Diodes Incorporated (DIOD) Q4 2017 Earnings Report, Transcript and Summary

Good afternoon and welcome to Diodes Incorporated Fourth Quarter and Full-Year 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instruction will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded today, Wednesday, February 7, 2018. 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 full-year 2017 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today from Taiwan are Diodes President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Rick White; 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 completion of the annual audit by the company's independent registered public accounting firm. As such, these results are subject to revision until the company files its annual report on Form 10-K in the fiscal 2017. In addition, management's prepared remarks contain forward-looking statements, which are subject to risk 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 7, 2018. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change. 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 to GAAP to non-GAAP items, which provide additional details. Also, throughout the company's press release and management's statements during the 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 60 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. 2017 was the milestone year for Diodes. We reached our goal of achieving $1 billion in the annual revenue commanded with the achievement of recurring new and the gross profit, as well as increased market share. Our soul results differed continued strength across all of our geographies in the target end market, as well as growth from Pericom. In fact, we reached record revenue levels in our automotive, industrial and the commutation end markets. We still have a primary growths driver in 2017. We also aim that the fourth quarter achieving a 210 basis points sequential increased in GAAP gross margin to 35.9%, demonstrating the ability to expand margins above our prior amount of 35%, and the tool our next target of 40%. For the past several years, we have been highlighting our continued investment and focus on new products as well as the process and the package entrepreneur to spend our customer content and the gross margin opportunities. Today we continue to accelerate the pace at of which we are transitioning all generation product to new higher margin product that provide higher value to our customers. In terms of our manufacturing operations, we complete the shutdown of the KFAB facility in mid-November as planned. As we stated in the past this action should dissolved in annual saving of between $10 million and $15 million beginning this year. Also, during the quarter, we completed the needed KFAB wafer fab process in SFAB 1 and are starting to rent production. We also completed the 8-inch wafer fab qualification in SFAB 2 and expect renting to 3,000 wafers per month by the end of this quarter and to 8000 to 10000 wafers for months by the end of this year. This capacity expansion aligns with our gross projection for 2018 and the overall favorable market demand. With our achievement of $1 billion in annual revenue in 2017, we recently established our next long-term goal of $1 billion in gross profit. In support of this objective, we are increasingly focused on key end market opportunities, that including automotive, industrial, high end smartphones, IoT and the high-end computing with our pure components. Further we continue to expand market share with our higher value new products and they remain committed to increase profitability as we benefit from solid operating leverage to drive earnings expansion and the cash flow for the company and our share orders. Before I turn the call over to Rick, I would like to take this time to welcome Emily Yang. Vice President Worldwide Sales and Marketing in mid-December and is joining us on today's call. Emily has been with Diodes, since acquisition of Pericom in November 2015, where she was Vice President of Global sales and also here are number of off sales managing positions covered in Asia, North America and Europe since 1998. With that let me now turn the call over to Rick to discuss our first quarter financial results and our first quarter 2018 guidance in more detail.

