Good afternoon and welcome to Diodes Incorporated fourth quarter and fiscal 2014 financial results conference call. [Operator instructions.] I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead..

Good afternoon, and welcome to Diodes’ fourth quarter and fiscal 2014 financial results conference call. I’m Leanne Sievers, Executive Vice 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, Senior Vice President of Sales and Marketing Mark King, and Director of Investor Relations Laura Mehrl. Before I turn the call over to Dr.

Lu, I would like to remind our listeners that 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. In addition, any projections as to the company’s future performance represents management’s estimate as of today, February 11, 2015.

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 of GAAP to non-GAAP items, which provide additional details. Also, throughout the company’s press release and management’s 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 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. Diodes once again achieved another year of solid results, with record revenue and gross profit driving the highest net income and earnings per share since 2010. 2014 concluded Diodes’ 24th consecutive year of profitability. Gross margin increased 230 basis points over 2013.

[Final] operating expenses as a percentage of revenue decreased 200 basis points. Together, those factors result in GAAP net income increasing by $37 million, or more than double 2013. The non-GAAP net income improved by $20 million or 40%.

Business margin improved from 2013 to 2014, but still impacted our gross margin by approximately 160 basis points in 2014, as compared to approximately 120 basis points in 2013.

Margins for Diodes with [unintelligible] more than offset [this] impact as we continued to make progress with [loading] and performance improvement in our manufacturing facilities, and expect utilization to greatly improve our margin over time, especially as we further ramp [unintelligible] fab and transition the manufacturing in our Chengdu assembly test facility from [unintelligible] to full production mode in the second half of this year.

Also during the year, we strengthened our [unintelligible] by reducing long term debt by approximately $42 million. When combined with our reduced capital expenditures of 6.6% of revenue for the year, we generated approximately $76 million of free cash flow in 2014.

Overall, I’m very pleased with our significant progress and the continued effort in 2014 toward achieving our target operating model of 35% gross margin and 20% combined SG&A and R&D. And, we expect to make additional progress in 2015.

In support of those goals, we remain focused on generating profitable growth by further refining product mix to maximize gross profit and to deliver increased earnings and cash flow. With that, I now turn the call over to Rick to discuss our fourth quarter financial results as well as fourth quarter guidance in more detail..

Thanks, Dr. Lu, and good afternoon everyone. Revenue for the full year 2014 increased 7.7% to a record $890.7 million, from $826.8 million in 2013. For the fourth quarter of 2014, revenue was $223.7 million, an increase of 6% from the $211 million in the fourth quarter of 2013 and a decrease of 4.3% from the $233.8 million in the third quarter of 2014.

Revenue was down sequentially, primarily due to normal seasonality. Gross profit for the full year 2014 was a record $277.3 million or 31.1% of revenue, compared to $237.8 million or 28.8% of revenue in 2013.

For the fourth quarter of 2014, gross profit was $70.7 million or 31.6% of revenue compared to the fourth quarter of 2014 of $60.8 million or 28.8% of revenue and compared to the third quarter of 2014 of $74.7 million or 32% of revenue. Gross profit margin declined sequentially, primarily due to lower BCD wafer fab loadings.

GAAP operating expenses for the fourth quarter were $48.6 million or 21.7% of revenue, compared to $52.8 million or 25% of revenue in the fourth quarter of 2013 and $49.7 million or 21.3% of revenue in the third quarter of 2014.

Looking specifically at selling, general, and administrative expenses, SG&A was approximately $34.2 million for the fourth quarter or 15.3% of revenue compared to $32.8 million or 15.6% of revenue in the fourth quarter of 2013 and $33.9 million or 14.5% of revenue in the third quarter of 2014.

Investment and research and development for the fourth quarter was approximately $12.6 million or 5.6% of revenue compared to $12.5 million or 5.9% of revenue in the fourth quarter of 2013 and $13.9 million or 5.9% of revenue last quarter.

