This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Good afternoon and welcome to DIODE's Incorporated Fourth Quarter and Fiscal 2021 Financial Results Conference Call. At this time, all participants are on the listen-only mode. At the conclusion of today's conference call, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference call, please press the star key followed by the zero on your touchstone phone. As a reminder, this conference call is being recorded today Wednesday, February 9th, 2022. I would now like to turn the call over to Leanne Seavers of the Shelton Group Investor Relations. Leanne, please go ahead.
spk10: Good afternoon, and welcome to DIODE's fourth quarter and fiscal 2021 financial results conference call. I'm Leanne Seavers, president of Shelton Group, DIODE's investor relations firm. Joining us today are DIODE's chairman, president, and CEO, Dr. Kashi Liu, chief financial officer, Brett Whitmire, Senior Vice President of Worldwide Sales and Marketing, Emily Yang, Senior Vice President of Business Groups, Gary Yu, and Director of Investor Relations, Vermeet Dhaliwal. Before I turn the call over to Dr. Liu, 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-K for its 2021 fiscal year ending December 31, 2021. 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 9, 2022. DAS 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 you 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 DIODE's website at www.diodes.com. And now I'll turn the call over to DIODE's Chairman, President, and CEO, Dr. Kei-Shu Liu. Dr. Liu, please go ahead.
spk07: Thank you, Leanne. Welcome, everyone, and thank you for joining us today. Dow had a record year in 2021, deflecting sustained execution that consists of five consecutive quarters of record revenue, as well as seven consecutive quarters of adjusted earning growth. In fact, full-year revenue grew 47% and the gross profit grew 56%. with gap earning per share expanding 166%, and adjusted earning per share expanding 120%, demonstrating the significant operating leverage in our model. Additionally, gross margin expanded 610 basis points, from the first quarter of 2021, the first full quarter after completing the die-on semiconductor acquisition, to the fourth quarter of 2021. This increase was driven by a combination of product mix improvement, manufacturing efficiency, and improved learning. Also, contributing to our ongoing margin expansion has been the achievement of five consecutive quarters of Raker Pelcom revenue, three consecutive quarters of Raker International revenue, as well as six consecutive quarters of Raker Automotive revenue. which grew 59% in 2021 and reached a record 12% of total revenue for the full year. With a full year revenue of $1.8 billion and a gross profit of $0.7 billion, 2021 represented a significant step toward our 2025 target of $1 billion in gross profit on $2.5 billion revenue and 40% gross margin. In addition to the manufacturing synergies provided by the LLC acquisition, over these past years. We expect to realize expanded synergies across our product portfolio, customers, and the end market in the coming year to drive additional revenue growth and the gross margin expansion. With that, let me now turn the call over to Brad to discuss our fourth quarter financial results and our first quarter 2022 guidance in more detail.
spk11: Thanks, Dr. Liu, 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 fourth quarter 2022 2021 was a record $480.2 million, an increase of 1.9% from $471.4 million in the third quarter 2021. For the full year 2021, revenue was a record $1.81 billion, an increase of 46.9% from $1.23 billion in the prior year. Gross profit for the fourth quarter was also a record at $190.7 million or a record 39.7% of revenue, increasing 5.2% or 130 basis points from $181.2 million or 38.4% of revenue in the third quarter 2021. For the full year, Gross profit increased 55.5% to a record $670.4 million or 37.1% from $431.1 million or 35.1% in 2020. GAAP operating expenses for the fourth quarter 2021 were $104.7 million or 21.8% of revenue And on a non-GAAP basis, we're $100.1 million, or 20.8% of revenue, which excludes $4.1 million of amortization of acquisition-related intangible asset expenses and $0.6 million of acquisition-related costs. This compares to non-GAAP operating expenses in the prior quarter of $99.6 million, or 21.1% of revenue. GAAP operating expenses for the full year were $394.4 million or 21.8% of revenue compared to $296.8 million or 24.1% of revenue in 2020. Total other income amounted to approximately $22.8 million for the quarter consisting of $13.2 million of unrealized gain on investments $11.2 million of other income, $788,000 of interest income, $1.1 million in foreign currency losses, and $1.2 million in interest expense. Income before taxes and non-controlling interest in the fourth quarter 2021 was $108.8 million, compared to $85.6 million in the previous quarter. Turning to income taxes, Our effective income tax rate for the fourth quarter was approximately 39.1%, which includes taxes related to non-GAAP items. On a non-GAAP basis, the tax rate for the fourth quarter was approximately 18.4%. GAAP net income for the fourth quarter 2021 was $65.5 million, or $1.43 per diluted share. compared to GAAP net income of $68.4 million, or $1.50 per diluted share in the third quarter of 2021. Net income per diluted share in the fourth quarter increased 142% year-over-year from the $0.59 per diluted share in the fourth quarter 2020. The share count used to compute GAAP diluted EPS for the fourth quarter 2021 was 45.9 million shares. GAAP net income for the full year 2021 was a record $228.8 million, or $5 per diluted share, a 166% improvement compared to the $1.88 per diluted share, or $98.1 million in 2020. On a non-GAAP adjusted net income, in the fourth quarter was a record $73.3 million, or $1.60 per diluted share, which excluded net of tax $3.3 million of acquisition-related and tangible asset costs, $0.4 million of acquisition-related costs, $13.5 million of costs related to certain LSE investments, and a $9.4 million gain on the sale of a manufacturing subsidiary. This represents an 8.8% improvement from the third quarter 2021 of $1.47 per diluted share or $67.3 million and a 116% improvement from $0.74 per diluted share or $37.3 million in the fourth quarter 2020. On a non-GAAP adjusted net income, For the full year, 2021 was a record $237.2 million or $5.18 per diluted share, a 120% improvement compared to $2.35 per diluted share or $122.7 million in 2020. Excluding share-based compensation expense of $6.5 million for the fourth quarter, and $26.2 million for the full year 2021, both GAAP earnings per share and non-GAAP adjusted EPS would have increased by 14 cents per diluted share for the fourth quarter and 57 cents for the full year. EBITDA for the fourth quarter was a record $139 million, or 28.9% of revenue, compared to $114.5 million, or 24.3% of revenue in the prior quarter. On a year-over-year basis, EBITDA increased 107.2% from $67.1 million in the fourth quarter 2020, further highlighting our significant operating improvements over the past year. EBITDA for the full year 2021 increased 82.1%, to a record $434.6 million, or 24.1 percent of revenue, from $238.6 million, or 19.4 percent, in 2020. 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 generated from operations was $77.6 million for the fourth quarter 2021 and $338.5 million for the full year. Free cash flow was $22.5 million for the fourth quarter, which included $55 million for capital expenditures and $197.3 million for the full year, which included $141.2 million of capital expenditures or 7.8% of revenue. Net cash flow in the fourth quarter was a positive $82 million and a positive $46.3 million for the full year, which included a pay down of approximately $152.6 million of long-term debt during the year. Turning to the balance sheet, at the end of fourth quarter, cash equivalents, restricted cash plus short-term investments totaled approximately $373 million. Working capital was $717 million, and total debt, including long-term and short-term, was $301 million. In terms of inventory, at the end of the fourth quarter, total inventory days increased to approximately 107 in the quarter as compared to 99 last quarter. Finished goods inventory days were 32 compared to 27 last quarter. Total inventory dollars increased $26.5 million to approximately $348.6 million. Total inventory in the quarter consisted of an $18.5 million increase in finished goods, a $15 million increase in raw materials, and a $6.9 million decrease in work in process. Capital expenditures on a cash basis for the fourth quarter 2021 were $55 million, or 11.5% of revenue, and 7.8% for the full year, which is within our target model of 5% to 9%. Now turning to our outlook. For the first quarter, 2022, we expect revenue to be approximately $480 million, plus or minus 3%, which at the midpoint is better than typical seasonality of down 5%. We expect GAAP gross margin on a consolidated basis to be 39.7%, plus or minus 1%. Non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition-related intangible assets, are expected to be approximately 21% of revenue, plus or minus 1%. We expect net interest expense to be approximately $1.4 million, Our income tax rate is expected to be 18.4%, plus or minus 3%, and shares used to calculate diluted EPS for the first quarter are anticipated to be approximately 46.3 million shares. Please note that purchasing accounting adjustments of $3.3 million after tax for previous acquisitions is not included in these non-GAAP estimates. With that said, I will now turn the call over to Emily Yang,
spk09: Thank you, Brad, and good afternoon. As Dr. Liu and Brad mentioned, fourth quarter revenue increased 1.9% quarter over quarter, which is better than the midpoint of our guidance due to the continued strong demand and record revenue across all the regions. Distributor inventory in the fourth quarter in terms of weeks increased slightly quarter over quarter, which is still below our defined normal range of 11 to 14 weeks. Looking at global sales in the fourth quarter, Asia represented 78% of revenue, Europe 13%, and North America 9%. In terms of our end market, computing represented 29% of revenue, industrial 24%, consumer 19%, communication 16%, and automotive 12% of revenue. We achieved record revenue in the automotive, industrial, communications, and consumer segments. Now let me