Aug 7, 2009
Operator
Good morning and welcome to Diodes Incorporated Second Quarter 2009 Financial Results Conference Call. At this time, all participants are in listen-only mode.
At the conclusion of today's conference call, instructions will be given for the question-and-answer session. (Operator Instructions).
As a reminder, this conference is being recorded today, Thursday, August 6, 2009. So let's turn the call over to Ms.
Leanne Sievers of Shelton Group, the Investor Relations Agency for Diodes. Leanne, please go ahead.
Leanne K. Sievers
Good morning and welcome to Diodes Second Quarter 2009 Earnings Conference Call. I'm Leanne Sievers, Executive Vice President of Shelton Group, Diodes' Investor Relations firm.
With us today are Diodes' President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Richard White; Senior Vice President of Sales and Marketing, Mark King; Vice President of Finance and Investor Relations, Carl C.
Wertz. Before I turn the call over to Dr.
Lu, I'd like to remind our listeners that management's prepared remarks contains 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 projection as to the company's future performance represent management's estimate as of today, August 6, 2009.
Diodes assume no obligation to update these projections into 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.
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.diode.com. And now I'll turn the call over to Diodes' President and CEO, Dr.
Keh-Shew Lu. Dr.
Lu, please go ahead.
Keh-Shew Lu
Thank you Leanne. Welcome everyone and thank you for joining us today.
I'm pleased to report Diodes' strong second quarter financial results. Revenue exceeded our guidance and increased 33% sequentially to above $104 million.
Demand and the order rate continue to improve throughout the quarter. As the production was rented on previous design wins at new customers and the new product were introduced for new application at the existing customers.
Revenue in Asia increased 42% from last quarter. As we increased market share at the current and the existing customer for our product Diodes in LCD TVs, LCD panels, set-top box, mobile handsets and notebooks.
Also during the quarter, our packaging output was manpowered limited. Therefore, we continually hired in people throughout the quarter to improve economic utilization at all packaging operations.
We started in solid margin growth during the quarter. Gross margin was 26.30% for the quarter, which is a 770 basis point improvement over the first quarter gross margin of 18.6%.
After broader economic environment and the demand continued to strengthen, we expect our margin will improve further as a result of increased factory utilization and our wafer fabs and the packaging facilities. Also notable in the quarter, we realized the full benefit of the cost spread initiatives.
Thus we began implement that last year in response to the global economic environment. As a result, operating expense were held effectively when compared to first quarter level, which contributed to our achievement of profitability on a then GAAP basis in the second quarter.
Due to the recent improvement in the economy and thus a greater improvement in the company's performance, we cancelled the temporary cost of reduction effort including falsification and the salary reduction. During the quarter, our continued effort to reduce our capital expenditure as well as our inventory levels, together with other efforts result in positive cash flow of operations, positive free cash flow and positive net cash flow.
Capital expenditure was $5.1 million in the second quarter. The main significant EBITDA our 2008 quarterly run rate of approximately $30 million.
Year-to-date, capital expenditure totaled approximately $9.6 million. We also fully improved our balance sheet during the quarter including continue debt deduction resulting from an additional $15 million buying back of convertible senior notes for common stock.
In total, we have repurchased approximately $71 million of our convertible senior here now, so far. Additionally, we further reduced inventory by $3 million over the first quarter and $90 million from the beginning of the year.
Based on our current estimates, we believe those positive trends will continue into the third quarter driven by further increase in demand and market share in Asia as well as additional improvement in North American and as further recovery in Europe. We also expect further improvement in profitability driven by higher revenue and continue improvement in factory utilization.
Filed 18 positive GAAP earning and cash flow in the third quarter. I'm very pleased with our company's result.
I believe our decisive action taking in response to the global market condition combined with our continued focus on new product repayments and design wins has resulted in a stronger of our financial position and the improved profitability for Diodes. With that I will turn the call over to Rick to discuss our second quarter financial result and third quarter guidance in more details.
Richard D. White
Thanks Dr. Lu and good morning everyone.
