DIOD - NASDAQ

Good afternoon, and welcome to Diodes Incorporated Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-on 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, Wednesday, November 8, 2023. 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 third quarter 2023 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes Investor Relations firm. Joining us today from Taiwan are Diodes Chairman, President and CEO Dr. Keh-Shew Lu, Chief Operating Officer, Gary Yu, Chief Financial Officer, Brett Whitmire, Vice President of Worldwide Sales and Marketing, Emily Yang and Director of Investor Relations, Gurmeet Dhaliwal. I'd like to remind our listeners that the results announced today are preliminary as they are subject to the company finalizing its closing procedures and customary quarterly review by the company's independent registered public accounting firm. As such these results are unaudited and subject to revision until the company files its form 10-2 for its fiscal quarter ending September 30 2023. In addition, management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore the company claims the protection of the safe harbor for forward-looking statements that is contained in the private securities litigation reform act of 1995. Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission including forms 10-K and 10-Q. In addition, any projections as to the company's future performance represent management's estimates as of today November 8, 2023. Diodes assumes no obligation to update these projections in the future, as market conditions may or may not change, except to the extent required by applicable law. Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms, including the company's press release or 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 Dr. Liu, Diodes' Chairman, President and CEO. Dr. Liu, please go ahead.

Thank you, Leanne. Welcome everyone and thank you for joining us today. As announced earlier, today our third quarter results reflected weaker than expected end customer demand in the computing, consumer and communication markets, as well as the overall Asian market. Our original assumption of a market recovery did not materialize throughout the quarter. However, our automotive product revenue in the third quarter remained at a record 19% of revenue, contributing to our commodity automotive and industrial revenue being 45% of revenue and above our target model of 40%. Although, the current environment presented challenges for our business in near term. I believe, we remain well positioned for a return to growth, as we continue to strive toward our next goal of $1 billion in gross profit. With that let me turn it over to Gary, Diodes' Chief Operating Officer for some additional insights on the quarter.

Thank you, Dr. Lu. Revenue in the quarter was $404.6 million, a 13.4% decrease reflecting the weaker than expected demand in the 3G market especially, in Asia as Dr. Lu mentioned. Although, our original guidance contemplates a continued reduction in channel inventory, global demand throughout the quarter, did not support a significant decrease in these inventory levels. In addition to the delayed recovery in the 3G market, in the fourth quarter we have also begun to see a more broad-based slowdown globally in industrial, as well as softness in some areas of the automotive market. This is primarily related to the customer inventory adjustment, as well as year-end distributor inventory management, which is contributing to our much lower outlook than our typical seasonality. Although the general market is slow, there are certain areas where the demand is beginning to show signs of recovery especially, in the computing market. That said, I want to reiterate that despite those weaker demand dynamics, we remain focused on the long-term and our product mix improvement initiatives, as we continue to invest in R&D for new products targeting expanded design wins in the automotive and industrial markets. Additionally, we are further developing the process technology in our previous acquired steps to build the capability, in preparation for the reduction of our waiver service agreements. In conjunction with those efforts, we also continue to increase manufacturing cost savings across all operations. These steps represent further enhancement to the actions, we have taken over the past several years, which have consistently enabled us to deliver increasing growth and the probability and will continue to do so for years to come. Let me now turn the call over to Brett, to discuss our third quarter financial results and our fourth quarter guidance in more detail.

