enable revenue growth. But in total we’re running below where we want to be. And we have been at that place for really all of this year and we continue to be there in anticipation for things to strengthen as Emily had kind of gone through and what we anticipate kind of going into 2024.

Yes. And the one comment I would like to put in, Tristan, this is Gary. And when we’re visiting several key kind of customer, they kind of talked about the elicitation of internal wafer fab. That I think that’s really kind of think about it is like in the future growth they really want to make sure Diodes have this kind of capability can support and growth in the future. So I would say like we are still in the kind of under-utilization level as Brett mentioned about. But for the future, as long as we qualify our product and the process into our own internal fab and we should have the kind of capability to support more business to our customer.

Okay. That’s great. And then for my follow-up, I believe most of your pricing agreements are in automotive. So outside of automotive, in terms of your revenue, that’s not locked into pricing agreement. I mean, what type of feedback are you getting from customers? Are people trying to ask for better pricing or is it relatively stable? And how do you think that evolves through the rest of this year?

Yes, I think, Tristan, it really varies a lot depends on the end market, right? So you’re absolutely right. Usually in the Automotive Market segment, we actually have a longer time price matrix type of agreement in place with the customers. And for example, in the Computing Market segment, it’s going to be a lot more function and feature protocol driven discussion than some of the others. Of course, our price competitiveness is given, right? If we take more extreme in the consumer market, because the overall cost is very sensitive, the demand is weaker you tend to get more of the pricing discussions, right? So I think it varies a lot. It also varies from customer to customer. But in general, right, definitely as the demand is weaker, you definitely get a little bit more price pressure. It’s almost going back to my discussion earlier, depends on the product type. If it’s a function feature rich type of product, you get less of the competition. If it’s a deep commodity, you get more. And just keep in mind that pre-COVID Diodes actually had a 1.5% to 2% built in quarterly price reduction. So we actually definitely structured to support this kind of overall pricing, I would say trend. And the way to really focus on is actually improve the manufacturing efficiency and the cost down to really balance this kind of pressure that we’re seeing in the market.

Okay. Great. That’s very useful. Thank you very much.

Thank you. And this concludes today’s question-and-answer session. I’d like to turn the conference back over to the company’s President, Gary Yu.

Thank you, everyone for participating on today’s call. We look forward to reporting our progress on next quarter’s conference call. Operator, you may now disconnect it.

Thank you, sir. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.