Semiconductor Industry Update: Onto Innovation and Diodes Incorporated Report Strong Q2 Results

Onto Innovation Inc. (ONTO) Q2 2024 Earnings Call Transcript

Brian Chin - Stifel Vedvati Shrotre - Evercore David Duley - Steelhead Securities Charles Shi - Needham Mark Miller - The Benchmark Company Blayne Curtis - Jefferies Good day, and welcome to the Onto Innovation Second Quarter Earnings Release Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Sidney Ho. Please go ahead. Sidney Ho Thank you, Justin, and good afternoon, everyone. Onto Innovation issued its 2024 second quarter financial results this afternoon, shortly after the market close. If you did not receive a copy of the release, please refer to the company's website where a copy of the release is posted. Joining us on the call today are Michael Plisinski, Chief Executive Officer, and Mark Slicer, Chief Financial Officer. I'd like to remind you that the statements made by management on this call will contain forward-looking statements within the meaning of the federal securities laws. Those statements are subject to a range of changes, risks and uncertainties that can cause actual results to vary materially. For more information regarding the risk factors that may impact Onto Innovation's results, I would encourage you to review our earnings release and our SEC filings. Onto Innovation does not undertake the obligation to update these forward-looking statements in light of new information or future events. Today's discussions of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. As a reminder, a detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings release. Now, let me turn the call over to our CEO, Mike Plisinski. Mike? Michael Plisinski Thank you, Sidney. Good afternoon, everyone, and thank you for joining our earnings call this afternoon. Our second quarter revenue exceeded the high-end of our guidance range, driven by better-than-expected demand of Dragonfly systems supporting advanced packaging for AI devices and Atlas and Iris systems for gate-all-around investments in the advanced nodes. Financially, we were pleased to see progress from our inventory management efforts resulting in a quarterly record generating $65 million in cash from operations. Margins also improved from the first quarter and we expect it to improve again in the third quarter, which Mark will address shortly. We will now review the second quarter highlights, starting with our specialty device and advanced packaging markets, where we achieved a fourth consecutive quarterly revenue record driven by AI packaging, which accounted for over half of the revenue in these markets. Advanced packaging has proven to be a key enabler for this new era of AI, and NVIDIA recently commented that it expects AI demand to outstrip supply well into next year and we see the market attracting additional suppliers, each bringing unique requirements for wafer substrates as well as interconnect sizes and densities. By broadly addressing these needs, the highly versatile Dragonfly platform achieved another revenue record in the second quarter. In fact, based on our current visibility, we project our inspection business will grow by over 70% this year. And we continue to expand our capabilities. Last quarter, we released a new sensor to detect yields critical subsurface defects in ultra-thin wafers and based on market response, we already expect over 80 systems to be delivered with this capability through the end of next year. More recently, we announced a new 3D bump metrology sensor to address the need for bump pipe measurements of denser and smaller interconnects used in future high-bandwidth memory and hybrid bonding applications where bump pipes and pitch will be less than half the size they are today. Our new sensor uses proprietary technology, which we believe allows us to meet these new challenges at higher throughputs than alternatives. Though still preliminary, initial customer feedback has been positive and we expect to ship several systems for production evaluations over the next three months. In addition to new wafer-level packaging technologies, we see growing interest in panel packaging technologies to support chiplet architectures and larger package sizes. We engaged early with leaders in this market and to date, we've shipped over 30 panel lithography systems to customers around the globe. In the quarter, we added a new customer to this list when we shipped our first fully automated JetStep X500 to support glass and substrate applications on a single tool. We believe the stability of glass will allow for smaller interconnects across larger package sizes, which is critical to many of our customers' packaging roadmaps. Finally, revenue from power customers grew significantly, nearly achieving a record -- a quarterly record set last year. We continue to expect demand for process control to remain strong throughout the rest of this year for the power semiconductor market. Now, turning to advanced nodes, spending is picking up and we are seeing growth continuing through the second half of 2024 and into the next year. In the quarter, orders from logic customers represented nearly half of the revenue from advanced node customers. For gate-all-around applications, we are seeing an increase in adoption of our Iris films metrology in addition to our leading Atlas OCD metrology. Rounding out our optical metrology suite of Atlas, Iris and Aspect is our integrated platform IMPULSE. In the second quarter, we closed volume agreements from two of the top four manufacturers, which we believe will represent greater than 60% combined share at these accounts. We've also successfully qualified multiple systems in logic for gate-all-around applications below 2-nanometer where requirements for speed and stability are increasing. Now, I'll turn the call over to Mark to review our financial highlights and provide third-quarter guidance. Mark Slicer Thanks, Mike, and good afternoon, everyone. As Mike highlighted, we exceeded second-quarter revenue and EPS guidance ranges while generating record operating cash flow of $65 million. Operating cash flow yield increased two percentage points to 27% of revenues, representing a doubling of operating cash during the same period last year. Second quarter revenue of $242 million was up 6% versus the first quarter and up 27% versus the prior year. Second quarter EPS increased 12% sequentially to $1.32 and up 67% versus the prior year. Both revenue and EPS exceeded our guidance ranges due to the better-than-expected demand for advanced packaging for AI devices, gate-all-around investments in advanced nodes and stronger software and services within the quarter. Looking at the quarterly revenue by markets. Our biggest market remains specialty device and advanced packaging, which grew 3% sequentially to a record quarterly revenue of $164 million and represents 68% of our revenue. Our biggest sequential increase was advanced nodes, which had revenue of $32 million, increased 21% over Q1, and represents 13% of revenue. Software and services with revenue of $46 million increased 6% over Q1, representing 19% of revenue. We achieved 53% gross margin for the second quarter, in line with the midpoint of our guidance range of 52% to 54%, driving more than 100 basis point improvement over the first quarter. Second quarter operating expenses were $64 million, just at the high end of our guidance range. We continued to make additional investments in R&D within the quarter, extending our product capabilities and technology differentiation to expand our server markets for 3D metrology as well as future hybrid bonding metrology and inspection. Our operating income of $65 million was 27% of revenue for the second quarter compared to 25% for the first quarter, validating our ability to execute a leveraged operating model. Our net income performance, also 27% of revenue was supported from favorable investment income resulting from our increased cash balance. Now moving to the balance sheet. We ended the second quarter with cash and short-term investments of $786 million, achieving operating cash flow of $65 million and converting 100% of our operating income into cash. Inventory ended the quarter at $320 million, down $10 million versus Q1. The team made great progress optimizing our inventory levels even with the Dragonfly revenue growth and the expected increase in our advanced nodes business in the second half. We expect further inventory reduction of $10 million to $15 million for the third quarter. We plan to be below $300 million as we exit 2024, which will be a $50 million reduction from our 2023 inventory levels. Now turning to our outlook for the third quarter. We currently expect revenue for the third quarter to be between $245 million and $255 million as HBM chip leaders continue to invest in advanced packaging capacity and new capabilities, as Mike discussed. We expect gross margins will be 53% to 55%, reflecting the improvements in manufacturing and supply chain initiatives discussed in prior quarters. For