Thanks Gary, and good afternoon, everyone. Revenue for the third quarter 2023 was $404.6 million, down 13.4% from $467.2 million in the second quarter of 2023 and 22.4% from $521.3 million in the third quarter 2022. Gross profit for the third quarter was $155.9 million or 38.5% of revenue, due to the impact of our waiver service agreements combined with higher facility underutilization costs due to the softer than expected demand in the quarter. This compares to $195.4 million or 41.8% of revenue in the prior quarter and $217.8 million or 41.8% of revenue in the prior year quarter. GAAP operating expenses for the third quarter were $102 million or 25.2% of revenue and on a non-GAAP basis were $95.6 million or 23.7% of revenue, which excludes $3.8 million of amortization of acquisition related intangible asset expenses and $2.6 million of restructuring costs. This compares to GAAP operating expenses in the prior quarter of $105.8 million or 22.6% of revenue, and in the third quarter 2022 of $105.4 million or 20.2% of revenue. Non-GAAP operating expenses in the prior quarter were $102 million or 21.8% of revenue. Total other income amounted to approximately $6.6 million for the quarter consisting of $4.5 million of interest income, $1.3 million of other income, a $1.3 million foreign currency gain and a $0.4 million unrealized gain on investments, and $0.9 million in interest expense. Income from taxes and non-controlling interest in the third quarter 2023 was $60.5 million, compared to $101 million in the previous quarter and $109.1 million in the prior year quarter. Turning to income taxes, our effective income tax rate for the third quarter was approximately 17.6%. GAAP net income for the third quarter 2023 was $48.7 million or $1.05 for diluted share, compared to $82 million or $1.77 per diluted share in the second quarter 2023 and $86.4 million or $1.88 per diluted share in the third quarter 2022. The share count used to compute gap diluted EPS for the third quarter 2023 was 46.3 million shares. Non-GAAP adjusted net income for the third quarter was $52.5 million or $1.13 per diluted share, which excluded net of tax $3.1 million of acquisition-related intangible asset amortization, $1.9 million in restructuring costs and a $0.9 million gain on an equity investment. This compares to $73.3 million or $1.59 per diluted share in the prior quarter and $92.2 million or $2 per diluted share in the third quarter 2022, excluding non-cash share-based compensation expense of $4.7 million net of tax for the third quarter both gap earnings per share and non-gap adjusted EPS would have increased by $0.10 per diluted share. EBITDA for the third quarter was $90.6 million or 22.4% of revenue compared to $133.5 million or $28.6% of revenue in the prior quarter and $141.9 million or 27.2% of revenue in the third quarter 2022. 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 $50.1 million for the third quarter. Free cash flow was $11.6 million, which included $38.5 million for capital expenditures. Net cash flow was a negative $27.1 million including the pay down of $35.3 million of total debt. Turning to the balance sheet, at the end of the third quarter cash, cash equivalents, restricted cash plus short-term investments totaled approximately $308 million. Working capital was $768 million and total debt including long-term and short-term was $53 million. In terms of inventory, at the end of the third quarter total inventory days were approximately 124, as compared to 112, last quarter. Finished goods inventory days were 34, compared to 30, last quarter. Total inventory dollars increased $18 million from the prior quarter to approximately $343.7 million. Total inventory in the quarter consisted of a $16.5 million increase in raw materials, an $8.9 million increase in finished goods and a $7.4 million decrease in work in process. Capital expenditures on a cash basis were $38.5 million for the third quarter or 9.5% of revenue which is at the high end of our target model of 5% to 9%. Now turning to our outlook, for the fourth quarter of 2023 we expect revenue to be approximately $325 million plus or minus 3%. We expect GAAP gross margin to be 35% plus or minus 1%, primarily due to higher underutilization costs on the lower expected revenue combined with less favorable product mix, from a reduction on the contribution of Automotive and Industrial revenue. Non-GAAP operating expenses which are GAAP operating expenses, adjusted for amortization of acquisition-related intangible assets are expected to be approximately 26.5% of revenue plus or minus 1%. We expect net interest income to be approximately $2 million. Our income tax rate is expected to be 18% plus or minus 3% and shares used to calculate EPS for the fourth quarter are anticipated to be approximately $46.6 million. Not included in these non-GAAP estimates is amortization of $3.1 million after-tax for previous acquisitions. With that said, I now turn the call over to Emily Yang.