review the end markets in greater detail. In the automotive market, we continue to extend our strong growth momentum with revenue increasing 37% year over year and 59% for the full year to set new record. Since 2013, when we begin our expansion initiative into the automotive market, we have achieved an eight-year compounded annual growth rate of 30%. One key to our success has been our content expansion initiatives and design wind momentum that has continued across all target application areas, particularly in three focus areas of connected driving, comfort, style, and safety, and powertrain. Automotive DC-DC 32-volt and 40-volt buck converters, LED switching drivers, and SBRs continue to see strong demand for telematics, front and rear LED lighting, daylight running lights, and ADAS applications. Similarly, linear mode LED driver product would be signed into first responders' emergency lighting system. And high-efficiency charge pump LED drivers have been seeing traction for indicator LED lights in the household EV plug-in charging units. Newly released LDOs, current limit power switches, and Paracon product line of level shifters crystal oscillators, buffers, and PCI Express clocks are seeing new design within ADAS, telematics, anomalous vehicle control units, and infotainment systems. We are also seeing great success from the high-voltage latch, high-voltage regulators, and only polar hot switching, including fans, window lifters, motors, water pumps, and door lock applications. Additionally, transient voltage suppressors, MOSFETs, gate driver ICs, and USB charging controller products are being designed into applications, including battery-managed system, wireless charger converters, and in-vehicle USB charging ports. Fast-recovering rectifier were also well-accepted in electric vehicle heat exchanger applications, as well as automotive electric intelligent controllers. MOSFET design in modulantum continues for automotive brushed and brushless electric motor applications including power steering, fuel, oil, and ABS pumps, seats, and mirrors. Our low-capacity ESC and surge protection devices are also being designed into applications for protection of in-vehicle network and for the IOPORT protections of its far-field cameras for advanced driving assistance. In the industrial market, revenue increased 43% year-over-year and 46% for the full year to also reach new records. We are continuing to see growth and adoption of DisplayPort, HDMI switches, and re-drivers in the commercial display application. Our ultra-fast recovery rectifier product and PCI Express Gen3 packet switch are gaining traction in the artificial intelligence, video analytics, 3D sensing camera modules, and civilian and security applications. We're also seeing strong demand for application-specific multi-chip circuits and standard recovering rectified products driven by multiple applications, such as diagnostic test systems, brushless DC motor drivers, energy metering, power supplies, smart lighting, and electrical medical applications, including automated blood and body fluid analysis. We have also been pleased with the strong design wing momentum for the light-on semiconductor image sensor product line being used in document scanners, lottery bar scanners, and PCB inspection applications. Additionally, our ultra-fast recovery rectifier products, bipolar transistors, synchronized controllers, and MOSFETs continue to gain momentum in power supplies and inverter applications. DC-DC LED drivers have been gaining design wins in smoke detectors, and SBR products are expanding in GPS tracking applications, which enable real-time location monitoring during the transportation. In the computing market, revenue was up 72% year-over-year and 122% for the full year. We're seeing strong tractions for USB Type-C power switches TVS, high-power density shock keys, low-voltage only polar hot sensors, dual-output unit polar hot sensors, DC-DC buck converters, as well as HDMI 2.0 redrivers in the new compute platform, including gaming notebooks and workstations. Similarly, we are seeing increasing interest for DisplayPort, USB Type-C, HDMI switches and redrivers in the docking station, dongles, active cables, and keyboard, video, mouse applications. We also continue to see strong demand for SSD mugs, crystal, and oscillator products in the enterprise SSD story modules and data center surfer applications. We have several design wings for the universal level shifter product family in various applications, including SSD storage, gaming, surfer, laptops, and mobile devices. Additionally, light-on semiconductor image sensor products continue to gain momentum with new design inks in the scanner and copy machines. In the consumer market, revenue increased 18% year-over-year and 12% for the full year to also set new records for the quarter and year. DIODE continues to see strong revenue growth of standard recovery rectifier products and SBR in the consumer applications, including digital light projection, LED backlit modules, and high-efficiency vacuum cleaners. We also have new design wings for USB mugs and bipolar transistors and LED TV and display panels, as well as increasing demand for low-power Class B audio amplifiers, SBRs, and LED