As Dr. Lu mentioned, revenue was a $103.9 million, a 33% increase compared to the $78.1 million last quarter and a 10.4% reduction from the $116 million reported in the second quarter of 2008.
Our results exceeded the expectations due to continued improvements in demands and order rates primarily in Asia as well as the further ramping of new design wins. Gross profit for the second quarter 2009 was $27.4 million or 26.3% of revenue compared to $14.5 million or 18.6% in the first quarter of 2009 and $39.6 million or 34.1% in the second quarter of 2008.
As Dr. Lu mentioned, this represents a 770 basis point increase, primarily attributable to a significant improvement in utilization at our packaging operations.
Our capacity utilization during the quarter was approximately 75%. ASPs in the quarter were on average stable due to tightened capacity.
We expect utilization in our packaging facilities to continue to improve in the third quarter to approximately 90% and have room for continued improvement at our wafer fabs. Selling, general and administrative expenses for the second quarter were approximately $15.2 million or 14.7% of revenues, which was a significant decrease on a percent of revenue basis from the $16.1 million or 20.6% of revenue in the first quarter.
Research and development expenses for the second quarter were $5.4 million or 5.2% of revenue, which was comparable on an absolute dollar basis to the $5.3 million or 6.8% of revenue in the first quarter. We plan to invest in R&D at similar levels while remaining conscious of market conditions.
Total operating expenses amounted to $21.5 million, which was within our expected range and comparable to the previous quarter reflecting the completion of our cost reduction initiatives. We expect the third quarter operating expenses to be comparable to the second quarter on a percent of revenue basis.
Total other expense amounted to $3.1 million for the second quarter. Looking first at interest income and expense, we had $1.3 million of interest income, primarily related to our portfolio of auction rate securities.
And interest expense of $1.9 million, primarily related to out convertible senior notes stated rate and our loan for the acquisition of Zetex. During the second quarter of 2009, we recorded a pretax non-cash amortization of debt discount of approximately $2.3 million in accordance with APB 14-1.
As we stated last quarter, effective January 1st, 2009, APB 14-1 requires us to separately account for a liability and equity component of our convertible notes which reflects an estimated non-convertible borrowing rate of 8.5%. We expect this additional pretax amortization to amount to approximately $2.1 million per quarter or 8 to $9 million for the full year of 2009.
In addition to interest income, interest expense and amortization of debt discount, also included in the total $3.1 million other expense WAS a $1.5 million gain on forgiveness of debt, which was partially offset by $2 million in foreign exchange losses related to foreign currency contracts that were part of the Zetex acquisition. Turning to income taxes, we recorded a net income tax expense of approximately $5.2 million for the second quarter which includes $4.9 million of non-cash, book tax expense related to our first quarter repatriation of $28.5 million in accumulated earnings from one of our Chinese subsidiaries.
The non-cash income tax expense from the repatriation of the cumulated earnings more than offset the tax benefit from our year to-date GAAP net loss. Looking at the remainder of 2009 and even though we expect continued improvement in net income before income taxes and non-controlling interest, which we refer to as PBG, we expect income tax expense to be a relatively nominal amount of 0 to 4%.
This is due to the fact that we have recorded in the first half of 2009, all of the non-cash tax expense related to the first quarter repatriation of earnings. In addition, our earnings in Asia are taxed at lower income tax rates while our losses in the U.S.
generated a tax benefit at higher income tax rates which offset each other. For 2010 with the phasing out of the preferential tax rates at our Shanghai operations, we now expect our income tax rate to range between 15 to 25%.
Second quarter GAAP net loss was $3 million or negative $0.7 per share, which included among other items, the $4.9 million of non-cash income tax expense related to the repatriation of earnings that I just spoke about. Non-GAAP adjusted net income was $2.5 million or positive $0.06 per share, which excluded net of tax, non-cash interest expense related to the amortization of debt discount of $1.4 million, non-cash acquisition related to intangible asset amortization cost of $800,000, gain on forgiveness of debt of $1.3 million, non-cash income tax expense related to the repatriation of earnings of $4.9 million and nominal amounts for restructuring charges and a loss on the extinguished amount of debt.