Thank you, Brett and good afternoon. As Dr. Liu and Gary mentioned, revenue in the third quarter was down 13.4% sequentially and below our original estimates. Our assumption of the market recovery in the quarter did not happen. Our global POS decrease in the quarter and our channel inventory increase slightly, remained above our defined normal range of 11 to 14 weeks. The automotive market remained relatively stable during the quarter. Looking at the global sales in the third quarter, Asia represented 72% of revenue, Europe 18% and North America 10%. In terms of our end-market industrial was 26% of Diodes product revenue. Automotive remained a record 19%, computing 25% which is improved three percentage points compared to last quarter with most of the improvement driven by AI Server demand increase. Consumer represented 18% and communication 12% of product revenue with smartphone demand especially in Asia still low, during the quarter. Our automotive industrial end market combined at 45% of product revenue represented the sixth consecutive quarter above 40% and is five percentage points above our 2025 target. Now let me review the end-market in greater detail. In the automotive end-market revenue and demand remained relatively stable in the third quarter. We continue to focus on expanding our content in various applications by extending our design win momentum. During the quarter we introduced 139 new automotive compliance products which included low voltage modified product for Automotive Battery Management System, Wi-Fi telecommunications and infotainment applications. As the content expansion continues to increase in the automotive market the demand for managing sensor data, control information, infotainment and power line and battery management is increasing dramatically. We introduced a series of power TVS products with a wide range of operating voltage ideal for protecting EVs and charging station applications. We're also seeing design wings for protection devices in domain control units, touch panel systems transmission control units, PCI Express Gen 4 clock generators as well as crystal oscillators in ADAS infotainment and auto driving radar systems. Automotive compliance ideal diode controllers continue to have strong demand from ADAS telematic and infotainment systems. We also secure design wings for USB type C solutions including USB power delivery controllers MUX switches and re-drivers for in-vehicle infotainment systems. We're also seeing increased adoption of 3.3 volt USB-C re-drivers USB-C display port alternative cross-box MUXes and different video protocol switches in rear seat entertainment, smart cockpit, ADAS and camera monitor systems. In the industrial market we begin to see product weakness materialize with a more pronounced inventory rebalancing combined with year-end distributor inventory controls expected in the fourth quarter. Despite the general market weakness, our team remains focused on furthering our design wing momentum and new product introduction to support future growth. The industrial and automotive market remain our top focus for expanding our content and market share to drive continued product mix improvement and growth margin expansion over time. To highlight a few positives during the quarter, our HDMI MUX and re-drivers USB type C display port alternative re-drivers and MIPI re-drivers saw growth in commercial displays while our HDMI signal duplicators were adopted in the industrial camera system. Silicon carbide Schottky diodes continue to gain traction in power factor correction applications for industrial adapters and medical equipment while [indiscernible] and SBR products gain momentum in power over Ethernet surfers and solar panel applications. We also continue to secure design wins for our linear LED drivers in handheld power tools and high voltage regulators in fan applications. And our PSO sound drivers continue to win new designs in security alarm, household smoke alarm and aftermarket dashboard alarms. In the computing market after many quarters of inventory adjustment, we're seeing some signs of recovery with particular strength in the AI server demand. We expect POS revenue to increase sequentially in the computing market with a further recovery in the first half of next year in this market. Our TVS protection product for USB-C data line protection USB-C source power switches, low voltage MOSFETs and low voltage ohmic pulse sensors are building momentum in notebook, desktop and docking station applications. There was also increased adoption of our connectivity and signal integrity products including MUX switches and re-drivers for HDMI, USB-C, display port and MIPI protocols in applications including workstations, gaming, notebook, desktop, docking station and add-in card applications. We're also seeing adoption of our 40 gigabit per second USB4 re-drivers in long channel cases together with USB4 re-timers and 20 gigabit per second USB Type-C display port re-drivers in the next generation computing platform design. Our PCI Express 3.0 packet switches are also building momentum by enabling high-speed seamless connectivity in cloud server and data centers with multiple CPU system support for cross-domain endpoints to improve reliability, availability and serviceability. Also in the computing, our timing products continue to gain design-in design-win momentum for server and storage applications while our PCI Express Gen5 Gen6 clock generators and buffers were designed into AI servers. In the communication market, we continue to secure new design wins for our timing products including clock buffers and crystal oscillators for smart NIC card and optical transceiver modules. Our LDO family, low-voltage omnipolar Hall sensors low-voltage MOSFETs and data line protection products saw solid demand and new design wins for camera, I-O protection, smart cover and wireless earbug applications in the smartphone. Lastly, in the consumer market, our bridge rectifier, Hall latch switches and TVS products continue to gain traction in home appliance applications. Design momentum also continues for our LED drivers SBR PSO sound drivers and audio amplifier in VR headsets, TV, monitor, headphones and tracker applications. And our LDOs gain demand momentum from home monitoring camera system while our HDMI passive active MUX re-drivers splitters and the display-poor MUXes saw increased adoption in keyboard, video, monitors and mouses. In summary, although the global demand environment remained weak and we are being impacted by inventory digestion across certain end markets, our team remains focused on driving increased design wins and new product introduction, especially in our strategic focus areas of automotive and industry. This initiative has been the foundation to our past contact expansion and market share gain, and we believe also serve to position us well for a return to the growth and margin expansion in the future. With that we now open the floor to questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from William Stein with Truist Securities. Please go ahead.

