Yahoo Finance Diodes Incorporated (NASDAQ:DIOD) Q1 2024 Earnings Call Transcript
Diodes Incorporated (NASDAQ:DIOD) Q1 2024 Earnings Call Transcript May 10, 2024
Diodes Incorporated isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to Diodes Incorporated's First Quarter 2024 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, Thursday, May 9, 2024. I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead.
Leanne Sievers: Good afternoon, and welcome to Diodes first quarter fiscal 2024 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 & Marketing, Emily Yang; and Director of Investor Relations for 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 Form 10-Q for its fiscal quarter ending March 31, 2024.
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, May 9, 2024.
Diode 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 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, Gary Yu. Gary, please go ahead.
Gary Yu: As reported earlier today, first quarter revenue reflect a slower-than-expected recovery in the consumer, computing and the communication market, coupled with the typical first quarter seasonality due to the Chinese New Year holiday. However, late in the quarter, we began to see some signs of demand improvement with distributor inventory levels starting to stabilize, supporting to our belief that the first quarter should be the low point and are guiding for a return to seasonal growth in the second quarter. In the automotive and industrial end markets, first quarter combined product revenue remained above our target model of 40%, but continue to be affected by inventory adjustment and a softness in certain areas. More broadly, the slower overall demand environment in the quarter contributed to reduced loading at our manufacturing facility, both internal production as well as from our manufacturing service agreement temporarily impact gross margins.
We expect gross margin to resume toward our target of 40% as we increase our factory loading by qualifying more products combined with increasing revenue growth for our higher-margin automotive and industrial market, consistent with our historical performance and our long-term growth strategy. In summary, with early evidence of recent pricing pressure subsiding, Diodes is well positioned with the size and the scale to support a return to growth as global demand and distributor inventory improves across our end markets. We remain focused on operating our manufacturing facility at a high level of efficiency as demonstrated by the steps the company has taken over the past several quarters to further develop our process technology and capabilities while lowering manufacturing costs across our operations.
With that, let me now turn the call over to Brett to discuss our first quarter financial results as well as our second quarter guidance in more detail.
Brett Whitmire: Thanks, Gary, and good afternoon, everyone. Revenue for the first quarter of 2024 was $302 million compared to $322.7 million in the fourth quarter of 2023 and $467.2 million in the first quarter 2023. Gross profit for the first quarter was $99.6 million or 33% of revenue, which reflects the reduced loading at our manufacturing facilities due to the lower revenue. This compares to $112.5 million or 34.9% of revenue in the prior quarter and $194.5 million or 41.6% of revenue in the prior year quarter. GAAP operating expenses for the first quarter were $86.6 million or 28.7% of revenue, and on a non-GAAP basis, were $87.6 million or 29% of revenue, which excludes $3.8 million of amortization of acquisition-related intangible asset expenses.
This compares to GAAP operating expenses in the prior quarter of $91.8 million or 28.4% of revenue, and in the first quarter 2023 of $108 million or 23.1% of revenue. Non-GAAP operating expenses in the prior quarter were $89 million or 27.6% of revenue. Total other income amounted to approximately $5.9 million for the quarter, consisting of $4.6 million of interest income, $1 million of foreign currency gains, $0.4 million of other income, $0.4 million of unrealized gain on investments, and a $0.5 million in interest expense. Income before taxes and non-controlling interest in the first quarter 2024 was $18.8 million compared to $27.9 million in the previous quarter and $88.6 million in the prior year quarter. Turning to income taxes, our effective income tax rate for the first quarter was approximately 18.8%.
GAAP net income for the first quarter was $14 million or $0.30 per diluted share compared to $25.3 million or $0.55 per diluted share last quarter and $71.2 million or $1.54 per diluted share in the prior year quarter. The share count used to compute GAAP diluted EPS in the first quarter was 46.3 million shares. Non-GAAP adjusted net income in the first quarter was $13 million or $0.28 per diluted share, which excluded net of tax, $3.1 million of acquisition-related intangible asset costs, a $0.3 million non-cash mark-to-market investment value adjustment, and a $3.8 million insurance recovery for a manufacturing facility. This compares to $23.4 million or $0.51 per diluted share in the prior quarter and $73.4 million or $1.59 per diluted share in the first quarter 2023.