operating expenses, we expect to be between $64 million to $66 million as we make additional investments in our R&D programs tied to customer roadmaps. For the third quarter, we expect our effective tax rate to be between 15% to 16% and 13% to 14% for the full year. We expect our diluted share count for the third quarter to be approximately 49.7 million shares. Based upon these assumptions, we anticipate our non-GAAP earnings for the second quarter to be between $1.25 to $1.35 per share. Our focus for the second half of '24 remains on executing on our targeted programs further quarter-over-quarter gross margin and operating margin improvements and continuing the progress made in the first half of the year. In addition, further growth of the advanced nodes business, driven by increasing orders for memory and gate-all-around logic should improve our margin profiles as we exit 2024. And with that, I will turn it back to Mike for additional insights into Q3 and the remainder of 2024. Mike? Michael Plisinski Thank you, Mark. For the third quarter, we see revenue from our advanced node customers increasing over 25% with growth coming from both memory and logic customers. About half of our logic revenue will support films and OCD applications for the gate-all-around node. Looking ahead, we expect to see logic revenue grow further in the fourth quarter with over 70% of logic revenue in support of gate-all-around applications. We expect our specialty and advanced packaging customers to remain at these record levels in the third quarter and growing in the fourth quarter, potentially leading to a new quarterly record for the company. Leading this growth is, of course, the demand for Dragonfly systems, but we also see growing demand for our films and acoustic metrology systems and packaging for both Logic and HBM applications. We are still in the early stages of adoption for these systems, but expect to deliver over $50 million in package metrology system revenue by year-end. In aggregate, our view has improved for the second half of the year and we now expect second half revenue to be 5% to 10% stronger than the first half of 2024. Though still early, we're encouraged by the setup leading into 2025. We expect to benefit from continued investments in gate-all-around capacity, and the announced capacity expansions from several high-bandwidth memory and logic packaging manufacturers, specifically for HBM or high-bandwidth memory, we expect new capacity coming online in the first half of the year to support the increase of HBM content for NVIDIA's AI processors from 80 to 192 gigabytes and for AMD -- AMD's AI processors from 192 gigabytes to 288 gigabytes. Adding to our optimism, we closed volume purchasing agreements with two customers with a combined value of over $300 million in the quarter. These agreements covered both AI packaging applications and gate-all-around investments through roughly 2025, a positive sign not just for a strong finish for this year, but a stronger 2025 as well. And that concludes our prepared remarks. Justin, please open the call for questions from our covering analysts. [Operator Instructions] The first question will come from Brian Chin with Stifel. Brian Chin Hi, there, good afternoon. Nice results and outlook. And thanks for letting us ask a few questions. Mike, previously you thought that advanced packaging revenue could pause or dip in 3Q, but your outlook today is more positive. What improved? And is it more on the Foundry or HBM memory side? Michael Plisinski Thanks, Brian. I think there was some confusion. What I said would pause would be specific to AI packaging, which is a specific set of really four customers, one logic and three memory. I did say that overall, we expected growth to continue sequentially through the next couple of quarters. Though we are seeing more revenue from those customers, there are still supply constraints that are limiting their ability to expand and to reach the levels of revenue that they were delivering or that we've been delivering to them in the first half. So we do still see a pause. I think it's definitely more constructive. Some of their announced expansions have been delayed. We've seen some customers actually get creative and push on some of their subcons to open up capacity and make room for a faster ramp where their greenfields are taking a little bit longer. That said, we are more bullish, but I think there was a lot of confusion around my definition of strictly AI packaging and just a handful of customers versus overall advanced packaging in our overall business for the specialty devices and advanced packaging markets. Brian Chin Yeah, thanks for clarifying that. And then looking at the $300 million in DPAs that you're announcing, it's sort of a multi-part, but can you give us a rough idea of, one, how that $300 million maybe splits amongst those two customers? Is it kind of like evenly weighted or maybe biased to one or the other? And then second, within that, maybe how that roughly splits amongst gate-all-around and advanced packaging? And then if I guess so, if I may, lastly, kind of is that revenue recognition expected to be linear or kind of maybe more weighted to the last three quarters as opposed to the next three years? Michael Plisinski Yeah, I don't have the breakdown in front of me. But by memory, I would say that the advanced packaging piece was the larger, a chunk of that $300 million. The breakdown, of course, is going to depend on when the expansions come out, but most of it was tied to 2020 -- sorry, 2025 for -- yeah, for next year. Yeah. It's mostly packaging. So it's about -- I just -- look, I don't have the breakdown quarter-to-quarter, but it's roughly 60% for packaging, 40% or so for the gate-all-around. Brian Chin Got it. Okay. That's really helpful. And just one last quick thing. What impact, if any, are you seeing this year in light of the reduced capacity expansion plans from advanced logic that was communicated last week? And how does this affect your thinking for gate-all-around revenue potential in 2025? Michael Plisinski Well, we're more constructive. We're definitely seeing good adoption of our products in the gate-all-around logic. We're seeing customers continuing to take more product. And as we mentioned, we see the fourth quarter growing from the third. So that's a positive sign. And you can tell from the -- what I just mentioned on the volume purchase agreements that customers are working with us to make sure we can continue a ramp of supply for them next year. So -- and that's all still before they hit their volume production targets in -- largely in 2026. So we expect that to continue to improve. What's probably nice surprise is the increased adoption of the Iris planar films in this mix. So in addition to the strong position we've had with OCD, we've been adding our more layer share for our planar films to the Iris system. And the next question will come from Vedvati Shrotre with Evercore. Vedvati Shrotre Hi, thanks for taking my question. I guess the first one I had was, we had an IDM customer of yours kind of cut down CapEx spending for 2025. Can you just help us think through how the conversations have changed for you? Or if, like your expectations going forward from that particular customer? Michael Plisinski Well, that remains to be seen. So they're certainly announcing CapEx cuts in general, but they're also -- let's say, reaffirming their desire to hit their next generation nodes and to ramp their latest generation processing nodes by 2026, I believe it was. So it depends on where they reallocate the rest of their capital. It's still a pretty big number. And to us, we are on the leading edge. So my expectations are their spend will be more towards that leading edge and we may not see any negative impact, maybe even a positive impact as an acceleration. Vedvati Shrotre Got it. Understood. And then on -- the next question I had is, I think you mentioned second half that you see the pause in AI packaging spend and the total advanced packaging spend actually continues to grow. Could you maybe help us understand the puts and takes into what's driving that delta between the two, like, are the OSAT starting to spend again? Is that what's really going on? Michael Plisinski We definitely see OSAT starting to spend more. But if we take a look at our advanced packaging spend, that includes all of the high-performance computer to include the lithography, et cetera, et cetera. So it would be a significantly bigger number to try and help people understand specific advanced packaging or the AI and packaging spend. We limited it to just four customers that are playing and spending in that space. And I think they've been pretty clear where their capacity growth is going and what constraints they've had and what spending has been like for them. So I don't think there's anything new that we're highlighting. Vedvati Shrotre Got it. And so, could you remind me again what kind of a decline or kind of pause you're seeing? Is it like 10%, 15% decline in your AI packaging