drivers, utilizing monitor, Bluetooth speakers, LED lighting, and smart doorbell applications. We also continue to see strong momentum for CFP and small DFN MOSFETs for IoT and wearable devices, as well as high power density products securing new design wins in the home exercise equipment. Mobile phone adapter generated strong demand for DIOS fast recovering rectifiers, and ACDC products continue to see growth from quick charging applications. Lastly, in the communication market, Revenue was also a record and grew 10% year over year and 13% for the full year. Design wind momentum for the Paracon product line continues in this market for our USB MUX and ultra high voltage protections with 5G CPE application. There has also been growing demand for USB re-drivers, primarily driven by the USB Type-C application. Additionally, our small size low saturated transistors continue with design winds across multiple applications, from base station, routers, network cameras, to doorbells. We saw strong demand for our SBR chip scale package and design wins for high PSR LDO product family in smartphone applications. In summary, 2021 was an exceptional year for DIODE, both operationally and financially. We achieved strong revenue growth and margin expansion for our total solution sales approach and content expansion initiatives especially in the automotive, industrial, and markets, as well as the Perricon product family. We also successfully integrated Lion Semiconductor acquisitions and benefited from the manufacturing synergies, with additional opportunities for the growth and expansion through the products, customers, and end-market synergies that we expect to realize over the coming quarters and years. With that, we now open the floor to questions. Operator.
spk04: Thank you. As a reminder, to ask a question, you would need to press the star 1 on your touchtone telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Matt Ramsey from Cowan. Please go ahead.
spk01: Thank you very much. Good afternoon, everyone. Good afternoon. Congrats on the great results, Dr. Liu. I wonder if you might provide some commentary. Over the last, I don't know, year and a half or so, the industry has been very supply constrained, and your company was fortunate enough to acquire the capacity from LightOn and did an amazing job in executing and filling that capacity, and it's led to some pretty remarkable growth. I wonder, as you think about the next year or two in diodes, growth plan, where do you have the opportunity to add more capacity, and how much of the growth are you thinking coming from pricing versus units versus additional capacity? Thanks.
spk07: Okay. So, I just answered several of your questions. First, you are talking about, you know, how much of the growth coming from price increase and and how much is coming from revenue growth, okay, or the capacity expansions. So we did not really separate that number very clearly, but we only increased the price based on our wafer or our cost material increased. So we reflect the material increase to our customer only. But we take this opportunity by, you know, data support customer to ask them to give us more design opportunity. So, you know, some of the area our customer would not allow us to touch in the past, now with this and a great support to our customer, we can demand or ask them to open up the design in opportunity for us. And so that is, you know, what we are doing today and using the capacity constraint to our advantage of open up more pitches opportunity. Now you're talking about the future growth, then, You know, we have like our SFEP 2, eight inch. We just from very low ramp it up to fully loaded by December last year. If you listen to what we have been talking about, last year, the whole year, we ramp up the SFEP 2. This year, that will be fully loaded. Okay, so then another is our GFAB. If you remember, we bought that GFAB back to 2019. And we committed to the original owner who support them for five years. And every year they would reduce their loading to us 10%. And so we gradually qualify our production or our technology, our product into the GFAB. And so we actually have additional capacity by original owner requirement reduced and so we are able to take the opportunity to give us more capacity for the growth. And this will continue because they're going to be, their demand going to go down and we continue ramp it up. At the same time, if we still need more than that, we can, they still have enough capacity, we can bring that capacity or bring that loading even higher. Because the time when we bought that, we said they are fully loaded. But in the wafer fab definition, when we say fully loaded, it's 80%. And if you look at some of our wafer fab, it's already loaded up to $100. percent or 95 percent. So we still have more room in the chief fair to give us additional growth. Then we are, our supplier other external fair with our relationship, we still can continue asking for a little bit more every quarters or, you know, here, there, to get a little bit more. So we still believe we have enough capacity to support our growth in this year or next year. And, you know, then when the demand starts to loosen up, we can take that opportunity to continue our growth pace.