Excluding non-cash share-based compensation expense of $4 million, net of tax, for the first quarter, both GAAP earnings per share and non-GAAP adjusted EPS would have increased by $0.09 per diluted share, respectively. EBITDA for the first quarter was $48.3 million or 16% of revenue, compared to $58.4 million or 18.1% of revenue in the prior quarter and $121.8 million or 26.1% of revenue in the first quarter 2023. We have included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income and GAAP net income to EBITDA, which provides additional details. Cash flow used in operations was $31.1 million for the first quarter. Free cash flow was a negative $51.5 million, which included $20.4 million for capital expenditures.
Net cash flow was a negative $47.9 million. Turning to the balance sheet. At the end of the first quarter, cash, cash equivalents, restricted cash plus short-term investments totaled approximately $280 million. Working capital was $824 million and total debt, including long term and short term was approximately $70 million. In terms of inventory, at the end of the first quarter, total inventory days were approximately 184 as compared to 160 last quarter. Finished goods inventory days were 67 compared to 49 last quarter. Total inventory dollars increased $39.6 million from the prior quarter to $429.4 million. Total inventory in the quarter consisted of $40.2 million increase in finished goods, a $1.6 million increase in work-in-process, and a $2.1 million decrease in raw materials.
Capital expenditures, on a cash-basis, were $20.4 million for the first quarter or 6.7% of revenue and within our target range of 5% to 9%. Now turning to our outlook. For the second quarter 2024, we expect revenue to be approximately $316 million, plus or minus 3%, representing a 4.6% sequential increase at the midpoint and reflecting a return to typical seasonal growth. GAAP gross margin is expected to be 33.5%, plus or minus 1%, reflecting the lower mix of revenue from the automotive and industrial markets as the 3C markets recover. Non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition-related intangible assets, are expected to be approximately 28.5% of revenue, plus or minus 1%. We expect net interest income to be approximately $3 million.
Our income tax rate is expected to be 18.5%, plus or minus 3%, and shares used to calculate EPS for the second quarter are anticipated to be approximately 46.5 million. Not included in these non-GAAP estimates is amortization of $3.1 million after tax for previous acquisitions. With that said, I will now turn the call over to Emily Yang.
Emily Yang: Thank you, Brett, and good afternoon. Revenue in the first quarter was down 6% sequentially and slightly below the midpoint of our guidance due to a slower recovery in the 3C market than originally expected. Our first quarter global POS decreased slightly due to the Chinese New Year in Asia, but has recovered since March and continued to grow into the second quarter. This also drove channel inventory value to decrease even though remaining above our defined normal range of 11 to 14 weeks. As Gary mentioned, we are beginning to see improvement in demand going into the second quarter with stronger book-to-bill ratio. In fact, this is the first time we've seen a positive book-to-bill ratio since mid of 2022, further supporting our expectation of the first quarter being the low point in the cycle.
Assuming no major macroeconomic change in the market, given the stronger backlog and better book-to-bill ratio and healthier inventory level in the 3C segment, we feel optimistic about second quarter revenue improvement and stronger second half of the year than the first half. Looking at the global sales in the first quarter. Asia represented 75% of revenue; Europe, 16%; and North America, 9%. In terms of our end markets, industrial was 23% of Diodes' product revenue; Automotive, 18%; Computing, 25%; Consumer 20%; and Communication, 14% of product revenue. Our automotive industrial end market combined totaled 41% of the first quarter product revenue, representing the eighth consecutive quarter above our target model of 40%. Now, let me review the end markets in greater detail.
Starting with Automotive market, revenue was 18% of our total product revenue, which was flat to last quarter on a percentage basis. The slowdown in the demand, along with inventory rebalancing continued in the first quarter, and we expect this would continue into the second quarter. But our demand creation momentum continued with expanding design in and design win across multiple applications. Our focus on the connected driving, comfort, style, safety and electrification continued as we introduced 44 new automotive products in the first quarter with a focus on applications such as EV protection, high speed and high bandwidth automotive Ethernet network protection, battery management system, Wi-Fi telecommunication, and infotainment. We're also expanding our solutions within electric and hybrid electric vehicle subsystems, including battery chargers, onboard chargers, high-efficiency DC/DC converters, motor drivers and traction inverters.