revenues first half versus the second half or how would you characterize that? Michael Plisinski Overall, in aggregate, maybe, yeah, maybe around 10%, staying steady. But between different customers, some are growing significantly, some are doubling, some are cutting back and it just really depends on the ebb and flow of each individual of those four customers. But in aggregate, it's around the 10% that I just mentioned -- 10% to 15%. Vedvati Shrotre Got it. And then, one last one, if I may. On your gross margins, is the kind of 100 bps increase quarter-on-quarter? Is that primarily driven by your product mix changing with more advanced notes coming back? Michael Plisinski Not all of it. I mean, certainly, the improvements we've been talking about are certainly paying dividends within our manufacturing and supply chain. So I think as we get into the second half of the year and see advanced nodes certainly improving, yes, that will help accelerate that gross margin improvement. I think it's also important, there's a -- yeah, let me just finish one thing, please, Justin. There's a discussion around the AI packaging. And I think it's important to note just how big that spend for us. We gave some guidance over 50% of our advanced packaging specialty market. That's around $88 million, $90 million. That's a lot of capacity that customers have been taking on. And as they've mentioned and we've reported, today, there are capacity constraints and the customers are announcing new factories for both HBM and Logic CoWoS. So I think that needs to be put in context as well. Just how much of that we've been already achieving. And the next question will come from David Duley with Steelhead Securities. David Duley Thanks for taking my question. I have a kind of a two-part technical question. If the CPU and GPU companies adopt rectangular glass substrates as a lot of technical papers are suggesting, how, in total, will that impact Onto? And then specifically drill down in, what exactly would your lithography tool do on these substrates? Would you be layering the -- would you be putting down the RDL layers? Or what are the steps that you would address if that were to take place? Michael Plisinski Yeah. So to address your first question, what it would mean for us is we would get opportunities. All the different process control technologies we're applying from the Dragonfly in the packaging areas now would likely translate into the panel side through the Firefly, which is a panel version of the Dragonfly tool. So we would expect all of the inspection Clearfind opportunities. We already see various metrology opportunities as well to drive Firefly business. In addition, there is software opportunities, of course. Those customers aren't, let's say, they're coming from a different point in the supply chain. They have opportunities to advance their process control capabilities through some of our fab-wide software. In addition, of course, the biggest thing is the lithography piece. And there, we would be printing the RDL lines. Primarily all the RDL lines, which would be -- right now, in Advanced IC substrates, we're doing up to 10 layers per side. For glass, we expect it to be less because we can go to finer resolution and we expect it will be all on one side, but we are seeing customers talk about both sides. David Duley Okay. And then as a follow-on to that, is -- when you look at TSMC's roadmap, these substrates, whatever they're made of are going to get much, much larger. And I was wondering how that might impact if we did move to larger substrates, how that might affect the lithography business? And then finally, if you do move to flat-panel substrates or some sort of more of a panel lithography solutions, would that help the CoWoS bottleneck? Michael Plisinski I believe so. I mean, that would be a significant improvement in economies of scale. It might help some of the challenges that are being seen with the different substrates and thermal issues between the substrates, heating at different rates, heating and expanding at different rates. So I think there'd be a technical advantage to going in addition to economies of scale advantage to moving to panel. And for the steppers, of course, it's iterative. So you're going to have steppers to support this -- or the volume of steppers would be required to support the volume of chips, but also the number of layers. So it's an iterative process. So it would be -- if they're going to do eight layers, that's that all adds to the utilization of our tools and drives up the opportunity for us. So we think -- and we think the -- sorry, the size of the substrate, I think that's obviously good for us because we tend to have a -- because we came from the flat panel display world. We have the ability to handle significantly larger sizes of panels than anyone is even talking about now. So 650-by-650 is like a display 10 years, 20 years ago. So, from that standpoint, there's no problem. But the real benefit that we offer is the high-resolution wide-field optics. And if customers want to print large package sizes without stitching and highly repeatable, they can pretty much only go to our tool right now for that capability, which will be demonstrated downstairs in our advanced packaging lab. And we're already scheduling demos for that system. Today, I think we have over seven or eight demos already planned. David Duley So, I guess, what -- when I -- just interpreting what you said is, you have some tools that are highly aligned to TSMC's size of their interposers or substrates going forward. Michael Plisinski I definitely didn't say that, but we're aligned to the market needs. Let's put it that way. And the next question will come from [indiscernible] with B. Riley Securities. Unidentified Analyst Hi, I'm actually on for Craig Ellis. But you've obviously had some really great quarters in advanced packaging, I think three really, really incredible quarters. And then this one was just great too. Kind of how do you see that ramp going? I know you said that next quarter is supposed to be even and then you go back up again, but you all said this is just the beginning. So is this kind of a sustainable ramp? And how long do we kind of see this coming forward and how sustainable is it? Michael Plisinski Well, like I mentioned, we see the capacities for each -- let's say, if you take an AI compute engine, we see the amount of HBM doubling on those -- essentially doubling on those. So even if AI just stayed flat, which nobody is projecting, AI is supposed to go up, the HBM side is already doubling. In addition, of course, we do see AI demand continuing through next year and we see that both from the end-customers driving the -- or talking about their demand side and our own customers talking about supply constraints and that they're looking at expanding factories into next year, early half of next year in order to alleviate these supply constraints. So, that makes us pretty bullish about our growth through 2025. Unidentified Analyst Okay. Yeah, that's great. Thank you. I got another one that's kind of hopping off of that. So in the last week or so, we've seen kind of some meaningful signs of growing diversification, which I think is probably a bullish signal for your business. Have you guys seen any -- or how do you expect at least kind of better pricing power or your ability to kind of penetrate these different suppliers in HBM? Michael Plisinski Well, we're already in off all suppliers for HBM. So it's a matter of maintaining our position and providing value propositions that matter. And then generally, we negotiate our fair share of that value. I don't see that's changing in any way. I think if anything that's getting better as we continue to add new technologies and accelerate our pace of innovation and release new capabilities that they need, that's only helping them to ramp faster, helping them to provide higher yields and become more profitable or gain more share from their customers. So I think from that standpoint, it gives us a win-win scenario with our customers. Unidentified Analyst Yeah. Okay. That's great as well. And just one last thing. I'm kind of bouncing off of David's question. So obviously, we've seen a lot of different challenges with CoWoS, especially CoWoS-L, and kind of the thermal design challenges and what have you -- do you expect that as this becomes more difficult than maybe what some people expected that your products can deliver more value towards meeting CoWoS demand? Michael Plisinski I think our products help to drive yields for -- and identify a root cause for some of these challenges and issues. But some of these are physics and of course, our products are not going to change the physics. The customers need to use our tools to measure, identify and determine how to adjust the process and adjust the physics in order to drive the yields up. So we're critical. That's why we're seeing demands for new types of sensors, new capabilities, and we react very quickly working with our customers. I think the one change