Combined, SG&A plus R&D equaled $46.8 million or 20.9% of revenue, which was down 60 basis points from $45.3 million or 21.5% in the fourth quarter of 2013. Versus third quarter, the total was down $1 million, but up 50 basis points from 20.4%, due to the sequential revenue decline. Total other income amounted to $1.2 million for the quarter.

We had approximately $1.7 million of currency gains and other income, approximately $300,000 of interest income, and approximately $800,000 of interest expense.

Income before taxes and noncontrolling interest in the fourth quarter 2014 amounted to $23.2 million, compared to the income of $6.3 million in the fourth quarter of 2013 and $26.3 million in the third quarter of 2014.

Turning to income taxes, our effective income tax rate for the fourth quarter and full year 2014 was approximately 25.8% and 23.7%, respectively. GAAP net income for the full year 2014 was $63.7 million or $1.31 per diluted share, compared to $26.5 million or $0.56 per diluted share in 2013. 2014 represented our 24th consecutive year of profitability.

The share count used to complete GAAP diluted EPS for 2014 was 48.6 million shares.

Non-GAAP adjusted net income for the year was $70.1 million or $1.44 per diluted share, which excluded, net of tax, $6.3 million of noncash acquisition related intangible asset amortization costs, compared to non-GAAP adjusted net income of $50.1 million or $1.05 per diluted share in the prior year.

GAAP net income for the fourth quarter 2014 was $16.7 million or $0.34 per diluted share compared to fourth quarter 2013 of $6.2 million or $0.13 per diluted share and third quarter 2014 of $19.4 million or $0.40 per diluted share. The share count used to compute GAAP diluted EPS for the fourth quarter 2014 was 48.7 million shares.

Fourth quarter non-GAAP adjusted net income was $18.3 million or $0.38 per diluted share, which excluded, net of tax, $1.6 million of noncash acquisition-related intangible asset amortization costs.

This compares to non-GAAP adjusted net income of $11.3 million or $0.24 per diluted share in the fourth quarter of 2013 and $21.2 million or $0.43 per diluted share in the third quarter of 2014. 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 and full year 2014 GAAP and non-GAAP adjusted net income was approximately $2.4 million and $9.2 million respectively, net of tax, noncash share-based compensation expense.

Excluding share-based compensation expense, both GAAP and non-GAAP adjusted diluted EPS would have increased by an additional $0.05 per diluted share in the fourth quarter and $0.19 for the full year. Cash flow generated from operations for the full year 2014 was $134.3 million and $26.9 million for the fourth quarter.

Free cash flow for 2014 was $76.5 million, which included approximately $58.9 million of capital expenditures. Free cash flow was $6.3 million for the fourth quarter, which included $16.6 million of capital expenditures and a $7.1 million reduction in inventory.

Net cash flow for the year was a positive $46.4 million, which includes the paydown of approximately $42.7 million of long term debt. Fourth quarter net cash flow was a positive $6.2 million, including the paydown of approximately $6.8 million of long term debt.

Turning to the balance sheet, at the end of the fourth quarter, cash and cash equivalents totaled approximately $255 million, including $12 million in short-term investments. Working capital was approximately $538 million compared to $493 million in 2013.

At the end of the fourth quarter, inventory decreased by $7 million to approximately $182 million, compared to approximately $189 million at the end of the third quarter of 2014. Inventory in the quarter reflects a $3.3 million decrease in work in process, a $2 million decrease in finished goods, and a $1.7 million decrease in raw materials.

Inventory days were 112 in the fourth quarter, compared to 108 days last quarter. At the end of the fourth quarter, accounts receivable was approximately $188 million, down over $5 million from the third quarter. AR days were 79 compared to 75 last quarter.

Our long term debt totaled approximately $140.8 million, down $6.7 million from the third quarter and down $42 million for the year. Capital expenditure on an accrual basis for 2014 totaled $58.9 million or 6.6% of revenue.

This is below the midpoint of our reduced capex spending target of 5% to 9% of revenue, due to the delay of the receipt of some assembly test equipment into 2015, which may push 2015 capex into the upper end of our target range. Fourth quarter capital expenditure were $16.6 million or 7.4% of revenue.