Additionally, the adoption of Diodes' USB Type C ReDrivers, display alternative active crossbar Muxes and MIPI switches have increased significantly in the rear-seat entertainment, smart cockpit, ADAS and camera monitor systems and our PCI Express Gen 6 Clock generators, crystal oscillators and TVS products are being designed into various ADAS platforms. We also continue to see momentum and design win for rectifiers, switchers, diodes and DC-DC product in infotainment, ADAS and telematics. Also within automotive our linear LED drivers won designs in headlights and EV high-beam low-beam applications, while our TVS products are being designed in for power line protection in the headlights, steering control modules and daylight running lights.
Our hall-effect switches and latches continue to gain design win and revenue growth momentum for cooling water pumps and window lift controls. In the industrial market, first quarter revenue represented 23% of the total product revenue, which was also flat to the last quarter but down in terms of revenue as the inventory rebalancing continues during the quarter, and this may last into the second half of the year. Despite the slowdown, we continue to focus on expanding our design pipeline and application opportunities. Specifically during the quarter, our LDOs continue to gain traction in fans, power tools and e-meter applications while Rectifiers switch [ to Diodes' ] carbide power MOSFET are being used in the power tools, power storage, solar inverters and high-efficiency LED backlighting.
We also continue to win designs with our Piezo driver portfolio in smoke detectors and alarm applications. Also in the industrial market, we are seeing adoption of HDMI Muxes and DisplayPort HDMI ReDrivers and LED drivers in the commercial display, highway signs and conference TV applications. We're also seeing traction for silicon carbide products in HVAC, energy storage system, power factor correction, and server power supplies. Additionally, our Contact Image Sensor had new design wins in automated optical inspection applications. In the computer market, like I mentioned earlier, inventory is healthy and we expect to see a gradual improvement in revenue, especially in the AI server area, with signs of stronger backlog in Asia. From a design momentum point of view, our signal integrity and connectivity products continue with increased adoption of HDMI, USB-C, MIPI, EDP ReDrivers and switches along with USB-C power switches and TVS in applications, including workstation, gaming, notebook, desktop, docking stations and tablets.
We also saw new design-ins and production ramping for PCI Express Gen 3 package switch, PCI Express clock buffers, TVS, rectifier, and switches diodes in server, artificial intelligence servers and data center applications. We also secured design wins and revenue growth for hall-effect latched switches in DC fans, LED drivers in keyboard lighting and contact image sensors for multifunction printers. Turning to communication market. On the enterprise side, due to slower-than-expected demand, the inventory depletion rate has been slow, and we expect this may last into the second half before returning to a healthy levels. On the smartphone side, even though inventory is clean, the recovery will likely to be gradual over the coming quarters. For the design side, our camera fresh LED driver rectifiers, clock buffers and LDOs with designing and ramping up in the smartphone and 5G equipment, while TVS products are being designed into smartphone battery protection applications.
We have several design wins for crystal oscillators in optical transceiver modules and Hall-Effect switches and true wireless stereo technology for earbuds. And lastly, in the consumer market, similar to the PC market, inventory is relatively clean. Even though the overall demand is not as strong as we expected, we still expect some of the new designs will start to ramp in Q2 and peak in Q3. Our Buck converters, LED drivers and MOSFETs are being designed into several smart home IoT and virtual reality projects, while our LDO saw new design wins in smart watches. Also our rectifiers, switch diodes and low switches and buck converters were designed in and ramping up during the quarter in televisions and monitors. We are also seeing traction for USB Type C DP retimers and USB Type-C active cable and docking station applications.
In summary, as indicated by our second quarter guidance, we are expecting a return to seasonal growth based on the demand improvement and channel inventory stabilization that we began to see, specifically in the 3C markets. As the demand improve further across all our end markets, we expect gross margin to benefit from increased loading of our internal facilities as we qualify more products while also benefiting from our product mix improvement initiatives by expanding revenue contribution from our higher-margin automotive and industrial solutions as those markets recover and resume growth. With that, we now open the floor to questions, Operator?
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