Thanks Dr. Lu and good afternoon everyone. Let me first mentioned that as stated in today's press release the impact on Diodes of the Tax Cuts and Jobs Act enacted in December 2017 is estimated to be an approximately $46 million increase in GAAP tax expense which has been excluded from the fourth quarter and full year 2017 non-GAAP results. We do not anticipate that this increased tax expense as a result of the tax bill will have a cash impact. Revenue for fourth quarter 2017 was $268.4 million, a decrease of 5.9% from the $285.2 million in the third quarter of 2017 and an increase of 15.7% from the $232.1 million in the fourth quarter of 2016. Revenue in the quarter decreased sequentially refracting typical seasonality and increased year-over-year due to continued strength across all of the target end markets and geographies. For the full year 2017 revenue was $1.05 billion and increase of 11.9% over the $942.2 million in 2016. GAAP gross profit for the fourth quarter was $96.4 million or 35.9% of revenues, compared to $96.3 million or 33.8% of revenue in the third quarter of 2017, and $67.3 million or 29% of revenue in the prior year quarter. The 210 basis points increase in gross profit margin was due primarily to continued improvements in product mix, combined with strong margin contribution from our Pericom business, as well as the reduced impact of the KFAB closure. For the full-year gross profit was a record $356.8 million or 33.8% of revenue, as compared to the $286.9 million or 30.5% in the prior year. GAAP operating expenses for fourth quarter 2017 were $72.9 million or 27.2% of revenue and $64.3 million or 24% of revenue on a non-GAAP basis, which excludes $4.7 million of amortization of acquisition related intangible asset expenses, and $4 million of restructuring charges. This compares to GAAP operating expenses in the third quarter of 2017 of $72.6 million or 25.5% of revenue and $63.9 million or 22.4% of revenue on a non-GAAP basis. Looking specifically at selling, general and administrative expenses for the fourth quarter, SG&A was approximately $44.7 million or 16.7% of revenue. This compares to $43.5 million or 15.3% of revenue in the previous quarter and $39.1 million or 16.8% of revenue for the fourth quarter 2016. Investment in research and development for the fourth quarter was approximately $19.7 million or 7.3% of revenue. This compares to $20.4 million or 7.1% of revenue last quarter and $17.7 million or 7.6% of revenue in the fourth quarter of 2016. Combined SG&A plus R&D for the fourth quarter of 2017 was $64.4 or 24% of revenue compared to $63.9 million or 22.4% of revenue in the previous quarter and $56.8 million or 24.5% of revenue in the fourth quarter 2016. Total other income and expense amounted to approximately $2.7 million for the quarter, including a $1.3 million negative currency impact. Income before taxes and non-controlling interest in the fourth quarter 2017 amounted to $20.8 million compared to $19.8 million last quarter and $2.6 million in the fourth quarter of 2016. Turning to income taxes, our effective income tax rates for the fourth quarter and full-year of 2017 were approximately $243.7 million and 99.6% respectively. Excluding the new tax reform impact of $45.9 million, our effective income tax rate would have been approximately 23% for the fourth quarter of 2017 and approximately 26% for 2017. GAAP net loss for the fourth quarter of 2017 was $30.7 million or a loss of $0.62 per diluted share. The GAAP net loss included $45.9 million or a loss of $0.93 per diluted share in tax related expenses not in our original guidance due to the recently passed Tax Reform Act. Excluding the tax law impact net income would have been $15.2 million or $0.31 per share compared to GAAP net income of $14.5 million or $0.29 per diluted share in the third quarter 2017 and net income of $1.3 million or $0.03 per share in the fourth quarter 2016. The share count used to compute GAAP diluted EPS for the fourth quarter 2017 was 49.4 million shares. GAAP net loss for the full year 2017 was $1.8 million or a loss of $0.04 per diluted share compared with net income of $15.9 million or $0.32 per diluted share in 2016. Excluding the tax law reform impact 2017 represented our 27th consecutive year of profitability. Fourth quarter 2017 non-GAAP adjusted net