Depreciation and amortization expense for the fourth quarter was $19.5 million and $73.6 million for the year. Now, turning to our outlook, for the first quarter of 2015, we expect revenue to range between $206 million and $220 million or down 1.6% to 7.9% sequentially, due to normal seasonality combined with the currency impact from a stronger U.S.

dollar. We expect gross margins to be 30.5%, plus or minus 2%. Operating expenses are expected to be approximately 23.2% of revenue plus or minus 1%. We expect our income tax rate to be 28% plus or minus 3% and shares used to calculate diluted EPS for the first quarter are anticipated to be approximately 49 million.

One final comment before turning the call over to Mark. Starting this quarter, we will no longer be providing midquarter guidance updates. Our business has grown in size and is now sufficiently diverse across markets and customers that we believe a midquarter update is no longer necessary.

In fact, in our last eight midquarter guidance updates on a revenue basis, we either maintained or narrowed to the middle of the range in seven of them and raised the guidance in the one when we purchased BCD. With that said, I will now turn the call over to Mark King..

Thank you, Rick, and good afternoon. Revenue in the fourth quarter was down 4.3% sequentially, primarily due to seasonality across our end markets as well as weakness in Europe coming off a strong Q3. OEM sales were down 3.6% while distributor POP and POS were down 4.7% and 5.4% respectively. Distributor inventory was up 1.3% and remained in line.

Turning to global sales, Asia represented 81% of revenue, North America 10%, and Europe 9%. In terms of our end markets, consumer represented 34% of revenue, communications 22%, computing 20%, industrial also 20%, and automotive was 4%.

The computing market experienced the largest decline in the quarter while on the positive side, the industrial market was supported by new business in solar, communications was solid at specific customers, and automotive maintained momentum going into 2015.

Customer activity level remained strong in all regions and product lines, with a growing number of design wins across our end markets. Q4 was a record quarter for our MOSFET products, while we also saw solid performance from our load switches, logic, and SBR products.

Diodes once again built upon its broad-based product offering by developing and launching products for diverse, high-volume, high-growth segments and customer applications.

Let me now talk about our business in more detail within each of our end markets, and unlike past quarters, I’m going to talk about product updates across discrete, analog, and logic, within each of our target end markets rather than separately. Let me start with the consumer market.

In Q4, Diodes launched a number of discrete products for high-volume TV and monitor power supply applications. Our new proprietary Trench SBR technology yielded products targeted at TV power applications providing designers with [unintelligible] rectifier alternatives that help meet higher efficiency requirements and space constraints.

This proprietary Trench SBR technology enables Diodes to produce rectifiers achieving application specific blends of ultra-low forward voltage and low leakage.

Also, further expanding our analog content in the consumer market, we released a family of four amp and five amp adaptive constant on time synchronous [buck] converters for low-output voltage power regulation in large consumer electronics such as digital TVs and monitors.

These devices have attracted very favorable early attention from a wide range of TV suppliers who are currently running systems tests with these recently released products.

Our focus in the large scale consumer product space resulted in more than 10 significant design wins across several product lines, including class D audio amplifiers, voltage references, load drop out regulators, and load switches.

In addition, we released a family of PWM controllers designed to improve operating efficiency and significantly reduce no-load losses in offline AC to DC converters.

In the communication market, and specific for the portable device markets, Diodes launched products from a number of families highlighted by the release of the secondary site active synchronous rectification controller, which is ideal for quick charge applications such as USB power delivery.

Addressing portables further, we expanded our TVS portfolio with a range of devices for battery quick chargers that require special high surge protection against in-rush current as well as a range of shocky diodes in tiny chip scale packages for space constrained portable applications.

Also in the communications market, we had major design wins in wifi modules, routers, and repeaters, leveraging our DC to DC converters, load switches, and voltage references.

In the computing space, we also saw strong design-in activity, led by multiple logic wins in tablets and notebooks as well as continued momentum in load switches and MOSFET products.

