Diodes Reports In-Line Quarterly Results

diodes

Following in the footsteps of comparable companies, Diodes reported in-line 3Q13 results but also provided below-consensus 4Q13 revenue guidance. Management’s 4Q13 revenue guidance of -5.5% quarter over quarter (midpoint) is an indication of weaker market conditions and not indicative of the company losing market share. We are sticking with our Buy rating as we believe the company can generate >$2.00 in non-GAAP EPS once all cost synergies have been realized from the BCD acquisition and once market conditions normalize. We are lowering our price target from $31 to $28 to reflect lowered estimates.

Third-quarter revenue of $224.5 million (up 35% y/y; up 5% quarter over quarter) was in line with guidance of $220-$230 million and in line with our estimates. A gross margin of 31.0% was at the high end of guidance of 28.3%-32.3%. Non-GAAP EPS of $0.38 (excluding FAS123 expense) compared favorably to our $0.36 estimate and was in line with consensus. A slight positive variance to gross margin and operating expenses was offset by ~$2.5 million in op ex. Free cash flow was $9.6 million, which contributed to an $18.5 million quarter over quarter increase in the net cash position.

Similar to other discrete component and standard analog chip companies (e.g. FCS, IRF, ONNN, TXN), the company is expecting a sub-seasonal 4Q13 due to a slowdown in chip orders which began in September (see our October 28 downgrade of sector rating). For Diodes, as an example, distributor inventory increased 6% quarter over quarter. Most of Diodes’ peers have guided 4Q13 revenue to decline 2%-8% quarter over quarter, which puts Diodes’ guidance of -5.5% in the range of others. The midpoint of management’s 4Q13 revenue guidance is $212.5 million, which is short of our prior $225.0 million forecast and prior consensus of $222.2 million.

Again, given how comparable companies have guided 4Q13 revenue, Diodes’ below-consensus 4Q13 revenue guide should not come as a big surprise. However, management’s guidance of a 300bp quarter over quarter decrease in gross margin (to 28%) was a bit shocking. We would have expected the company to have a quarter over quarter decrease on gross margin if revenue decreases and assuming manufacturing load drops. This situation is being exacerbated because at the same time the company is generating 5.5% less (quarter over quarter) in revenue, the company will also be depleting inventory by $10-$20 million quarter over quarter. During 3Q13, wafer fabrication utilization rates at the company’s fabs were 80%-85%, and during 4Q13, utilization rates are expected to drop to <80%.

Shares are now trading at 14.0x and 10.0x our new FY14 and FY15 EPS estimates, respectively. We view FY15 as a more appropriate measure of the company’s EPS power as this timeframe reflects manufacturing cost synergies to be realized from the BCD acquisition (e.g. consolidation of front-and back-end production needs).

 

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