spk09: Right. And then on top of that, Matt, we also will continue to drive the product mix improvement. So we want to focus to better utilize the available capacity to support better business as well.
spk01: Got it. Thank you both for the commentary there. As my follow-up question, I guess I'd be remiss to not mention that you're bumping right up against your long-term 40% gross margin target. I think you're run rate of revenue is slightly under $2 billion, and you were planning to hit 40% at $2.5 billion in revenue. So if you could just kind of walk me through the puts and takes on gross margin as we go forward. Is this kind of a new floor of margin and sustainable? And what are the incremental margin drivers as you add that additional $500 million in revenue towards the target model? Thank you.
spk07: Well, you know, the really – what we're looking for is $1 billion gross profit. Okay, and when I said that, it really is the goal, $1 billion gross profit, because that falls through to the EPS. So that is really the goal. Now, when I say $1 billion gross profit, then we say, how do we make it? Then we say, $2.5 billion revenue, 40% GP to make up that one billion. And if our gross margin can be better than 40%, we are not going to, we just continue improve our gross margin and we get there without 2.5 billion. So we achieved that goal earlier. Then after that, then we'll start to get to our next target. But I'm not ready to announce that next target yet, but we are quite close to the target of $1 billion gross profit.
spk01: Got it. Thank you. I'll get back in the queue, but congratulations on the progress.
spk04: Thank you. Thank you. I show our next question comes from the line of William Stein from Truist Securities. Please go ahead.
spk02: Great. Thanks for taking my question. I'll add my congratulations, especially to the outlook, but both the results and outlook are great. I have a question about the guidance by end market. Normally, Q1 is down a little bit, and I think the end markets that tend to do that are the, I think what you call the three Cs, right? Consumer, comms, and communications, I think those are typically down sequentially while industrial and automotive are typically up a little bit. So if we think about the delta or the difference in this Q1, you know, is it more spread across all end markets that they're all going to do a little better than typically, or is it more that you're going to see sequential growth a little bit in each of the end markets, or is there some different explanation?
spk09: Okay. Hi, this is Emily. So I think overall what we're seeing is actually strength across all the end markets. I think all in all, we have really strong demand. And if we look down to the specific segments, so for example, automotive, we actually have a full year growth of 59%. we see that momentum continues. And for the industrial, we're also seeing a lot of growth, like 46% for the full year. And again, a lot of design in pipeline continue to grow. On the computer side, where we talk about the low-end PC, there's definitely a little bit softness. but we're also seeing strength on the cloud computing and server, so it's kind of balanced itself. On the consumer side, you're right, absolutely. Q1 usually is not a super strong quarter, and we definitely see a little bit of softness. I would say more from the China consumer side, but again, we have a lot of overall other demands, whether it's home care or some other consumer applications. that we continue to see the strength, right? On the communication side, I think there's a lot of, you know, news about the smartphone softness a little bit in China, but since we are very well diversified into all the Tier 1 smartphone manufacturers, that we're actually seeing, you know, not that much of the impact to the overall BIOS. So I would say all in all, 5G continues to drive a lot of momentum, not just on the base station, but 5G-related applications. So, yeah, I would say all in all, still very, very strong.
spk02: My follow-up, if I can. I think I saw an announcement recently about diodes dipping its toe into silicon carbide development. Can you maybe clarify what you envision? Well, first, what capabilities you're developing and what – market or opportunity you believe you'll be able to address. Thank you.