We have included in our earnings release, a reconciliation of GAAP net loss to adjusted net income which provides additional details. Cash flow for the second quarter amounted to $17.8 million from operations, $12.8 million of free cash flow and $16.3 million of net cash flow.
Year-to-date cash flow from operations is $24.6 million, free cash flow is $15.2 million and net cash flow is $6 million including the repurchase for cash of $9.6 million par value convertible notes. Turning to the balance sheet, at the end of the second quarter, we had $429.3 million in cash and short-term investments consisting of approximately $109.5 million in cash and $319.8 million in short-term investments.
During the second quarter, $319.8 million of par value auction rate securities and the related no net cost loan of $211.9 million were reclassified as short-term investments and current liabilities respectively because the auction rate securities can be put back to UBS at par on June 30, 2010 under the previously disclosed settlement. Our working capital at quarter end was approximately $323 million.
Long-term debt including the convertibles senior notes which are redeemable in October 2011 was approximately $142 million. Now turning to inventory, at the end of the second quarter, inventory was approximately $80 million which was a decrease of about $3 million in the first quarter and a $19 million decrease from the beginning of the year.
These reductions highlight our successful initiative to materially reduce inventory levels. Inventory days were 96.
Accounts receivable was $85.7 million, AR days improved from 82 in the first quarter to 67 days in the second quarter. Capital expenditures were $5.1 million for the second quarter which was below our original estimate of $67 million for the quarter.
CapEx year-to-date is $9.4 million. During the quarter, we invested in new equipment to balance our manufacturing lines due to a change in product mix towards more complex devices as a result of the ramp of our analog and Zetex products.
As we look toward the future, we expect our capital expenditures in the third quarter will be 8 to $12 million. Depreciation and amortization expense for the second quarter was $11.8 million.
Turning to the outlook. Looking at the third quarter of 2009 as Dr.
Lu stated, we expect our business will continue to grow and that we will have further financial improvements to the strong result we recognized in the second quarter. We estimate that third quarter revenue will increase 10 to 15% sequentially and gross margin is expected to be approximately 28 to 32% as we continue to benefit from further improvements in factory utilization.
In terms of operating expenses, we resented the previous temporary cost reduction actions and expect operating expenses to be comparable to the second quarter on a percent of revenue basis. Our income tax expense is expected to be a relatively nominal amount of 0 to 4%.
With that said I will now turn the call over to Mark King, Senior Vice President - Sales and Marketing. Mark?
Mark A. King
Thank you, Rick and good morning. As Dr.
Lu and Rick mentioned, our strong second quarter results reflected the continued increase in demand for our products utilizing LCD TVs, mobile handsets, set-top boxes and notebooks. Additionally, our continued focus on new product development and our high level of design win activities resulted in an increase in market share specifically in Asia.
We have seen strong gains and new customer penetrations over the past two quarters in hall sensors and MOSFETs for mobile handsets, netbooks and notebooks. As we stated approximately one year ago, it was our goal to further penetrate the cell phone market and I am pleased to report that we have greatly expanded our confidence in cell phones over that time and are starting to see an impact on revenue.
We continue to expect a high rate of adoption in the third quarter resulting in further penetration of this high growth market. We also saw expanded production in Q2 of new design wins for our SPR products over a broad base of applications and equipments.
We continued our efforts to reposition worldwide channel inventory for future growth during the quarter. Inventory was down 5% in Q2 and 28% year-to-date.
And we expect it to remain flat in the third quarter. Regarding pricing, ASPs were on average stable due to the tightened capacity while average unit costs were down due to improved utilization.
As mentioned previously, we significantly improved loading at our manufacturing facilities, which we expect will continue in the third quarter and further benefit margin. In terms of segment break out, computing and consumer, each represented 32% of revenue with industrial at 18%, communication 15% and automotive 3%.