to that is with the lithography where there we are helping to define a process. Our [pace] (ph) lab downstairs is focused with our partners, several very, very talented partners and collaborators are focused on solving challenges associated with the adoption of glass. And as we do that, we hope that will be adopted by our customers and help propel the chiplet and advanced packaging roadmaps to the next level. And the next question will come from Charles Shi with Needham. Charles Shi Hey guys. Good evening, Mike, Mark. The question I want to ask is about China. I know you tend to do a little bit more business with the leading customers and the China exposure you had last year was kind of in the mid-teens and the first quarter was actually fell to like single-digit percent of your total revenue. But I haven't seen your Q2 numbers, but I just want to get a sense from you because this year's WFE upside, a lot of that actually is coming from China based on the commentary from your large-cap peers. And are you capturing some of that upside? What's your expectation for China revenue contribution for the full year and any trend from first half to second half? Michael Plisinski Yeah. I think, if I look at our numbers, we think second half China revenue will be up over the first half. But it's not massive, it's still in the teens level. So we're seeing growth. We saw growth from Q1 over into Q2 from China. That was a fairly significant growth, which you'll see. But, in general, I would say China for us is really about a lot of the specialty. We've talked a lot about power semiconductor markets. We are making progress in some of the meteorologic areas within China as well, but that's a little bit slower. And yeah, I mean, you know the challenges we have selling into China. So I don't think that's a surprise. I think it's good that we're able to achieve the growth rates we're projecting even without the tailwinds of China that some of our peers are enjoying [indiscernible] go ahead. I was going to say, which -- there's local competition in China and they're getting stronger and we see that at the lower-end starting to take share. So I think for us, our strategy is to focus on the higher-end applications, the most challenging applications and where those applications are that we add the most value. Charles Shi Got it. The other question is about that $300 million VPA through 2025. When do you expect to ship that $300 million of VPA, when does that start? When does the shipments start and when do you think we'll get to that peak shipment? If you can provide some color about that, that would be great. Thank you. Michael Plisinski There'll be some initial shipments at the beginning in the second half, but most of the bulk of it is going through 2025. And the next question will come from Mark Miller with The Benchmark Company. Mark Miller Hi, congratulations on another good quarter. Just wondering -- it appears that you're doing very well. Can you give us some insights where you think you've gained the most share and what areas? Michael Plisinski I think we've maintained a very high share in AI packaging. So in the HBM and the 2.5D logic, the CoWoS packaging, we've done well there. And then I think the gate-all-around we've certainly had some nice increases in adoption of our Iris planar films that I hope will translate into further growth into 2025 and 2026 as the gate-all-around node goes into full production. And we see the full benefits of the of the slots that we're winning. I think those are the two biggest areas. Of course, the panel packaging is a strong position for us as well. Still small and not a lot of, let's say, growth right now. There's a lot of overcapacity from a couple of years ago, but our position continues to strengthen. We continue to add new customers. And I believe this move to the glass and our wide field optics with high resolution is setting us apart from the competition and creating opportunities for meaningful share gains there as well. Mark Miller You just briefly mentioned Atlas. And I'm just wondering what's going on with Atlas and OCD. Michael Plisinski Now, that that's going very well. The OCD -- the Atlas OCD tool is qualified in all of the gate-all-around applications or at least the three major players. We've continued to -- we've talked about the increased capital intensity of OCD and gate-all-around and that's -- in our opportunities for share gains there, that's continuing to prove out. So that's for sure a tailwind for us and a strong one. That's an older story. So I didn't mention it earlier, but thanks for reminding me to bring that up. Mark Miller Let me just squeeze one in more. People are talking about Michael Dell, in particular, about AI chips into PCs. Do you see that as an opportunity? And if so, when do you think that starts to become an opportunity? Michael Plisinski Well, yeah, we've seen that. That's why I mentioned several new players are trying to enter into this space. I think it really depends on what is it -- what does the company mean by AI chips? So if it's just a repackaging or some software wrapped around their current architectures, probably won't change too much unless it drives up adoption. If it's more around packaging and bringing memory and logic closer together, hence what NVIDIA has been doing and some others. Then, I think it can mean a lot to us because it drives up that specialty more advanced packaging that we're so good at right now and creates more opportunities for our Dragonfly tools and sales. I think another big opportunity is where we hear customers from smartphone manufacturers talking about integrating more AI capability in their phones. And that could drive a refresh of phones, which, of course, drives a tremendous amount of advanced packaging content and would nicely recover NAND memory and as well as the advanced packaging OSAT business. And the next question will come from Blayne Curtis with Jefferies. Blayne Curtis Hey, thanks for taking my question and great results. I just kind of curious more color on the growth you've seen in advanced packaging or advanced nodes. I think it was like 50-50 logic memory. Can you just kind of talk about where you're seeing the strength in end markets? And there's also the question had been the pace of recovery there, but you also have new products with, like, planars. So just kind of curious how much of it is recovery versus new products as well. Michael Plisinski I wouldn't say a lot of its recovery. For gate-all-around, of course, there's -- that's more investment in the future and a new node, a new inflection or transition. Most of the others are the same. So, the NAND expansions that we've seen have been driven by the -- both new products. So like the aspect for high stack 3D NAND and then some additional of our more traditional products, again, to support high stack 3D NAND. So these are mostly technical transitions or technical buys versus, let's say, indications of a recovery in the market. I'd say the positive sign or the positive takeaway is these customers are seeing utilizations coming up. They are seeing inventories coming down. And so they're preparing and investing in these inflections for the next wave of orders and product launches. Blayne Curtis Thanks. And then I just wanted to ask on gross margin. I think your model -- long-term model is a little dated, but at $1 billion run rate, which I guess you're at where you're guiding, it was 56% to 57%. I'm assuming the mix is different, but can you maybe just kind of talk through the ability to get gross margins back into that range of 56%, 58% and if some of the mix that you laid out back then is different now and if that's still the right range. Michael Plisinski Yeah. No, thanks for the question. We -- obviously, when it comes to the long-term model, we're not in the -- we're not ready to update that yet. Obviously, our commentary has been we're going to get back into the model. And once we do that, we'll look at updating it further. But when we look at the gross margin, I mean, our goal this year is just to see quarter-over-quarter gross margin improvement with the objective to get back into that model gross margin at that $250 million, $260 million a quarter run rate and then look beyond that. But I think the things that we've done from our manufacturing capabilities, driving continued leverage, and obviously the mix will help as we drive more back into advanced nodes, which is our higher-margin product. And that does conclude the question-and-answer session. I'll now turn the conference back over to Sidney Ho for any additional or closing remarks. Sidney Ho Thanks, Justin. We will be participating in a number of investor conferences throughout the quarter. We look forward to seeing many of you at these conferences. A replay of the call today will be available on our website at approximately 7:30 Eastern Time this evening. We'd like to thank you for your continued interest in Onto Innovation. Justin, please conclude the call. Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.