spk03: Okay, this is Gary, and nice to talk to you. And actually, you know, the silicon carbide development, we've been starting for this kind of project probably a year ago, and we see that's a very strong trend from the market. And we have our design team in-house, and we do our wafer design, and we use our design using outside fabrication through the wafer. And particularly the silicon carbide we are using is for the automotive related, you know, part like the OBC onboard charger, like micro EV and the inverter. And especially if you see the news we have for the dial set, that's the JE joint venture activity that we have with your silicon carbide modes with the technology that we have put into module. Module go to the inverter, and those inverters are going to the the electronic vehicles motors. And that's the area we're going to focus on.
spk02: Any revenue to discuss in that area yet, or is it all? No, not yet.
spk03: Not yet. Not yet. Our engineering samples will be delivered by the end of this year, and we are looking forward because the motive is related, probably one year or a little bit longer, and we're looking for probably the first revenue going to come in probably the middle of next year.
spk02: Great. Thank you. Congrats again.
spk03: No problem.
spk04: Thank you. Aisha, our next question comes from the line of Gary Mobley from Wells Fargo Securities. Please go ahead.
spk12: Good afternoon, everybody. Thanks for taking my question, and congrats to a strong 2021 and a good start to the current calendar year. I wanted to ask about your manufacturing footprint in China. I realize the majority of your employees are based in China. So have you seen any impact on your production facilities past or present or maybe in the future from China's COVID zero policy?
spk07: Well, let me answer this one. You know, actually our wafer fat majority of wafer fat internally is not in China. Okay. And, you know, we have external, but internal, we, in the, you know, GFAB and OFAB in Europe, and the OSC have, you know, the WIFOFAB in Taiwan. So today, in China, we only have SFAB 2. Okay, so we don't have majorities nowadays. Now for assembly, yes, but virtually, the two major sites is in Shanghai, which don't have that big problem on COVID-19, and Chengdu, again, in Sunspot. The China government is very, very careful So we don't see the problem due to COVID-19. And actually, it's helping us because, for example, typically every year during the Chinese New Year, we're going to have shutdown because a lot of workers are going to go home for the Chinese New Year. So during the Chinese New Year, that month, our productivity or our production is actually slow down. That's why one of the reason we have this seniority in 1Q, we cannot get enough output. But this year, like last year, the China government actually encouraged quote by quote, encourage the people don't go home. Stay in the doko and either take off or continue walking. Okay, so because of that, this year our output affected by Chinese New Year is not that great or that critical. And therefore, we are able to support our demand. Still not enough, but we are able to support. So therefore, we have guide our 1Q revenue, you know, flat from 4Q, because our output is not really going to slow down that much. At the same time, we do build some inventory in 4Q, try to get support on 1Q. So overall, we do not really affect, manufacturing-wise, by COVID-19, you know, affect in China. But actually, we are better than in the past. It's due to the workers do not really go home.
spk12: Got it. Appreciate the color there, Dr. Liu. I have a couple of follow-ups for Emily, perhaps. You know, normally Q1 is down 5%, but I presume that you're going to have a better than seasonal Q1 because perhaps you're getting an opportunity to replenish distributor inventory. And related to that, would you expect me back up in the normal 11 to 13-week range? Is there any way to quantify the impact of your competitors, one in particular that is exiting a few hundred million dollars last year and the next year in some product categories that you directly compete in? Thank you.
spk09: Right. Gary, like Dr. mentioned, maybe a little bit better than expected output in Q1. That's the reason we provided a flight guidance, which you are absolutely right. This is usually about 5% down quarter, right? So what we do, we feel aggressively working with all the customers closely and review all the opportunities in front of us, right? So if this is the right fit for the overall DIOS growth and fit it into our overall strategy, we aggressively pursue. And like I mentioned earlier, any time there's a strategic change from my peers or merchant acquisition always create a more opportunity for DIOS to pursue after, right? But, again, we are not just blindly going after every business. We really more focus on strategic good business that will continue to drive our product mix improvement as well as total solution sales strategy that we initiated a few years ago, right?
spk12: Got it. And the impact from one of your competitors exiting the market?