income was $21.6 million or $0.42 per diluted share, which excluded net of tax, $3.8 million of noncash acquisition-related intangible asset amortization costs, $2.6 million of restructuring charges and $45.9 million tax expense due to the tax law reform impact. This compares to non-GAAP adjusted net income of $22.6 million or $0.45 per diluted share last quarter and $7.7 million or $0.15 per diluted share in the fourth quarter 2016. Non-GAAP adjusted net income for the full year 2017 was $69.1 million or $1.37 per diluted share, compared to $38.4 million and $0.77 per diluted share in 2016. We have included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income which provides additional details. Included in the fourth quarter 2017 GAAP net income and non-GAAP adjusted net income was approximately $3 million net of tax of noncash share-based compensation expense. Excluding share-based compensation expense both GAAP diluted EPS and non-GAAP adjusted diluted EPS would have increased by additional $0.06 per diluted share in the fourth quarter and $0.24 for the full year. Cash flow generated from operations was $74.8 million for the fourth quarter and $181.1 million for the full year 2017 both were at record levels. Free cash flow was $45.5 million for the fourth quarter, which included $29.3 million of capital expenditures and $70 million for the full year 2017, which included a $111 million of CapEx. Net cash flow was a positive $2.6 million including the pay down of approximately $57.8 million of long-term debt and $8.7 million for the share repurchase. Net cash flow for the full year 2017 was a negative $44 million including the pay down of $159.9 million of long-term debt and the share repurchase. Turning to the balance sheet, at the end of the fourth quarter, cash and cash equivalents plus short-term investments totaled approximately $208.4 million. Working capital was approximately $415.2 million and long-term debt including the current portion was $268.1 million. At the end of the fourth quarter, inventory increased by approximately $5.1 million from the third quarter 2017 to approximately $217 million. The increase in inventory reflects a $21.8 million increase in finished goods, a $1.7 million increase in work in process and $18.4 million decrease in raw materials. The increase in finished goods inventory is due to preparation for the Chinese New Year slowdown. Inventory days were 114 in the quarter compared to 102 days last quarter. At the end of the quarter, accounts receivable was approximately $200 million, a decrease of $30.3 million from last quarter. AR days were 74 compared to 73 last quarter. Capital expenditures for the fourth quarter were $29.3 million or 10.9% of revenue and $111.2 million or 10.5% of revenue for the full-year. As we projected full-year 2017 CapEx was above our target model of 5% to 9% of revenue with the majority of expenditures related to newer advanced packaging capacity expansion in our assembly test operations in China and to support the KFAB process transferred to SM 1, as well as our 8-inch capacity expansion in SFAB 2. We expect CapEx for 2018 to return to our target model of 5% to 9% of revenues. Depreciation and amortization expense for the fourth quarter was $24.5 million and $95.7 million for the full-year of 2017. Now turning to our outlook, for the first quarter 2018, we expect better than typical seasonal results due to continued strength in our target end markets. Revenue is expected to range between $261 million and $277 million or down 2.8% to up 3.2%. At the midpoint this is flat to fourth quarter and represents a 13.8% increase year-over-year. We expect GAAP gross margin to be 36% plus or minus 1%. Non-GAAP operating expenses which are GAAP operating expenses adjusted for amortization of acquisition-related intangible asset expenses are expected to be approximately 23.2% of revenue plus or minus 1%. We expect interest expense to be approximately $3 million. Our income tax rate is expected to be 31% plus or minus 3% and shares used to calculate diluted EPS for the first quarter are anticipated to be approximately 51 million. Not included in these non-GAAP estimates are purchase accounting adjustments of $3.8 million after tax for Pericom and previous acquisitions. With that said I will now turn the call over to Emily Yang.