Earnings call: Diodes Incorporated exceeds Q2 expectations, eyes growth By Investing.com

Diodes Incorporated (NASDAQ:DIOD), a leading global manufacturer and supplier of high-quality application-specific standard products within the broad discrete, logic, analog, and mixed-signal semiconductor markets, has reported robust financial results for the second quarter of fiscal 2024, surpassing market expectations. The company witnessed a resurgence in demand within the computing market, especially in Asia, and experienced growth in the automotive and industrial sectors. Diodes anticipates strong revenue growth in the upcoming third quarter, citing increased point-of-sale activity and a strategic focus on expanding gross margins and operational efficiency. Diodes Incorporated, with a significant revenue share from Asia, Europe, and North America, remains optimistic about its future prospects. The company's targeted markets, including automotive, industrial, and computing, have shown signs of improvement, with Asia being a particularly strong region for growth. Diodes' strategic focus on gross margins and operational efficiencies, coupled with a cautious yet opportunistic M&A strategy, positions it well for sustained growth in the semiconductor industry. Investors and stakeholders can look forward to the next quarter's conference call for further updates on the company's progress. Diodes Incorporated (DIOD), while showcasing a strong performance in its recent quarterly report, also presents a mixed financial landscape according to real-time data from InvestingPro. Here are a few key metrics and insights to consider: InvestingPro Tips also indicate some cautionary points for investors: For investors seeking a deeper dive into Diodes Incorporated's financial health and future outlook, there are additional InvestingPro Tips available at InvestingPro DIOD Q2 2024: Operator: Good afternoon and welcome to the Diodes Incorporated Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session. [Operator Instructions] And as a reminder, this conference call is being recorded today, Thursday, August 8, 2024. I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead. Leanne Sievers: Good afternoon and welcome to Diodes second quarter fiscal 2024 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes Investor Relations firm. Joining us today are Diodes President, Gary Yu; Chief Financial Officer, Brett Whitmire, Senior Vice President of Worldwide Sales 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-Q for its fiscal quarter ending June 30, 2024. In addition, management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and therefore 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, August 8, 2024. 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 and GAAP and non-GAAP terms. Included in the company's press release are definitions and recommendations of GAAP to non-GAAP items, which provide additional details. Also, throughout the company's press release and management statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days in the Investor Relations section of Diodes website at www.diodes.com. And now I'll turn the call over to Diodes President, Gary Yu. Gary, please go ahead. Gary Yu: Welcome everyone. Thank you for joining this conference call today. As reported earlier today, second quarter results exceeded our prior expectations as Diodes' demand began to recover from the low point in the first quarter, especially in the computing market in Asia. Additional positive indicators included improvement in distributor inventory levels with a sequential decrease in channel inventory weeks. Demand improvement during the quarter was most prominent in our computing end market, where Diodes is increasingly participating in the growth of AI servers. In fact, POS across the 3C markets increased significantly over the prior quarter, and Diodes was able to maintain automotive and industrial product revenue at 41% of total due to the content increases in both markets, even though the recovery remained slow due to the ongoing inventory adjustments. As we look to the third quarter, we are guiding for strong revenue growth of over 8% at the mid-point, supported by overall POS growth of more than 7% in the second quarter. Our near-term expectation for gross margin continues to reflect factory underloading related to our wafer service agreements as well as our internal demand. However, we expect to continue margin expansion toward our target model of 40% as loading improves combined with a resumption of growth in the automotive and industrial end markets. As global demand strengthens, we remain focused on driving further operational improvements to deliver increased earnings and cash flow. With that, let me now turn the call over to Brett to discuss our second quarter financial results as well as our third quarter guidance in more detail. Brett Whitmire: Thanks, Gary, and good afternoon everyone. Revenue for the second quarter 2024 was $319.8 million, compared to $302.0 million in the first quarter 2024 and $467.2 million in the second quarter 2023. Gross profit for the second quarter was $107.4 million, or 33.6% of revenue, which reflects factory underloading at our manufacturing facilities related to our wafer service agreement as well as our internal demand. This compares to $99.6 million, or 33% of revenue, in the prior quarter and $195.4 million, or 41.8% of revenue, in the prior year quarter. GAAP operating expenses for the second quarter were $103.7 million, or 32.4% of revenue, and on a non-GAAP basis were $90.9 million, or 28.4% of revenue, which excludes an $8.3 million restructuring charge, $3.9 million amortization of acquisition-related intangible asset expenses and $0.6 million for officer retirement. This compares to GAAP operating expenses in the prior quarter of $86.6 million, or 28.7% of revenue and in the second quarter 2023 of a $105.8 million, or 22.7% of revenue. Non-GAAP operating expenses in the prior quarter were $87.6 million, or 29% of revenue. Total other income amounted to approximately $9.1 million for the quarter, consisting of $4.2 million of interest income, $4.4 million in unrealized gains from investments, $0.8 million of foreign currency gain, $0.6 million of other income and $0.9 million in interest expense. Income before taxes and non-controlling interest in the second quarter of 2024 was $12.8 million compared to $18.8 million in the previous quarter and $101 million in the prior year quarter. Turning to income taxes, our effective income tax rate for the second quarter was approximately 20.6%. GAAP net income for the second quarter was $8 million or $0.17 per diluted share, compared to $14 million or $0.30 per diluted share last quarter and $82 million, or $1.77 per diluted share in the prior year quarter. Share count used to compute GAAP diluted EPS in the second quarter was $46.3 million shares. Non-GAAP adjusted net income in the second quarter was $15.4 million, or $0.33 per diluted share, which excluded, net of tax, $7.2 million in restructuring charges, $3.5 million in non-cash mark-to-market investment value adjustment, $3.1 million of acquisition-related intangible asset costs and $0.5 million in officer retirement. This compares to $13 million, or $0.28 per diluted share, in the prior quarter and $73.3 million, or $1.59 per diluted share, in the second quarter 2023. Excluding non-cash share-based compensation expense of $3.4 million GAAP and $2.8 million non-GAAP net of tax for the second quarter, GAAP earnings per share would have increased $0.07 per share and non-GAAP adjusted EPS by $0.06 per share. EBITDA for the second quarter was $41.1 million, or 12.8% of revenue compared to $48.3 million, or 16% of revenue in the prior quarter, and $133.5 million, or 28.6% of revenue in the second quarter 2023. We have included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income and GAAP net income to EBITDA, which provides additional details. Cash flow provided by operations was $14.4 million for the second quarter. Free cash flow was a negative $3.5 million, which included $17.9 million for capital expenditures. Net cash flow was a negative $2.9 million, including the pay down of $22.2 million of total debt. Turning to the balance sheet at the end of second quarter, cash and cash equivalents, restricted cash, plus short-term investments totaled approximately $277 million. Working capital was approximately $860 million and total debt, including long term and short term was approximately $47 million. In terms of inventory at the end of second quarter, total inventory days