Now turning to the industrial end market, where efficient power management is critical, Diodes launched a series of industrial MOSFETs with a breakdown voltage range of 100 volts to 250 volts and the first in a new series of power factor correction, PFC, diodes using proprietary Diodes process technology.

We also continued to expand our portfolio in support of our LED lighting strategy, including a constant current LED driver targeted at LED signage, strip lighting, and low-current retrofit lamps.

We also saw an uptick in activity and notable design wins for hall sensors in door locks, brushless DC fans, and e-meters and significant ramp in revenue for our proprietary solar diode.

And finally, in the automotive market, Diodes capitalized on its recent gains by launching automotive qualified devices from its MOSFET BJP, and PVS product families.

Most significant were the first products in a range of 175 degree [unintelligible] MOSFETs designed specifically for ruggedness and high temperature to meet the demands of under-hood operation.

Utilizing Diodes’ recently established shielded gate MOSFET process, these devices are well-suited for driving automotive inductive loads such as DC motors and relays. Also launched in Q4 were the first devices in a series of automotive grade [lin and can bus] protection TVS devices.

Our LED drivers also saw increased acceptance with headlamp, running light, and interior lighting socket wins. In summary, Diodes once again achieved another year of solid results with continued gross margin improvement as well as record revenue and gross profit.

It was also a record year for new product introductions and design wins across our end markets. As we look forward, we remain focused on further advancing our process technology and investment in chip scale packaging in support of our focus on the portable space and future application opportunities.

We also continue to place a strong emphasis on the automotive market, where we have gained strong momentum going into the new year.

In conclusion, we have a robust pipeline of new products and design wins and are well-positioned to support our near term and future growth, both with the addition of the BCD facilities and the ramp up of Chengdu for back-end assembly. With that, I’ll open the floor to questions.

Operator?.

The first question comes from Steve Smigie from Raymond James..

Dr. Lu, congratulations on a solid 2014. As you look out to 2015, can you talk a little bit about whether you think you can see growth for 2015 that’s roughly similar to 2014, maybe a high single-digit type growth? Just curious if that makes sense..

I believe 2015 will be similar to 2014. Look at the plan, look at the comparison. I think 2015 will be another strong year for us, especially as we will focus more on profitable growth, which I’ve been focused on.

Gross profit is very important for us, so if you look at 2014 versus 2013, we had 16.6% growth of gross profit, and we’re hoping 2015 has another strong improvement at the gross profit area..

And just to follow up on your gross margin comments, I know you guys focus on gross profit dollars, but just for our modeling purposes, as we think about gross margin percentage, would it be fair to assume that Q1 is probably the bottom here for the year? And then you should have pretty good tailwinds as you mix in more of the auto and industrial into 2015 for the gross margin percentage?.

The answer is yes, and it is because right now, I think during the speech I mentioned about our BCD fab, which is a Shanghai fab that we acquired from BCD. And they are ramping up on the fab [two] and they’ll offload some of the fab one loading to fab two. So due to that, both fab one and fab two is underloaded right now.

And all our new product is really used in fab two. At the same time, we try to bring some of the wafer loading from outside to the fab two. For example, some of our SBR loading, right now, outside, we try to develop the process and qualify that process and move from outside loading to the fab two.

And we believe it will be somewhere around the second half of this year. The fab two should start to ramp for the SBR requirement. And at the same time, we try to see maybe we can put up an [8 inch] equipment in the fab two, and all those efforts should be improved as fab two loading, at the same time, fab one loading should be greatly pulled back.

And from there, I think we should expect Q1 will be the lowest one, and then all the loading improvement for the fab, BCD fab should start to improve. So the answer is yes, and we’re still focused on the gross profit improvement..

Rick, I was hoping you could give a little bit of color on what you think tax rate might look like this year. So, 28% for Q1.

Would it stay at that level? Or will you get some improvement going forward? And does that include the benefit of the tax credit?.

I think the Q1 number of 28% is probably the high. I think we’ll probably end up being somewhere around where we were in 2014..