Thank you, Rick, and good afternoon. It's a pleasure to be joining you all today as Diodes' Vice President of Worldwide Sales and Marketing, and I look forward to meeting some of you in the coming months and quarters. Let me being my comments with the summary of the quarter. Fourth quarter revenue was down 5.9% reflecting typical seasonality following two quarters of strong sequential growth of 8% last quarter and 12% in the second quarter. Due to a tight supply, we focused on supporting immediate demand resulting in our distributor POP being down 4.8%. We had record POS globally up 3.7% with record high both in Asia and North America. Channel inventory dropped by 2% quarter-over-quarter and it is very clean and healthy. Customer and design activity remains strong across all regions, positioning Diode for continue growth in 2018. We also gain further traction with the Pericom product line in particular in computing market. We set revenue record in in high product categories during the quarter, including offset, battery management, digital power into switch. While also continue our strong design win momentum in CMOS LDO, LED driver, hall sensors and connect ASIC. Going forward we expect to make continue progress with design wins, new product introduction and margin expansion with new higher value process. Turning to global sales in the fourth quarter, Asia represented 80% of the revenue, Europe 11% and North America 9%. In terms of our end markets, consumer represented 26% of revenue, communications 26, industrial 22%, computing 18% and automotive 8% of the revenue. Let me now provide more detail within each of the end markets. In the consumer market, we continue to gain strong traction from our hall sensors CMOS LDO and switching products as well as increasing design wins for AC DC power supply controllers for battery chargers and adaptor applications in the smart devices including voice-enabled speakers. We also secured a number of wins for our low dropout voltage regulators in highly integrated battery chargers for IoT applications. Ultra-low IQ CMOS LDO also gaining design momentum in IoT applications like trackers. In the communications market, we also have other corner of solid design-in activities with our logic TVS, MOSFET, CMOS LDO, switching, timing and connectivity products across multiple applications, including telecom gateways, routers, switches, set top boxes, wireless devices and chargers especially in new wireless charging solutions. As a key focus for the coming year, we're working to expand our customer contest in high end smartphone specifically, as an example during the quarter our 12 gigabits per second differential MUX with MIPI switches are being designed into smartphones to help MIPI port. Our chip offers extremely low insertion loss and minimal skew between the channels to enable fast switching between the ports. For mobile communication application including charging of portable devices and variables Diodes launched several new TVS product for general panel surge protection. One in particular was the general protector from an active secure transmission for some major mobile devices which resulted in an immediate design-in. Our low voltage MOSFET product will also feature in this market space with two new CSP products for the application such as battery protection, featuring high power density in small footprint. Also new were a range of six new single-phase bridge rectified devices ranging from 1 amp to 3 amps. This innovative device features operating ranges up to 1000 volt in a very low profile, small footprint package and are also suitable for consumer and industrial LED lighting applications. For computing applications, we continue to see new design-in activity for our signal integrity, interface, logic and LDO products. Signal integrity activity was led by our new ReDrivers for USB Type C connectors, combo ReDrivers of PCIe3, SATA3 and USB 3.0 in server and storage applications as well as ReDrivers for Display Port 1.4 applications. We secure several new wins for our CMOS LDO product along with multiple new designs for our new interface products in server markets. We also introduced our translating transceiver targeted at server and storage systems to provide lateral translation and buffer needs in the system. Also, for computing applications, Diodes launched several TVS products including a surge protector for Type C connectors, a quick charging application, as well as CJ TV ads for USB 3.x and Thunderbolt 3.0 applications. In addition, we launched 13 100-volt to 130-volt Trench Schottky parts aimed at power supply applications in notebook and servers that are also suitable for consumer application. For industrial applications during the quarter Diodes launched 12 60-volts to 100-volt MOSFET based on our Shielded Gate technology for applications such as power-supply, charging, and brushless DC motor applications. We also introduced four new additional devices inside those recent launch range escape drivers ranging from 50 volts to 600 volts aimed at industrial motor driving. Industrial trend increasingly favors brushless DC motor due to their superior efficiency and compact size and Diodes small form factor products are ideally suited for this market. Complementary in the 600-volt Gate tracker portfolio with Diodes first 650-volt ITVT device enabling Diodes to provide evaluation for us and present a complete power stage for motors driving application. Additionally, during the quarter, we continue to expand our LED lighting portfolio for the industrial market by adding a universal PWM dimmable buck converter for the connected and tunable LED lighting applications. In fact, key LED lighting consumers have realigned efforts to work connected lighting, where our newly released parts are being used. And lastly in the automotive markets, Diodes launched a number of new products for this fast-growing market from several significant product families, including MOSFET, bipolar, pre-biased transistors, as well as linear LED drivers. Our focus on the momentum in this market continues as we design-in new product for applications such as infotainment, motor drive, events driving assistance systems. Additionally, our recently released family of hall sensors are being designed-in for several motor drive applications. We also released a unit holder Hall sensor switch family for proximity and position strengthen for applications such as seat position, seatbelt detection, gear shift position and tailgate door positions. Once again Diodes showed that MOSFET technology was the class leading power packaging capability and the 175-degree temperature rating drove significant customer qualifications and design-in activities across major automotive customers in Europe, U.S. and Asia. Finally, we also began sampling our first high-side IntelliFET device that is generating large customer interest. In summary Diodes closed out 2017 with record result. Setting the stage for continued revenue growth and margin expansion in 2018. Our new product initiatives combined with additional Pericom products have proven to be consistent contributor to our strong result. As Dr. Lu mentioned, our focus going forward with be on key end market opportunities that include automotive, industrial, high-end smart phones, IoT and high-end computing. With that I'm opening the floor to questions. Operator?