were approximately 191 as compared to 184 last quarter. Finished goods inventory days were 79 compared to 67 last quarter. Total inventory dollars increased $32.2 million from the prior quarter to $461.5 million. Total inventory in the quarter consisted of a $27.1 million increase in finished goods, a $3.2 million increase in raw materials and a $1.9 million increase in work in process. Capital expenditures on a cash basis were $17.9 million for the second quarter, or 5.6% of revenue and within our target range of 5% to 9%. Now, turning to our outlook. For the third quarter of 2024, we expect revenue to be approximately $346 million plus or minus 3%, representing an 8.2% sequential increase at the midpoint, which is the highest sequential growth in the last 14 quarters. GAAP gross margin is expected to be 34% 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 27.5% of revenue plus or minus 1%. We expect net interest income to be approximately $2.5 million. Our income tax rate is expected to be 18.5% plus or minus 3% and shares used to calculate EPS for the third 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 will now turn the call over to Emily Yang. Emily Yang: Thank you, Brett, and good afternoon. Revenue in the second quarter increased 5.9% sequentially and was higher than the midpoint of our guidance. Our global POS increased more than 7% in the quarter and our distributor inventory decreased. As Gary mentioned, we are excited to see continuous improvement in the demand going into the third quarter with stronger beginning backlog and book-to-bill ratio, especially in Asia. Looking at the global sales in the second quarter, Asia represented 77% of revenue, Europe 15% and North America 8%. In terms of our end markets, industrial was 23% of Diodes product revenue, automotive 18%, computing 26%, consumer 19%, and communications 14% of the product revenue. Our automotive industrial end markets combined total 41%, which is comparable to the last quarter on the percentage basis but slightly higher on the dollar basis. This is the ninth consecutive quarter above our target model of 40%. Now let me review the end markets in greater detail. Starting with automotive market, revenue was 18% of our total product revenue, which was flat to the last quarter on the percentage basis, but 7.6% sequential increase in product revenue. Inventory rebalancing continued in the second quarter and we expect this will extend into the third quarter. However, we are also seeing some customers inventory getting into healthier levels and demand is more stabilized with some new programs starting to ramp. So we expect a gradual recovery throughout the second half of the year. Our demand creation momentum remains strong throughout the quarter with expanding design ins and design wins across all focus areas including connected driving, comfort, style, safety and electrification. From a product perspective, our LDO product family DC-DC, buck converters, transistors and gate drivers receive strong demand from power supply, wireless charging, infotainment, telematics and lighting applications. We also secure design wins for USB PD Type-C charging and video controls for EV cars. Our silicon carbide, Schottky diodes and MOSFETs are also gaining traction for inductive charging systems. We are also seeing traction for our linear LED controllers, in taillight and aftermarket applications. Diodes' SBR products continue to experience strong momentum from our car display, headlight systems, infotainment and sensor lighting applications. Also during the quarter, our TVS diodes and transistors win designs and are ramping up volume in DC fans protection, ADAS, and battery management systems. We also continue to see opportunities for automotive clock buffers and PCI Express clocks along with USB Type C switches, USB Type C display port retimers and active crossbar muxes in realty [ph] entertainment, infotainment, ADAS, smart cockpit applications. Additionally, our hot sensor growth momentum continued this quarter with wins in multiple applications including fans for the car seat, engine cooling system, valve, and window lift motors. Diodes also continued to focus on expanding our product portfolio with the introduction of 130 new automotive compliance products in the second quarter covering power protection, battery management system, brushless DC motors, motor control, infotainment, smart cockpit, ADAS data line I/O, ESC protection, power management, backlighting and LED lighting applications. In the industrial market, second quarter revenue represented 23% of total product which was flat to the last quarter but up on the dollar basis. Similar to the auto market, the recovery remains slow due to ongoing inventory rebalancing and slower than expected demand recovery which may last until the end of the year. While the overall demand still soft, we are also seeing pockets of growth in areas like medical and aerospace which are experiencing improving demand. Despite the market softness, we continue to make progress and gain momentum across a number of products including our silicon carbide products that are gaining traction in the Power Factor Correction, energy storage system, heating, validation, air condition, as well as surfer power supply applications. Also in the industrial market, our Schottky and rectifier products are winning in the power products while bipolar transistors are being designed into solar inverter applications. And our LDO saw solid demand for fans, power tools and e-meter applications. We also secured a number of design wins for our contact image sensor product in the automated optical inspection printers, panels, printed circuit boards, and battery film inspection applications. In the computing market, revenue increased approximately 12% sequentially with healthy channel inventory and signs of stronger backlog in Asia, a key highlight in the computing market is Diodes growing content in the AI surfer area. As the AI data center volume continues to expand, we are excited to share that our PCI Express packet switch has been designed into tier-1 AI data center projects along with our PCI Express clock buffers, LSFO [ph] translators, standard logic, as well as other discrete products that started to run into production. Recently, a tier-1 EMS customer also named Diodes as one of the key suppliers supporting their AI ecosystem. Due to the rapid increasing power requirement in the AI data center applications, we also have additional content opportunities with our power MOSFETs and other discrete products that are being designed into power supply unit, backup battery units, thermal DC fan as well as DC/DC bricks and hybrid switched capacitor units. Diodes timing solutions including crystal oscillators, PCI Express clock ICs and power management solutions are also seeing traction in AI computing applications. As one of the industry major suppliers of PCI Express Gen five, Gen six clocks, Diodes has been benefiting from the worldwide data center infrastructure build out. Our SSD switches and power switches, both have solid demand from SSD, HDD in the storage and in the data center applications. We are also seeing increased adoption of our HDMI redrivers, USB crossbar Muxes and MIPI redrivers for laptops, desktop PCs, while our linear redrivers are being adapted for GPU cards and gaming notebooks. Also in the computing market, our Schottky rectifiers has been receiving strong demand from notebook adapters, thin DC fans, and power applications while our high surge TVS and ESC protection devices are winning designs in the DRAM modules/ Turning to communication market on the enterprise side due to slower than expected demand, the inventory depletion rate has been slow and we expect this may last into the second half before returning to the healthy levels. Within the smartphone market even though inventory is clean, the recovery will likely be graduated over the coming quarters due to slower than expected demand. On the design wins in the communication market, our ultra-low jitter crystal oscillators are being designed into gigabit switches and optical modules for AI networking and data center applications and Diodes protection devices are being adapted in the mobile phone application while our low voltage MOSFETs are also being designed into mobile phone for battery management applications. And lastly in the consumer market, similar to the PC market, inventory is relatively clean, although the overall demand in this market was not as strong as we expected, we anticipate some of the new designs will start to ramp in the third