And that doesn’t include the R&D tax credit that came in? So end of year next year, you’d maybe see a benefit in that quarter as an additional benefit, right?.

Right..

The next question comes from Christopher Longiaru of Sidoti & Company..

Just piggybacking on some of what you just said, could you guys comment on what your utilization was in the quarter, and specifically, what it was at fab two?.

The fab two is about 50%, right?.

Yeah, so, in the fourth quarter, fab two was about 50%, which is basically what it was in the third quarter..

And as you bring more of BCD in house, how does that look, as you exit 2015? What is your expectation there?.

So, we are taking two actions. One is try to develop and codify the SBR technology or process into fab two. And we believe we should be able to bring in the [unintelligible] SBR into fab two, about the second half. We have targeted the June/July timeframe to ramp it up. That action should give us probably improved outlook.

I’m hoping somewhere around improved another 10% to 20% loading, when we finish the year. But at the same time, our new product will [start to ramp], and that will be helping the improvement too. Then the second technology development is we are looking at putting the 8 inch capacity or capability inside fab two. But that takes a while.

That one is really trying to fully load the [S fab] in 2016, because it will probably take one year to get the equipment, build the process, or install the equipment, to prepare for the process. And so we’re hoping that one will start to impact the loading probably next year. First half of next year, we should start to impact the loading..

My other question is just on the operating expenses for the year, still kind of 22% to 24% of revenue is where you guys expect to be?.

For this year? If the revenue is going up, you know the way we [did], right? Whenever the revenue is going up, we are holding up the R&D and SG&A, so as a percent it will improve. And if you look at from 2013 improvement to 2014, we significantly improved that operational expense. And we will continue that kind of effort.

So it depends on how much revenue growth in 2015. If we are able to achieve another year similar to the growth from 2013 to 2014, then we should be able to similarly decrease significantly our operational cost..

The next question comes from Gary Mobley from Benchmark..

Did you say, Rick, that you had currency gains in the quarter of $1.7 million?.

No, that was currency gains plus other income, including interest expense..

The point of my question is that I’m sure that you’re translating U.S. dollars from Taiwan and Asia, and I’m just curious to know how much of a headwind that created for the revenue versus when you guided the revenue initially.

And are you getting a one-for-one offset with currency hedging from the top line to a gain in the opex line?.

Well, the major impact was not in the Taiwan dollar or the China currency. It was mainly in the euro and the pound. And basically, we have a natural hedge in Europe, because we have a lot of expenses in our wafer fab that are in local currencies.

So if you look at the way it works, you would have some headwind on revenue, but you’d also make it up on cost of goods. The other income line is based on the translation of your local currency balance sheet into dollars, and so it really depends on how much local currency cash and receivables and things that you have. So it can vary.

But from a revenue standpoint, it was a headwind, from a P&L standpoint, it wasn’t that much of a headwind at the bottom line..

Neutral on the bottom line, but nevertheless, maybe you would have come in near the high end of your revenue guide if you wouldn’t have had that currency headwind.

Is that a fair way to think about it?.

Yeah, I think so. The currency cost has some problems, but we were able to hit our guidance. So without that currency headwind, we would have been a little higher. [laughter].

So you’re right. We tried very hard to get to the guidance, and we were able to do it..

Basically, currency is just one of the issues we have. So we don’t look at currency as that much of a significant factor overall. We just try and hit our guidance no matter what the currency..

Good enough. Dr. Lu, when you and I met at the Consumer Electronics Show, I think one of the items we were talking about was growth and profitability and trying to draw a distinction between prior commentary about profitable growth, and I think the implication is that the idea is to grow the mix of higher margin business [unintelligible] auto.

So can you share with us what auto was at the end of the fourth quarter? If I’m not mistaken, it was probably, what, 4%, and what you anticipated, by the time we ended 2015, and how this emphasis on higher margin business sort of shapes your capex outlook for the 2015 timeframe?.