Great. Thanks for taking my questions. The first is about your capital allocation strategy. There are several similar companies, let's say, diversified companies with broad end markets, a lot of analog products. Many of them have micros. I acknowledge you don't but you're a very consistent generator of free cash flow and you've used that to continue to pay down debt for the last few quarters, I think the last maybe eight or ten quarters perhaps. You now have a net cash balance. Stock's down a lot from the peak. What is it going to take to see the company resume a buyback and would you consider establishing a dividend?

Yeah, so this is Brett. I think that as we've talked about before we do view our capital strategy, as essentially driving growth investment in growth. A key part of that is looking at M&A. A key part of that is investing back in the business that we've done. I think we've openly talked about our history. We have had some stock buyback programs. Back in 2015, we had a program and then we bought Light on Semiconductor. It was a buyback. We continue to look at that. From a dividend perspective that's not something that we view on the table right now, but we continue to contemplate the best use of our cash as we continue to be confident of our growth in cash generation. Yes we just continue to consider it. Absolutely.

Okay. As a follow-up I'm hoping you can address a combined question about the quarter and the outlook. I think in the press release and then also in the commentary in the call you talked about a recovery that you expected to happen that didn't. Perhaps my recollection of my notes, just isn't all that strong, but I don't recall Q3 being guided for a recovery. Maybe you can just refresh my memory. What recovery were you expecting that didn't materialize? Then going forward maybe talk about when you think things settle out and start to recover and when we can start thinking about revenue returning to growth. Thank you.

Yeah. William, this is Emily. I think during the Q3 earnings call we provided guidance. The guidance is actually based on a lot of assumptions for each of the market segments and some of the customers, I would say overall situation. So looking back, we compared to what we assumed in the beginning of the quarter versus the end result. We still feel like that some of the assumptions didn't realize and we did actually assume certain recovery areas that should improve because of the channel inventory situation. So I think that really refers back to our assumption. Like I said based, on the assumption, there are certain things that we built in there. Unfortunately, it didn't really materialize during the quarter, right. So I think your second question is really when do we think the business will go back to the normal range? So, I think that's really a crystal ball question. It's really hard to predict at this moment. The market is extremely dynamic. But I think what we want to really assure is the market situation or demand decrease, as well as the inventory adjustment should be short term. And we want to make sure as a company we continue to focus on the important areas that really helped us with success in the past, which is really focused on the product mix improvement. This include by introducing more new products and continue to drive the automotive industrial compact expansion at the same time working on the manufacturing efficiency, right? So we cannot really control the market. But with all these right things in place we're confident that this will continue to drive us revenue improvement as well as margin improvement over time.

Thank you. This is Dr. Lu. And as I mentioned in my speech, we will continue to focus on R&D, spend the money in R&D, focus on new technology new process and new product. And this is we still target of our vision of $1 billion of gross profit. And so short term, yes, we have some inventory problem or not. This is inventory adjustment. But for us still need to focus on long term.

Thank you.

Our next question comes from David Williams with Benchmark. Please go ahead.

Hey, good afternoon. Thanks for taking the question. I guess maybe firstly, here just it seems like there's been some mixed commentary out of the automotive segment and the put and takes around just where the exposures are and whether it's good or bad. But just kind of wondering if you could help us kind of square some of your commentary on the automotive, where you're seeing the weakness particularly in terms of geographies and whether that's ICE or traditional excuse me ICE or EV anything that kind of helps us understand where the particular weakness is coming from would be helpful?