quarter. In terms of design momentum, our adjustable current limit power switches and LED controllers saw solid demand in the large screen TVs as well as USB HDMI applications in TVs and monitors. We're also seeing solid traction for our boost converters in point of sale machines and portable devices. Additionally, we are securing increasing design wins and ramping production of our led and low power PCI Express Clock generators in sports cameras, smartwatches and home security cameras. In summary, as indicated by our comments today, we are encouraged by the signs of improving demand, especially in Asia and in the 3C markets. Coming off the low point in the first quarter, we are guiding for continuous strengthening of demand into the third quarter, which at the midpoint of our revenue guidance represents over 8% growth and the highest sequential increase in the last 14 quarters for Diodes. And when combined with our strong design momentum across our end markets, we are well positioned for increasing growth and margin expansion as a global market recover. With that, we now open the floor to questions. Operator? Operator: Thank you. [Operator Instructions] And our first question today will come from William Stein with Truist Securities. Please go ahead. William Stein: Great. Thanks so much for taking my question. Congrats on the good quarter and especially the above seasonal revenue guidance. And that's what I wanted to ask about. The sequentials that you're guiding to are, as you highlighted strongest in a while and certainly above typical seasonality. It sounds like either all of that or the majority of it is in the compute end market specifically for data center AI applications. Is that the right way to interpret the guidance or is the - or is the better than seasonal guide more broad based than that? Emily Yang: Hi Will, this is Emily. Let me address the question. First of all, thank you. I think the 8% guidance is actually based on a couple area we look at, right? So we did mention second quarter POS came in very strong and we expect similar momentum into the third quarter. We look at beginning of the backlog, we look at book to bill ratio. I think you are right. Majority of the growth is driven by the computing, especially on the AI server data center area with some of the design wings and the ramping of the production. But at the same time, right, if you look at consumer, usually 3Q is the peak for consumer because of holiday bill. And then if you look specifically under communication, the smartphone area, it also follow a similar pattern, right. So based on all these assumptions, that's the reason we actually came up with 8.2% guidance growth for the third quarter. William Stein: Thank you. And then a question about channel inventory. Can you maybe offer us a bit more detail in terms of what that level of inventory is currently and maybe where you expect it to be at the end of next quarter? And how long before it's normalized and it's less of a, well, let's say no longer a drag? Thank you. Emily Yang: Yes. Definitely, so I mentioned, right, first of all we have a strong POS growth and we also have a decrease in terms of channel inventory. And it's still higher than our defined normal range of 11 to 14 weeks. So we actually definitely want to continue to focus the POS growth for the third quarter and continue to drive the channel inventory down to the normal level. It is a little bit hard to estimate the time frame, but on the other hand, just assume the inventory dollar is the same amount. As soon as the POS start growing, the channel inventory weeks will change or decrease significantly, right? So that's really where our focus, at the same time because of dynamic market situation, we also start seeing a lot more urgent order or short lead time orders, right. And in order for us to better serve our customer, we also feels like a little bit higher channel inventory or internal inventory actually better position us and giving us the flexibility to gain this kind of quick order and market share. William Stein: The expedite - expedited orders. Emily Yang: I'm sorry. So you said expertise? Yes, we start seeing a lot of expertise, pull-ins of the orders and also a very short lead time orders or urgent orders from customer more now than before, right. So we view that as also a very positive indicator of the market turning around. Operator: And our next question will come from David Williams with Benchmark. Please go ahead. David Williams: Hey, good afternoon. Thanks for letting me ask the question and congrats on execution and the growth here, it's good to see that return and strength there. Emily Yang: Thank you. David Williams: I guess maybe, yes, maybe first, Emily, just kind of thinking about the strength that you're pointing to an AI server, particularly in Asia, do you get a sense that we're seeing any maybe orders that are stockpiling ahead of other restrictions that may come down later on this year? Or do you feel like you are shipping maybe to end consumption for consumption that's happening more near term, not something for this just being built? Emily Yang: Yes. So David, we actually work with the customer very closely and we manage closely with their actual forecast, right. So we believe this is actually an actual real bill instead of events bill or stuff like that. So, we also have the forecast more than just this month, next month the forecast extended to next year. So we do see a good momentum. This is just the beginning of the ramp, so we are actually pretty confident that this will continue. David Williams: Great. And then maybe just on the computing side, if you kind of look across the demand trends you're seeing there, obviously AI server is doing well. But if you kind of think about your AI or, excuse me, your server versus client side mix, how do you think about that? And then maybe as well, if you think about growth, not just this in the coming quarter, but for longer term, how do you see those two performing over the next several quarters? Thank you. Emily Yang: Yes, I think overall, right, AI server or data center ramp up the volume definitely faster than the regular server. I think even with a regular server we see a lot of stability and it's going to be a slower ramp. But taking into account that inventory is really clean. So any of the improve from the demand is going to drive additional momentum of the orders and the backlog and the revenues, right. So overall AI servers still a very small percentage among the overall server market, right? And we also see the continuous of increasing the percentage overall. So I think the next big one would be more into the edge AI area and that would definitely continue to drive a lot more momentum as well as a faster refresh of the generation. So that's really what we are counting on. David Williams: Thank you again. Operator: And our next question will come from Matt Ramsay with TD Cowen. Please go ahead. Matt Ramsay: Thank you very much. Good afternoon, Emily. [indiscernible] we can't have three sentences on an earnings call this day without talking about AI. So I'll double click on that again. I wonder if you could spend a little bit of time. It's kind of one thing to emphasize maybe unit dynamics and demand dynamic for AI servers, but I wondered if you might be able to be a little bit more granular and talk about content. Just what is this AI server content with one or two server makers or ODMs? Or is it much broader than that across the board? Maybe you could give us a little bit of an idea of the specific components that you're selling in. And if you think about at the server level, what kind of dollar content are we talking about? Ballpark like the - just anything to sort of calibrate investor expectations because when folks hear AI server wins, they can let their imaginations do a lot of different things, and I just wanted to be a little bit more precise there, if we could? Thank you. Emily Yang: Yes, definitely, right. We're components, right, so we definitely support the - I would say, complementary chips surrounding the main chipsets and the memory modules and stuff like that. So I did mention a little bit earlier, we are really, really excited, especially for a key wing that is actually on the PCI Express we call the Packet Switch (NYSE:SWCH). Some of the other competitors are called the PCI Express Switches. So this is actually with the function to expanding additional PCI Express Ports, so this is really exciting. It's actually definitely a new momentum that we didn't see before. And so this is definitely more on the content