spk09: I think it's really hard to really say how big or how small the impact. I also think, you know, one of my peers published a lot of statements, but there's also others maybe didn't really that vocal but also making changes. So, again, we, you know, monitor all this very closely, you know, as long as it fits into our long-term plan. as long as that's going to help us to achieve the $1 billion gross profit Dr. Liu mentioned earlier, we're definitely aggressively going after it.
spk12: Thanks, Emily.
spk04: Thank you. I show our next question comes from the line of Tristan Gare from Baird. Please go ahead.
spk05: Hi, guys. Quick question on the gross margin trajectory for the next few quarters for this year. What's going to be the next component versus further fixed cost absorption? It sounds like you have room to further expand utilization rates, so how should we put that in the mix, you know, in terms of margin expanding this year?
spk09: Yeah, so maybe let me make a comment, and Dr. Liu and some others maybe can add some more. I think the margin improvement really consists of a few things, and they're all very important, right? One of the biggest ones is product mix improvement, and we've been talking about this for a while, so we will continue to drive This is really more from the total solution sales, replacing some of the legacy stuff with some of the newer product with better margin, better ASP as well. And we believe this is actually just the beginning of this whole initiative. And this is actually something we established probably about two or three years ago. and will continue to drive for improvement. I think, you know, manufacturing efficiency improvement has always been the strength for DIOS. And, you know, like Dr. Liu mentioned, we continue to add additional capacities. You know, this can be, you know, even adding more equipment with an existing life or replacing some of the old equipment with a new one. expanding to four-inch to six-inch or stuff like that. That will continue to drive some of the capacity improvement. In result, that will continue to drive our manufacturing efficiency and continue to improve our cost. Then we also have Li-ion semiconductor synergies that I talked about. We start seeing the benefit of the manufacturing synergy, but there's still customer synergy, end market synergy, and end product synergy that we can actually continue to see benefit over the next few years. So I would say all in all, you know, this is a few areas will continue to help us to drive the margin. And just like Dr. Liu mentioned, we're definitely not going to stop at 39.7 or 40%. And this is continued the direction. And, you know, we definitely want to continue to deliver the results to you guys as well.
spk05: Okay, great. And then for my follow-up, it's going to be about inventories in the channel. So you've mentioned that you, you know, you mentioned the well-advertised slowdown in China's smartphone, but that you're also very diversified. So are you seeing any pockets of inventories in the supply chain outside of the States that you could point out despite that diversification? And then also, Are you seeing inventory rebalancing because of the high level of working process inventories? So are you seeing some customers basically choosing and picking what they're going to order because they can't close the box, so they're kind of waiting for that last component?
spk09: Yeah, I think, Tristan, overall we're still seeing the channel inventory very lean. So even we see a very slightly increase in our channel inventory end of Q4. That's actually driven by some of the support for the Chinese New Year customers and also the timing of the shipments. But all in all, still extremely lean. I think, you know, Gary asked a question. I probably didn't address it. It's actually do we expect, you know, back to the 11 to the 13 weeks or 14 weeks that we define as the normal range. We don't really expect return to that normal range in a short period of time. So we believe that with all the visibility that we have, with all the customers that we actually have a direct communication with, So far, no one has the opportunity to build up a lot of inventory on the shelf at this moment. I believe that will continue for a few quarters to come and we'll continue to monitor very closely. You know, that's pretty much applied to all the Tier 1, Tier 2s that we have a direct contact. And then with the Tier 3, Tier 4 customers, we actually monitor very closely with each of our distributor partners, and they also monitor very closely. And, you know, so we definitely don't see that as an issue at this moment.
spk05: Great. Thank you very much. Thank you.
spk04: Thank you. As a reminder, to ask a question at this time, you would need to press star one on your telephone. To withdraw your question, please press the pound key. I show our next question comes from the line of David Williams from Benchmark. Please go ahead.