Yes, I think you can see two areas - not just automotive - industrial and automotive, those are the two areas you can see as a percentage of revenue is increased in 2014. And automotive actually, in 2013 it’s about 3% of our revenue, and 2014, it’s 4%.

You might say 3% to 4% is not that big, but our revenue is going up too, and as a percentage, it’s going up. So you can see automotive is growing faster than our average growth on the revenue. Industrial is similar. Industrial and computing is almost the same, 20%. And so this is what we have been working on.

If you remember, I’m always talking about our mix. We improved the mix, we improve the mix, if we are focused more on the industrial and automotive area. And we’ll continue that effort. And if you remember back to 2013, I [unintelligible] automotive [unintelligible], and the whole purpose is trying to focus more on automotive business.

So if you ask me, in 2015, what will be automotive, I don’t have the full number yet, but if you see from 3% 2013 to 4% 2014, 2015 should continue increasing. And especially automotive design wins, take [unintelligible] to the revenue, take a long time. And if we start to focus on 2013, 2015 should be a year of the harvest of our strategy there.

And therefore, I believe 2015 we should see a great improvement as a percentage of revenue in 2015. I don’t know the number yet, but I believe it will be a strong growth year for the automotive business and at the same time industrial should continue to improve too..

Your next question comes from Harsh Kumar from Stephens..

Rick, as I look at the gross margins for this March quarter guidance, how much of it do you think was BCD versus FX. I know you said FX wasn’t much, and just simply lower revenues.

Is there a way we should think about that split?.

[unintelligible] We make that statement, 2014 versus 2013, BCD affected us….

160 versus 120, basis points, right. It’s affecting us, but the revenue decrease, the loading at S fab two, those are all factors. But I really don’t want to split it between the two pieces..

If I look at the opex increase, if I did kind of the guidance run through my model, and I think opex is going up, correct me if I’m wrong, if I’ve miscalculated, almost $3 million sequentially in the March quarter from the December quarter.

First of all, is that a correct number, and then secondly, is the opex going to stay elevated here? What’s causing it to go up? Or should we moderate and bring it down as time goes on? What’s happening with the opex line?.

I think there may be a calculation error. If you look at fourth quarter, opex was about $48.6 million, 21.7%. And in the first quarter, we said it’s going to be 23.2% plus or minus. And if you just use that midpoint, that gives you $49.5 million, which is about a $700,000 to $900,000 increase. That increase is in R&D..

So, Dr. Lu, you also mentioned in your commentary, in the second half there would be a pilot line in Chengdu that will be going into full production.

Could you just elaborate? Are you starting the ramp in Chengdu, or is this moving manufacturing around?.

We’ll start to ramp it in Chengdu. I think this quarter we’ll get power completed. At the end of this quarter, power will be completed, and then we’ll install the equipment, which I think Rick mentioned is slightly behind. Some of the equipment has come in, but it already should be in this quarter.

And we’ll install the equipment after the power is finished. And then we’ll do the qualification, do the [PCN], and then we will start to ramp the Chengdu facility. So that’s why we said second half we would start to ramp.

And if we finish the power this quarter, we could move in the equipment, do the qualification, and do the PCN and start to ramp in the second half..

The next question comes from Suji De Silva from Topeka..

In terms of the gross margin target of 35% that you’ve outlined, is there a revenue run rate that that hits at? Or if that’s not the way you think about it, how much of that gap can you close through the manufacturing improvements in BCD in Chengdu or mix versus needing revenue growth to get there?.

Well, actually, we’re coming from two approaches. One is to continue product mix improvement, and that is going to continue, and then you just look at how do we improve from 2013 to 2014, and we will continue that movement, or that improvement. That’s one. And that is really a significant one, product mix improvement.

The other one is the loading, and our other fab loading is almost there, and we now try to focus more on how to improve the loading from BCD fab, the Shanghai fab. And those are the management’s focus. And the assembly side is not that much. We’re still a little bit behind or a little bit below our model, but that will continue improvement.