[Operator Instructions] Our first question comes from Tristan Gerra with Baird. You may begin.

Could you talk about to the inventory outlook for Diodes into the first half of this year, do you expect to further increase internal inventory days and also when should we expect the POP to exceed POS as you start replenishing some of the longer OEM demand as you under shipped overall demand in Q4.

I think overall, we're strong POS results as I reported earlier, so we're actually seeing year-to-year significant growth on POS result. For the inventory point of view and we continue to really focus on supporting the immediate need from the customers and we're strategically expanding our capacity as well. So, for the inventory position and number of days we definitely monitor very closely.

I mentioned for we going to have the Chinese New Year in 1Q. And this Chinese New Year we have no choice but [indiscernible] in China going to go long and therefore we strategically viewing some inventory. We actually start our Chinese New Year action, which is changing four shifts to two shift operations start from December last year and full shift operation means they walk in 12 hours and four days a week and rest three days, another operation will be working three days and four days also night and two shift operations mean working six days rest one day. And all the teams. So, this result, the way we gear up to prepare for the Chinese New Year typically it was done during the Chinese New Year when we don't have enough people. But this time, because market is tight -- or the market is good, capacity is tight, I decided to take in portion of the very bottleneck operation to this two-shift operation, start from December 1, last year. And therefore, we prepare and build us some inventory, finish good inventory, prepare for Chinese shutdown and to stock for [doubt of our] customer who really face very tight support issues. So -- anyway, the key thing, POS is very, very strong and POP -- POS is actually better than POP, and we do have some inventory prepared for the Chinese New Year to support the customer needs.

And then given the tightness that you are experiencing currently and as you have mentioned the Chinese New Year's impact on production, what's the timeframe in 2018 where you expect lead times to stop coming down and where you are expecting to have supply catch up with demand?

Well, I think I mentioned that before. I see this time, the tight situation is not going to loosen up in near futures, okay. And so far, we still see very tight in first half of this year. And now, visibility for the second half is not clear, but we do working on putting up some needed capacity, to support the growth of this year. But really majority of the -- we need to put the capacity its really because we continue gaining the market share. I think during the speech, you noticed we gained the market share in all the regions, Asia, North America, and Europe. And we actually have the record revenue again this year for all our end markets, especially for automotive you can see now we continue two quarter now at the 8% of our revenue. So, we are working continue toward our goal this year to 9% of our revenue. So, all the market gain and all the growth we do need to prepare a capacity for it. Okay, so I don’t think that capacity expansion from us going to be over capacity because I -- so far, I still see a very strong market growth at least for Diodes.

Thank you. Our next question comes from Gary Mobley with Benchmark. You may begin.

I'm curious to know if we should think of the 36% gross margin you predicting for Q1 is the new base of which you can further expand gross margin as you get to your seasonally strong second and third quarters of fiscal year '18.

Well I typically don’t get the focus beyond the current first quarter or beyond the current quarter but so far, we see the market at this is still very strong and therefore you can assume that, you can see that like in the 4Q, we're 35.9% which is almost 36% and 1Q we guide 36% and actually if we continue the seasonality of 2Q and which typically should be early to grow then if we have even, if we have the goal then yes, the GP will increase. And second thing is we are ramping up SFAB 1 to support the KFAB shutdown. And you remember we shut down KFAB, November on schedule. And we are now installing the equipment from KFAB, and the schedule is everything should start to qualify online, all the equipment from KFAB install in SFAB 1, should be by end of this month we shipping everything ready and we start to ramp and if we start to rent then we have more output, lower cost from SFAB 1 and at the same time I think the 8 inch fab in the -- just the KFAB shut down we already state the synergy will be $10 million to $15 million start for Q1. So, if you see continue value in that area, yes, the 3Q will continue to improve. And then the 8-inch fab, I think I mentioned all ramping to 3000 wafers by end of this quarter and by end of the year go to about an 8000 to 10000 and that will improve the GP too. So, the overall if the market continues the strength, Diodes will continue gaining market share, our assembly cost are underloaded should not exist and that GP will be good and then we expect one synergy and we expect to 8-inch shrink. I feel like I said I'm no making the forecast yet, but 36% and it should continue and improve too.

And Rick, can you share with us your goal in reducing debt for 2018 based on your cash flow assumptions and what on? And you can share with us your outlook for the tax rate for that year under the new tax plan?

Sure. So, from a debt perspective since we bought Pericom, we take down about 200 million, we paid 160 last year and so I don’t have a detail forecast of how much we are going to pay down it depends on the interactions we need to make in certain family cash and wafer fab places, so it's going to be in the $100 million range or more probably it is my guess. From a tax perspective we guided 31% the issue here is not the lower tax rate that issue has to do with three parts of the tax code there is a part of the code called guilty and it's basically if a non-U.S. earns over 10% of his assets and the U.S. government tax has been anyway there is a disallowance over an interest reduction and then Taiwan adjusted their tax rate from 17% to 20%. So those three pieces are included in that 31%. So, we're going to have to go and do some things make some changes in the structure and also the way we do business processes to make it go down and so we are in the process of doing that. I'm not going to give you a rate for the rest of the year because we're still steady in it, and we are still looking at what impact we can have.