In regards to geographic break-up, Asia represented 77% of total revenue. Asia revenues increased 42% from the first quarter driven by overall improvements in demand for notebook, netbook, panels and market share gains in China, local branded LCD TVs and mobile phones.
After sharp declines in distributor inventory in the first quarter, inventory was flat and POS roughly matched TOP for the quarter. Distributor inventory is approximately one to one and half months and is expected to remain flat.
Design activity was strong and increased over the first quarter. In the third quarter, we expect to see continued growth in panel and LCD TVs, notebooks and net books and China local mobile phones.
In North America, sales represented 14% of total revenues and increased 25% over the first quarter. OEM sales were up 7% driven by solid gains in the lighting sector and increases in smart phone revenues driven by recent design wins.
Distributor POS was higher than distributor POP in the quarter and inventory declined another 4%. Industrial accounts for direct into the channel remained relatively flat during the quarter as a result of the continued slowdown in the housing markets.
Design activity accelerated significantly in the second quarter, highlighted by 34 analog wins, 1 Hall sensor, 6 LED drivers, 4 SBRs and 21 MOSFETs. Sales in Europe accounted for 9% of revenues in the second quarter and decreased approximately 10% from the first quarter.
Distributor sales were down 16% as distributors continued to reduce inventory. Channel inventory decreased 20% quarter-over-quarter and POS was up slightly.
Volume sales remain flat over the previous quarter but showed a positive trend going into the third quarter. Direct sales to automotive customers recovered by 17% after a flat first quarter while direct sales to consumer accounts again remained flat and sales to industrial customers continued to decline.
Overall design activity increased significantly with the value of new design wins more than doubling from the first quarter. Although the third quarter is typically impacted by the summer holiday closures at many manufacturing site, we expect improvements in the third quarter for our consumer accounts in Europe and a more stabilized business with the automotive customers.
Now turning to new products; new products revenue increased approximately 4 million from last quarter and represented 15.5% of sales, which was comparable to last quarter on a percent of revenue basis. Dollar increases were primarily due to increases in SBR products and discrete particular MOSFET.
During the second quarter we released 83 new products consisting of 37 analog products across 6 device families and 46 discrete, which included 30 MOSFET, 7 transistors and 9 SBR devices. Our continued focus on new product development further broadened the range of devices introduced in the quarter.
The 30 MOSFET devices were for battery packs, portable, communing and LCD TV and back lighting application. Our MOSFET business has continued to expand with new business being one through designing opportunities.
Also during the quarter, we introduced a miniature precision current monitor that markets smallest solution size for battery, current measurements and portable applications. Packaging of thin 4-Pin DFM package to this current monitor supports system management function, while extending active run time.
The device helps reduces power enduring to prolong battery life and suits a broad range of batteries cell configuration. Typically uses include battery charging, battery capacity measurement and over current monitoring and applications including PDA, mobile phones and smart phones.
Additionally, we extended our LED driver family with the introduction of a cost effective and small form factors solution for small LCD screens used to cross a wide range of potable consumer electronics. This family of high efficiency DC to DC boost wide LED drivers is specifically designed for providing uniform and LED backlog into LCD screens measuring up to 5 inches.
Targeted applications include personal navigation devices, digital photo frame, mp3 players, PDAs and digital camera. In terms of global design wins in process design activity was at its highest level in recent quarters, with wins 175 accounts globally.
90 wins at 68 customers in Asia, 94 wins at 52 customers in North America and 75 wins at 55 accounts in Europe. Design wins and in process design activity were broad base in both product and in equipments.
Our expanding MOSFET line was the most active with key wins and mobile handsets and smart phones, notebook, netbook and automotive with 32 active projects as we are at 23 active projects including a key solar power design win. Additionally, we had 20 new projects for lighting and 16 new projects for USB power switches, which with several volume production orders placed a new wins from the first quarter.