spk08: Hey, good afternoon, and thanks for letting me ask the question. I apologize, I jumped on a little bit late, but Dr. Liu, I wanted to ask, you've been through a lot of these cycles, and we've talked about it in the past, but just kind of curious how you're seeing the landscape today And how do you think maybe the, it seems like the channel inventory still remains extremely lean, but it always tends to be that we've got excess through the supply chain. Do you think, do you feel pretty comfortable today that there really isn't maybe some excesses that are kind of building up within that channel that just maybe aren't being seen or aren't as visible? And do you think there's even an opportunity for that to have happened, I guess, kind of given the demand and where that's, the level that it's been?
spk07: Well, yes, you are right. I have been in semiconductor business for a long time, and I go through 1970, 80, 1990, up and down cycles. So I'm familiar with that, but if I'm going to say this year, this cycle is really different from the past. the previous cycles, okay. In previous always, demand, continue, and extension for the capacity behind. And then all of a sudden you get a shortage. Then people, the people wait until they cannot stand, then they go to edit the capacity. Then the problem is the D time of the equipment take a long time. So the time they get capacity there, everybody get it at the same time, then all of a sudden you get overcapacity. Then everything go down, then go to the down cycle. So if you look at, it's a timing issue of the capacity improvement. And that's why if you remember several years ago, our strategy is putting capacity ahead of the demand. So during the downtime, you actually added the capacity because the lead time, equipment lead time issue. Now, this time, that's what I'm able to grow this year or 2021 much better than 2020 is because we ramp up SFAP2 at that time, we get AOC ahead of time, and then we get GFAP even one or two years before the shortage. So we prepare for all this one, you know, And all this shortage, and that's why we are able to take advantage of this. But now if you're talking about move forward, I think the move forward still helps you because you don't see that many of people eating capacity that crazy. Okay? Everybody very careful. to 18 the capacity. So, you know, we, I don't, I think this shortage will be continued at least this year. Now, you're going to start to loose it up, but electronic demand actually continue increase, you know, ahead of, or more than in the past And so I will see that demand going to continue very strong, and then the capacity increase gradually catch up with the demand.
spk08: Okay. Good. Definitely great insight. I certainly appreciate it. And then maybe one other one here for Emily, but you've had some really nice growth in the automotive side. And that's been a fairly diversified, I guess, application area across the different areas of the vehicle. But when you think about your maybe ICE or traditional vehicle versus the EV, how do you think that split looks like maybe this year or even in 21? Are you seeing much adoption within the EV space now, or is that primarily still driven by the traditional? And then how do you think that mix kind of shakes out as we go into maybe the next 12 to 18 months? Do you see the demand in EV and kind of that pull-through? And does this happen fairly quickly for you all in terms of seeing that reflected within your revenue base?
spk09: Right. So I think, you know, the EV volume increase is definitely real, right? I think, you know, there's a lot of data in public company that we can refer to their output unit increase and expectations. for 2020 growth, 2022 growth, as well as 2023. So, you know, there's also a lot of new startup or any of the tier one traditional manufacturing are all working on some sort of EV application. So we think that's real. There's a lot of opportunity for DIOS continuing to expand and continue to grow in this area. So this is actually volume increase as well as content expansion increase. On the traditional side, what we really focus on, there's also a lot of comfort, style, and safety. We're talking about the number of lightings, the number of cameras. I talk about brushless DC motors. and all this additional contact expansion for us to go after. So we're really growing, I would say, both from traditional vehicles as well as the EV vehicles, right? So if you remember, the three areas we focus on is electrification that covers the EV, the hybrids, right, or the battery management system. And then we also talk about the comfort, safety, and style, as well as connectivity. This is actually for the ADAS, the telematic and infotainment system. So I would say all in all, applies to both. And the good news for DIOS is we continue to have a lot of momentum and continue to have a lot of opportunity in front of us. And with our new product introduction, we are very confident that we'll continue to drive a very strong momentum in the automotive growth, which should be, and we have been demonstrated, stronger than the overall market, right? So if we look at the track record from 2013 to 2021, we actually have a compounded annual growth rate of 30%, and that will continue to be the focus for DIOS. And, you know, so we're definitely ready.
spk08: Great. Thanks so much. Certainly appreciate the help.
spk04: Thank you. I'm showing no further questions in the queue. At this time, I'd like to turn the call back over to Dr. Liu for any closing remarks.
spk07: Thank you for your participation on today's call.
Disclaimer