If you look at our best 250 to 268 and our cash is almost to that 200, so we should able to bring more money back plus the money we make for operation, to pay-off the debt. So, my aggressive point is hoping by end of next year, try to pay-off our debt. Now we may not be able to do it but at least go down to the case be need to be much more than that.

Okay, so you are still making more acquisitions.

That's a different story. Gary, if I make operated or acquisition then whatever we talk I talking above it's all. But I'm still today, I don’t have very obvious one under the radar screen yet, okay. So, the goal is really try to reduce that tax to a very minimum and has more cash against the debt.

Our next question comes from Shawn Harrison with Longbow Research.

This is Gausia Chowdhury on behalf of Shawn. Can you remind us of what the normal seasonality is for the first quarter with Pericom? And then any color that you could provide without any end markets which funds would be the best in the first quarter and 2018 aside from automotive please.

Okay, let me clear that answer first. This similarity typically is 1Q we were down from 4Q previous year about 5% to 10%, that is typical. And then second quarter typically growth 5% to 10% and then third quarter around a 5% and then fourth quarter typically down 3% to 5%. That is a typical similarity. But this year really the two things, one is we really continue gaining the market share. Second the market is still very good for us at this at least the market we participate. Therefore, we are able to guide our 1Q platform, from the 4Q. And so that is better than similarity of these quarters. Now if you are asking which market for us we almost see each market is very good. For example, computing due to the Pericom acquisition and Pericom products, very strong and we -- Diodes products, actually, one notch higher. And therefore, they are computing for us if that is getting quite growth. And automotive I don’t really say industrial we are still quite strong. And even the compute of the communication since we focus on high end form of smart phones, and that actually give us a very good growth in that area. And that’s a communication. In consumer we focused on IoT and different IoT top up in different applications. So, if you look a Diode then you almost -- that’s why we are every -- we are saying we gained the market share we grow at record revenue of all different market segment, it is because the growth for Diode in order, in market. So, if you see we grow and record revenue in all the regions and markets and all the end markets we participate.

And then can you break down the components behind the gross margin improvement. Just roughly how much was it between Pericom versus mix versus the KFAB?

The gross margin contribution…

We don’t have that, we don’t disclose that kind of...

Yes, we don’t disclose. But before we acquired Pericom, Pericom gross margin its very high. There are two market segments. One is a is a crystal, an oscillator called [indiscernible] called FCP, frequency-controlled product. That is slightly below margin somewhere around 13% and the IC portion of the telecom business is very good is in 50% to 60% GP. And when Diodes take over we put a lot effort to increase the market share in the IC area and I think if you read in through Henry's speech, it's really going up quite a lot and USB Type C area, so if you look at Pericom had very strong product portfolio brings us one step higher from PC to servers to data center and those with a very good high GP type of products and their growth is better than other areas. And so, this is how it helped Diodes to improve the GP and in the computing area to gain the market share, Emily, you can.

I think on top of that we continue to focus our expanding our context, gaining the market share, focus really on the higher value products and provide a higher value to the customers. So, we believe this strategy and focus would continue to enable Diodes' growth in the margin expansion area.

Thank you and one last clarification if I may, the CapEx closure synergies, did I hear you correctly that you said you will start seeing it the end of the quarter and would it be back half weighted or how should we think about the weighting throughout the year.

So that we've said all along that the impact is going to between $10 million and $15 million and that’s based on the lower cost associated with SFAB 1 output versus KFAB as SFAB 1 ramps up, and as Doctor Lu said we’re just going to start that in March. So, it will have moved through the quarters as they increase production.

So that synergy actually has been, proven number one, SFAB has better yield, better performance than KFAB. Number two, the cost is low number three now its capacity is actually increased because originally you have KFAB, SFAB capacity is limited but now we put in KFAB equipment in SFAB and boost the SFAB capacity one notch higher. And the last one is when you combine two fabs into one, that utilization actually -- because before we shut it down, both are running 70% to 80% now after one call away the other one even at a higher capacity due to in stock KFAB equipment, we still go to running somewhere around 95% because direction is SFAB with higher capacities, so based on that we are confident our synergy from the combined two fabs should be $10 million to $15 million.

Our next question comes from Edgar Roesch with Sidoti & Company.