Yeah. So David, this is Emily. I think overall in the automotive market segment that we see in general the inventory level increase, right? So we do expect some inventory rebalancing. Each customer situation can be different from the others and each program can be a little bit different as well as down to the part number level. So unfortunately, not everything equal. But in general, we also see with the inventory rebalancing coupled with certain area of demand adjustment as well, right? So as a result of this too and I also mentioned you know quarter end inventory control by some of the distributors. So we really believe that's really compounded area that we do expect automotive is going to be under a little bit of challenge in the short term. And from the regional point of view, I think for automotive, especially with strategic account, it's really a global approach, right? So it's really kind of difficult to point it out to a specific region. But in general, we're seeing more of the weakness from the North America and also Europe market, so that's really what we see.

Yeah. And if you look at we're still able to accomplish record of the 19% of the revenue. So our automotive still continue growing. At the same time, we still continue improve our content of the automotive. Because that's the effort we are focused on and I think we still continue successfully to increase the content.

Yeah. So I think I mentioned we actually introduced 139 automotive compliance product just in third Q. I believe second quarter is 113 and the previous quarter is actually other 79 or 80 numbers. So ,you can actually see the focus overall for the company on driving new product, introduction, as well as getting into a new market area expanding our SANS and TAN will continue to be the focus.

[Technical Difficulty] Is that part of the issue going into the fourth quarter?

Hey David can you repeat that? You really broke up on that question. Could you repeat that?

Yes. My apologies. Was the -- UWA strike was that any impact to you guys on the fourth quarter?

Yes. I mean you know there's definitely indirect impact, but I think relatively it's not a big impact.

Okay. All right. And then just lastly for me is on the gross margin can you kind of maybe give us a puts and takes there and just the guidance on the margin side is down pretty further than we would have thought, but is it just volume or is this part of the service agreement that's also having impact? And any color there would be helpful. Thank you.

Yes. So, I think overall right when we look at this margin, I talked about the product makes a change a little bit. If you look at auto industrial percentage, definitely decrease a little, right? But mainly the reason is actually due to the underloading situation under realization, of course, that's coupled with different reasons, right? I think the long-term agreement I mean the service agreement is part of it as well as the decrease in the revenue, right? But again this is the things that we really believe is a short-term challenge that we will overcome. I think the long-term focus talking about the product makes improvement auto industrial as well as introducing new products and we're confident that in the longer term, we'll continue to drive the revenue improvement as well as the margin improvement.

Right. And this is Gary. I would like to put some comment on the lightweight for service agreement here. And basically there's really nothing we can control for our customer demand, okay, and the loading here. But what we really can control is that we're aggressively loading our stuff and then follow-up our processing technology to waiver that we acquired a couple years ago. And that's really the things we want to focus on and you're going to see the possibilities in the future. But I've got more loading to resolve the underloading situation.

Thank you.

The next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Hi everyone. I hope you're surviving the early morning wake up in Taiwan. So, probably what's on most people's mind is you know how 2024 looks and I'm sure you're not going to go there. But maybe if you can give us a sense of maybe sort of the exaggerated seasonal patterns you might see to start the year or maybe even different some of the atypical seasonal patterns that might unfold during the year considering the inventory drain that has to take place?

Yes, I think Gary with the market dynamics that's going on, I think it's hard to put a seasonality picture anymore, right? Just looking at 2023, it is a little bit all over the map, right? So, I think in general, we're still hopeful that you know the market demand situation as well as inventory readjustment is going to be over, so we still think that's going to be a short-term issue again right? Since it's short-term we want to continue to focus on the important things that can get DIOS to be more successful down the road right? So that's what we really see you know I think first half it's definitely a visibility and challenge in front of us so we're definitely hoping for a second half improvement.

Okay. So I would assume that you're trying to maximize your manufacturing load just like your competitors are in the SOC macro environment. And so related to that how is pricing holding up on a like-for-like product basis given that maybe people are a little looking through the nooks and crannies for all types of business at this point in time?