And then Chengdu, at the beginning, could be a headwind, because [of the parts] will be small, and then you put equipment. But long term, that will be a plus. So if you look at it, our major focus is actually partly our mix improvement, including the new product as a percentage of revenue. Those are our management focus.

And then our other operational focus is how to improve the loading for the BCD fab..

And then in terms of the end markets, can you talk about which end markets are driving above average growth, you think, even in the first quarter, across digital televisions, computing, smartphones.

And is the tablet market stable? Or is that continuing to decline?.

I think the first quarter’s actually a little hard to make a lot of statements on, because everybody’s kind of retrenching a little bit. I think we still will maintain some strength in the automotive area, and the industrial, and everything is kind of just going along at kind of the guidance level. Some things are down a little bit more.

I think computer’s down a little bit more than we expected, is another thing. I think maybe the tablets are a little bit down. That’s more of a Christmas item. So I think it’s really hard to tell exactly how that’s going to roll in at this point..

Q1, the real effect is the Chinese New Year. That’s why every time you look at Q1, that is really more an effect, especially almost 80% of our revenue is coming from Asia. That means our customer produces the product in Asia to support worldwide, and local market [unintelligible].

And the Chinese New Year applies to almost all the manufacturing segments in Asia. And especially that one week, then one week after the quarter, it affects the revenue or our growth, or our revenue, quite significantly. That’s why we always say this is cyclical or seasonal effect. And it actually affects Diodes more than other companies.

It’s because almost 80% of our revenue is coming from the customer in Asia..

The last question from me, for Rick or perhaps Dr.

Lu, in terms of the use of cash, is there a further desire to reduce the debt, or can you talk about the acquisition environment, whether that’s changed for your targets and environments in the last three months?.

Actually, if we can find a good M&A target, then obviously, we want to use the money to do that. But if we cannot find it, we just continue returning the money to the [debt], and then whenever we see it, we can always borrow back..

That long term debt is a revolver, so we can pay it back or borrow it again. It’s got like four years left on it, so it’s not an issue borrowing and paying it back. We’re trying to pay it back as quickly as possible to reduce our cost, but we can certainly use it again if Keh-Shew comes up with the right target..

The next question comes from Vijay Rakesh with Sterne Agee..

Looking at the gross margin, I just want to go back to that. What’s the headwind for gross margins in 2015 from BCD? How many BPS is that? And I know your long term target is 35%.

When do you see [unintelligible] getting closer to that long term gross margin?.

I [unintelligible] want to give to you, long term gross margin, our business model is 35%. And we’ll continue to move to get to that number. And so it just depends on how long is long term, but I don’t have that much patience to wait forever. So that’s really my focus, is trying to get to the 35% ASAP.

Now, if you’re talking about 2015, I think we still have a lot of work to get there, so I don’t think 2015 we can get there. But you know I’m already taking about we will put the SBR loading to BCD fab. I believe the ramp is in the second half this year. That will significantly improve the BCD loading.

At the same time, I’m trying to look, is [unintelligible] fab, because if I can put more [unintelligible] in equipment, inside there, and convert some of the BCD 6-inch capacity into 8-inch capacity, we can bring in some of the 8-inch loading outside into the BCD fab.

And those will be in 2016, our [unintelligible] will be impacted, the loading in 2016. And so I think if we continue doing that, continue the product mix change, and I usually look at how much we improved from 2013 to 2014, then you can expect similar improvement in 2015 and then you can project about when we should be back to our business model.

That might be better than me telling you..

And just looking at Chengdu, [unintelligible] second half next year, do you expect by then that the BCD loading should be fully loaded, so that 140 to 160 basis point drag is completely out of the way. Or do you think that will still be there and then Chengdu fab kind of adds some more on the loading.

How do you see that?.

I will tell you that BCD won’t be fully loaded until after we do all this, until next year. So in Chengdu, we start to ramp, but the Chengdu ramp is to help the growth of the company, not just BCD.

And what we kind of tried to do is ramp up Chengdu and keep our Shanghai [unintelligible] about where the capacity now, and our future growth, the majority will be coming from Chengdu..