So, I joined little late I know you gave some commentary about automotive but I wanted to understand something about the end market? As you have success there does the qualification process get shorter or in any way easier for Diodes?

The qualification it is now going to be shorter. Especially the new spend that’s pretty of couple wires the qualification is even tougher, but don’t forget we saw this engagement or this focus back to 2013 and I think I make that statements several times with different investors we are talking about in 2013, I started focus on automotive twice and 3% of our revenue in 2013 coming for automotive, then 4% 2014, 5% 2015 and going up and it's the reason we are able to grow like a 20% to 30% a year it's due to gradually the automotive part rented up to production. So, you want to see at even highest peak of the growth later on because it is more and more products is really direct. So, the range that waiting time to rent do not get any shorter and it's more tougher, especially for the safety type of product, safety type of system it is getting tougher. But virtually we take these actions way before and now and therefore it enables us to continue a very fast speed of growth.

And as a follow-up Dr. Lu how intense are package innovations and winning business there. I know obviously quality is a big factor but you guys used packaging innovations to win a lot of business, is that intense on the automotive side or is it more standardized?

Yes, it's basically the power package, I've been talking about Diodes is focused on two directions, one is power packaging. We have smaller but higher energy delivery, the power efficiency, so power package is one direction area. Another area is small geometry that gets smaller and smaller and -- like CSP, like DDFN in both direction. So, for the power trend area of automotive, yes, that area we get in our power packaging, our assembly. We're getting there. And obviously like we said Diode has a very good packaging capability, therefore our quality can -- our manufacturing can pass the audit of all the automotive companies. All the automotive companies before they really using high volume of the product they need to audit our facilities. And our packaging site our CIP SAP and even the Neuhaus which is in Europe they all passed automotive audit. So those enable us to enter into automotive and highly growth in the market.

I think we are also driving our technology improvements and also with connected cars, we're definitely seeing expansion crossing to higher technology level. So, we see significantly Pericom contacts with a higher technology expand into this area. So, I think what Dr. Lu mentioned over the years we see a very strong pipeline from the demand creation point of view. We believe with our technology; our packaging technology improvement will really enable us to continue to grow in this segment.

Yes. This connected car or infotainment, all those Pericom product can bring Diode product into that area.

And then one other question. I know you don’t give a lot on products category whether power semis or connectivity and timing or where your strength is coming from. But could you -- sensibly power semis was a good business in 2017 and do you see that as a strength again in '18? Could you give us a little bit of color on categories?

Yes, definitely. Connectivity product, it really covers a lot of PCI Express, we call the package switch, basically expanding PCIe ports for different applications. We are definitely seeing a very strong adoption rate which we just mentioned a little bit earlier, even into our automotive segments right. PCIe, which covers a lot of high-speed muxing technologies from Pericom, we're also seeing that being adapted in multiple market segments. I think the other strong area is actually timing. And timing is really covers both from the clock IC point of view as well as frequency controls, which usually people familiar with crystals and crystal oscillators. And we believe with the leverage that we have with the strong Diodes print position across multiple segments that we can actually leverage and cross sell this kind of product into our key customers area and key end market focus including automotive, industrial, IoT application, high end computing as well as high end smartphone areas. So, we do see a lot of synergies to leverage between the product lines within Diodes product families.

Well, [indiscernible] USB type C and power delivery, we actually from different group address different areas. [indiscernible] is dealing in the USB type screen of product but if you look at Diodes portion from acquisition basically they are focused on the power Type C, in Diodes we have our product in the Type C and from the power delivery point of view our MOSFET is very strong in that area. So now when you combine, this technology AC to DC charger, that technology one side of the cable, then you’re talking about how the telecom is the other and the MOSFET is all the MOSFET of the cables, we spend on very strong producing to address the Type C power delivery, that kind of thing so.

One of the other actually also extremely trying this kind of application of prototype is actually a single integrity product line, so we do see very strong momentum in TYPE C, in PCIe, infotainment different area that we see picking up facility, so we are very happy with that we believe that will supply our future growth.

[Technical Difficulty] too much detail on the product portfolio and it is because Diodes plus telecom, we have so many products, so very difficult to just talking about one area, so typically say, we gain the market share but if you did that we do have developed a product portfolio to cover different end markets and different systems solutions.

Thank you. And I'm showing no further questions at this time. So, I'd like to return the call back to over Dr. Lu for any closing remarks.

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