Yes. So I think in general right price is always driven by demand and supply, right? When the demand is a little bit weak and with a little bit more supply, there's definitely some shifts in that dynamic, but what we're still seeing majority of the price pressure is really coming from the deep commodity area and the advanced or differentiated unique product overall still much better. So again right based on this which is nothing new that we've been talking about. So we'll continue to focus on the new differentiated new products right, which is referred back to the product mix initiative improvement that we have been focusing for the last number of years already right so that will continue to be the direction and focus overall for the company.

If I could just sneak one more in. Go ahead, Gary.

I would like to put some comment on that. Other than the price pressure that we're facing now and again really we can conclude it's private where the price of all manufacturing goes down in the efficiency that way, so that we can take advantage of those kind of cost savings activity initiatives to face those kind of prices issue and price pressure from the front of the market.

Okay. Brett if I can sneak one in. You're essentially guiding your OpEx to decrease roughly $10 million sequentially. Is that anything structural or permanent or is it just lower bonus accruals and some other variable items?

Yes. So basically you have if you look at some of our trend across the year, as we start to see some of the revenue trend you can see the actions that we're taking to bring our employee spend in line with that. We're also you can see some restructuring charges we took in third quarter, as we consolidated some stuff and various actions we're taking and I think you'll continue to see things we're doing to drive and be stronger as we work through this cycle and continue to stay focused on kind of the when you look back a year ago when we were hitting $500 million, we were right on top of our model. And as we think about going forward, we're going to tighten the belt during this cycle to be stronger and then get in a better position as we go forward and continue to work to enable ourselves to grow back into that.

Thank you.

Our next question comes from Tristan Gerra with Baird. Please go ahead.

Hi. This is Tyler Bonbon for Tristan. Thanks for taking the questions. You touched on some of the near-term dynamics on pricing. Could you talk about maybe what your expectations for pricing are into next year?

Yeah. So I think Tristan, I think pricing is a dynamic. There's different product categories, there's different competitors that we are facing and each of the area can be a little bit different versus the other. I think the end market is also a key factor. So in general you're seeing more of this kind of price pressure coming from the maybe consumer more on the computing area, because the volume demand-driven So I think in general, we believe with the new product introduction and with the focus of the compact expansion in auto and industrial and together with the manufacturing efficiency can help us to weather better from the price pressure and with the long-term margin improvement So, I think in general that's what we see overall in the market.

Great. And then before this current quarter that you just reported when was the last time that you had underutilization charges and what does that tell us about where we're at in the cycle?

Yeah, actually, we do not dispose of too much information about those kind of underutilization charges to our client at this moment here. But we do see that underutilization situation happening since like the third quarter and then we again emphasizing the previous question here, so we really cannot control that demand from our client. But what we can do here is try to continue to do the driving or process in the product qualification in that waiver file that we can load it up, and avoid this kind of underutilization situation happening again and again.

Well, if you are looking at the underloaded problem or unloaded, I need to separate from two aspects. One is underloaded due to our service agreement due to when we do the acquisition for the operation then we have a service agreement and that what we are doing is develop our own technology and putting our own product to continually speed up the underloaded effect. So that's one direction. The other direction due to the underloading is our own manufacturing and due to our own loadings. Then we slow down the capacity extension. So you can see that's why the CapEx for the manufacturing capability or capacity was reduced. That extension was reduced. That's the way that's why Brett mentioned, we cut down our CapEx. But at the same time, I think dropping the price may not be a good solution, because if the market slows down and you know you cannot just drop the price and try to gain more loadings, okay? So most important is the product mix and new product. See if you can focus on new product and bring the product mix then maybe short-term, we don't solve it. But for long-term strategy strategic direction this is what we need to do to get it you know for independent to the market. See if you are going to the differential product and the back automobile you cannot be easily depressed or get shields lost by other people. So the whole thing would be the capacity utilization due to the customer demand, not due to the losing the shields. Okay. So this is the strategic direction we are focused on is more new product, more automotive industrial, more you know differentiate type of product to resolve the capacity issues. By dropping the product our price will not be you know a good solution.

Great. Thanks for all the call there.

As we have no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Dr. Liu for any closing remarks.

Thank you for your participation of today's call. Operator, now you can disconnect.