expansion, right. So on top of the PCI Express Package Switch, we're also see like our PCI Express Clock or Clock Generators and buffers, crystal oscillators, and there's a wide range of different discrete products being used. Right. And this is not just on the GPU card or the main board, this is actually beyond. It can be a power supply unit supporting the AI servers. It can be a backup battery unit, thermal DC fans, or even the DC-DC break. So this is really expanding more just on one board. I think that's really exciting. So like I said, overall, AI servers or data center, still a small percentage overall, but we do expect the percentage will continue to ramp and when the GPU supply continue to improve. Right. We actually start getting a lot of momentum on the inquiry as well as the design-ins and design wins and all of this will be ramping next year. So like I said, this is the initial traction that we see and we do expect this will continue to expect. Matt Ramsay: Got it. Thank you for that additional color. I guess as my follow up question for the team, I like to dig in a little bit to gross margin. We've had obviously a period where the cyclicality of the industry has been pretty violent over the last, I don't know, 36 months. We went way up and then we went way down and now we're coming back out, which is great to see. And maybe you could - has there anything changed at all with sort of rules of thumb about ways to model gross margin as the revenue continues to recover for the company? Any new or different variables there? Any comments on utilization? I just want to make sure we're understanding how the margin impact will be as the company grows forward from the recovery here? Brett Whitmire: Yes, Matt. Hey, this is Brett. Make a few comments. I think Gary may follow up on it is I think that some of the principal things we've used in the past still definitely apply. The biggest knob that clearly is a part of what we're driving is the mix of our product and the influence that has on margin. And I think something to point to that you see is that we've kind of reiterated foundationally we've gotten and provided stability to this over 40%, this auto and industrial. But if you look back a year ago, that percentage was probably 6% or 7% higher than we are today. And kind of understandable given we're still kind of going through that auto industrial correction. And we're actually quite pleased that in the midst of that we've been able to maintain that above 40%. And as we go forward, what our expectation is that there'd be multiple tailwinds that would support our margin improving over time. You'd have the mix of auto and industrial that continues to maintain and grow the regions that drive a lot of that will continue to strengthen. We're continuing to see the correction and the strength that's particularly in Asia today. I think we'll see that more broadly as we go forward. We also will see the overall demands and the volumes that we're driving be able to increase that will improve our utilization. And we're also making a lot of progress in getting a more broad portfolio of things qualified in some of the factories that we bought over the last four or five years. Particularly pointing to our SPFAB and our GFAB, which is really to get flexibility across our hybrid model across our analog portfolio and our discrete portfolio. And I think each of those elements has a fairly significant impact to firing on all cylinders and continuing to drive growth as we march back to our business model in total. So Gary, you want to follow that? Gary Yu: Yes, actually I think Brett brings a very good point here. As for the ultimate automotive industrial, I think we're kind of driving a lot for the content increase in those two areas. We released a lot of new product quarter by quarter in those two areas, which can increase our content in the near future. I'm very confident on that. Okay. The second here is for the loading. As Brett mentioned about is on process and product porting from external foundry is what we're driving for the couple quarters already. So far the qualification progress is very well and achieved several key milestones. Okay, so we do see our product and also qualifying several key customer side and we're starting to receive [indiscernible] in short time. So I got a pretty good confidence on the loading for those two major wafers in the future. Matt Ramsay: Thank you very much for all the detail, guys. I really appreciate it. Thanks. Operator: [Operator Instructions] Our next question will come from Tristan Gerra with Baird. Please go ahead. Tristan Gerra: Hi, good afternoon. So for Q3, you talked about AI content and PC demand. And PC demand, notably in Asia. You also talked about consumer potentially picking and part of that is seasonality. How do you see the overall demand environment in China? There's been some companies this week talking about incremental weakness in the automotive China market. Are you seeing those trends and what are kind of the divergent trends that you see in Asia currently from an end demand standpoint for this coming quarter? Emily Yang: Yes, hi Tristan, this is Emily. So let me address this question, right. In Asia, in China specifically, we continue to focus on content expansion, especially on the auto industrial side as well. Right? So overall the demand is a little bit soft, especially on the 3C area from the end consumer consumption point of view. But we also seeing some improvement as well. So I would say all in all, right, we actually view China still a really good potential territory for us. And we actually looking at the customer, they really look at, it's called cost, performance value, CP value. As long as bios continue to focus on driving the technology and introducing new products, focus on features and functions, walking away from a lot of deep commodity product, which we see most of the competition from the local suppliers, we still see there's a really strong and positive path for Diodes overall to be successful in China and also in Asia overall. Tristan Gerra: Okay, that's great. And then in the past, I think it's fair to say that most of the M&A that you've done was centered around increasing capacity. And I'm assuming that it's probably not on the table even for next year. Are there any technologies where you feel that could be incremental from a mix standpoint? And how should we be looking at your M&A strategy overall, medium term? Gary Yu: Well, actually, no. Hi, Tristan, this is Gary again. Nice to talk to you. So, basically, as you know, just a two way perfect in the past couple of years. One is GFAB in Scotland, the other one is SPFAB in U.S. And basically, we identify our GFAB as our discrete wafer fab and as well as SPFAB as our analog wafer fab. So we got quite a few technology like split clay, the battery fab and transmose [ph] fab kind of pouring from our external wafer foundry into this wafer fab in Scotland, and also very advantaged China and on the process from the foundry as well externally, and put it internally into the fab in South Portland. So I would say that those two kind of big project probably will be the most important project in Diodes. Try to make sure the technology and process wise, we can cap that internally. At the same time, our design team also develop a newer process and the product within this two wafer Those two wafer fab. Okay. Instead of just supporting process. Brett Whitmire: Well, I think, Tristan, to add to that in terms of the M&A that you would most likely see us looking at, would be things that would help enable top line and be complementary to the manufacturing footprint we can provide. And so I think over the past, we've had a combination of organic and acquisition related growth. That activity of Gary and Dr. Lu continues, and we actively are continuing to look in that area. Gary Yu: Yes, actually, we are very, very careful about us to let the right target for the M&A. And we not only looking for the size, and we're also looking for any synergy, can help that, Diodes more gross revenue and achievement wise like that. So definitely, we're looking forward to that. Tristan Gerra: Great. Thank you very much. Operator: And this will conclude our question-and-answer session. I'd like to turn the conference back over to Gary Yu for any closing remarks. Gary Yu: Well, thank you, everyone, for participating on today's call. We look forward to reporting our progress on next quarter's conference call. Operator, you may now disconnect. Operator: The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect your lines at this time.