And then last question, as you look at your gross margin profile, what are the puts and takes between product mix, utilization, and BCD? How do you see those three, if you look at the next one to two years, let’s say, on a mid to longer term basis?.

Our long term goal is 35%, so we are 31.1% now. We are about 4% away from that number. And we should get there sooner or later. But our hope is sooner. And I think we already said, we would improve on the S fab loading, we will continue to improve the [SKE] loading, and we will ramp up Chengdu.

I think all those are all targeted at the business model of 35%. I just cannot give you the exact timing..

Your next question is from Tristan Gerra from Baird..

Dr.

Lu, as you’re in Taiwan currently, how would you characterize the environment? Do you see anything that’s out of the ordinary as we get into the Chinese New Year? Is there any visibility into [March]? And what type of channel feedback are you getting in terms of inventory management and demand trends?.

Well, actually, Taiwan is [unintelligible] is really the total Asia [unintelligible] from the renminbi to the Japanese yen, to Korean. Everybody is going down on the exchange rate. And that does not really affect much on the market. And the market in Asia actually, I think the market is already [in his statement], Q1 actually went down.

Then, in 2015, I think I already said, if you look at the bright spot is in the U.S., so if you look at it, it will be Asia production for the U.S. That’s the area I see the bright spot. European, so-so, and Asia, internal consumption, so-so. So that’s why I’m hoping, and I say, it is similar to 2013 to 2014. The bright spot is really the U.S.

or North America consumption..

And then you talked on the call about the Chengdu initial headwind.

Any way you could quantify and also provide some timing in terms of the headwind and when it starts actually becoming accretive instead?.

That headwind is not really very significant, because Chengdu, [unintelligible] assembly, you told me to put back wafer fab, put a lot of capacity in wafer fab. You cannot just put the nine by nine, floor by floor. In the wafer fab, when you put it, it’s a big headwind, and it takes a while to fully load it.

Virtually, assembly you can put it [one number, one nine], then one floor by one floor, and then if you pull out the floor, then you go to one building by one building. So you can gradually add back capacity. And so if you do it right, then it should not be a big headwind.

I’m just saying, it will affect some, but we are not really putting that in our business model, that it will [be hurting us] so much if we just be careful of expansion, that’s what we are doing..

Plus, the ramp up time is a lot quicker from an assembly test standpoint than it is from the wafer fab..

Yeah, that’s another. Another goodie is the ramp up time is much shorter, and the development time is even almost [unintelligible] because we just transfer that tech knowledge from Shanghai assembly to Chengdu, and they can duplicate and then qualify, install equipment, codify, then we can go to production. So it should not be a major affair..

The next question is from Shawn Harrison from Longbow Research..

A few quick questions.

The currency impact sequentially in terms of dollars, Rick, how much is that on the first quarter guidance?.

First quarter guidance we assumed that currency is going to remain the same as it was in the fourth quarter..

So the guidance just assumes a continuation of that fourth quarter headwind?.

Sure, yeah..

Second, I guess with sell-in matching sell-through in the fourth quarter, a bit anomalous from maybe what other semiconductor companies saw, do you expect any divergence between sell-in versus sell-through here during the first quarter?.

No, not really. I think we’ll be pretty much right in the same area. I don’t think any divergence there..

And Rick, accounts payable days, it seemed to dip a little bit abnormally, at least when looking at my model.

Was there anything within that that I should take away? Or was it just timing?.

No, I think if you go back and look at the fourth quarter every year, those accounts payable days go down. So it’s nothing specific..

Your next question comes from Lena Zhang from Blaylock..

Can you talk about your utilization rates in your assembly and testing facility in Shanghai?.

Utilization in Shanghai assembly is about 97% in the fourth quarter, which is about where it was in the third quarter. So, basically fully loaded. It will never be 100%..

It means certain packages are already fully loaded, certain packages are not. That’s why it’s [37%]..

And I am showing no further questions. I’d like to turn the call back over to management for closing remarks..

Thank you for your participation today. Operator, you may now disconnect..