In summary, I believe our continued focus on new product development and design win activities during this tough economic environment has been a contributing factor to our strong results and growth during the quarter. Additionally, our decisive cost reduction efforts have allowed us to maintain expenses in order to improve profitability as revenue growth.
We have also effectively capitalized on the operational and product synergies from our acquisition of Zetex that will continue to materialize in our future results. Moving forward we remain focus on further ramping new product design wins while expanding market share at new and existing customers.
I believe our proven business and product strategies will continue to produce profitable growth as the economy improves further. With that I'll open the floor to the questions.
Operator?
Operator
(Operator Instructions). Our first question comes from the line of Gary Mobley from Noble Financial Group.
Gary Mobley
Hi guys. I'm going to ask some of the questions that I asked on last conference call.
I asked last time whether or not you guys can achieve gross margins in the 30% range on peak utilization at 139 a quarter in revenue, if this is how you are turning to buy that line now. So I'm wondering now what your expectation as you do get up to the 130 million per quarter level, what kind of gross margin will like to be.
Keh-Shew Lu
Well, I think we give the guidance on the third quarter and from there, I think our midpoint of guidance is the 30%. So you already could see from there we should be able to give 30% at any point of what we give to you, then but like I said we -- our capacities is still not fully utilized yet tat that level, it's third quarter level.
And I need to be careful to separate from the main capacity to the economic capacity because every time, when we complement capacity, we're more different to economic capacity but I think during speech, I mentioned from main capacity point of view -- main positive capacity point of view, we actually form and the reason is we reduce -- during the Chinese New Year, we reduced almost 30% of people, and we are hiring the people back but it takes time to training them to make them to the production line and to there is a more productive, and when those is continually improved, then profit. Then productivity is getting better, the CPM gets imposed.
So that will be continued improvement of CPM, when our operator gets more productive and although continue increase and when our increment utilization gets better. But that's only the second side.
From the widespread side of the Diodes, it's a little bit behind, it's behind packages. So we still have a room for improvement of the Diodes campaign to give us more profit.
So I think we should be able to get to the 35% our target, when our programs continue growth. I don't know when -- I cannot give a prediction but I am confident that if the loading continues to improve, if the productivity continues to improve, if the wafer fab loading continues to improve, we should be able to get there.
Gary Mobley
I do have follow-on. What do you think you could have done in revenue if you were personnel constrained in the second quarter, and where shortage of personnel acts as a throttle for your third quarter?
Keh-Shew Lu
I really cannot give you that number but I can tell you, we actually condense some of the regiments because we do not have enough main capacity to support all the demand. So we have to turn down some demand, some logging, some regiments.
Gary Mobley
Thank you, guys.
Keh-Shew Lu
And as we believe the third quarter will continue growth, but we can still look very promising and we'll continue gaining the market share and that's where we'll give the guidance of 10 to 15% growth even we grow 30% in the second quarter; we feel strongly to be able to continue that growth pack in third quarter.
Operator
Our next question comes from the line of Joe Whitene of Longbow Research.
Joe Whitene
Hi. Good morning.
Joe calling in for Shawn Harrison.
Keh-Shew Lu
Yeah, hi Joe.
Joe Whitene
Hi. First question is Mark, you were walking through the European trend, it sounds like its still mix there which is not surprised.
I see a little bit weaker automotives maybe stabilizing a little bit. So what's the estimates you arrived for deals of 10 to 15% sequentially?
What does that assume for year-end? Is it a flat quarter or is it another slight step back?
Mark King
We think we had a pretty bad second quarter and basically we decreased our distributor inventory by 20%. So we're projecting some slight -- we don't project the markets to be yet anything more than flat.
But we expect some recovery in our numbers in the European market in Q3.
Joe Whitene
Okay, that's helpful. And then Mark, again now for the comment that you made, you mentioned there are some efficiencies from the Zetex acquisition yet to come, just hope you can give a little more color on those.
Are they cost savings that are going to help operating expenses or are they more synergies that are going to expand the topline, I guess across more geographies?
Mark King
I think a little bit of both, I mean I think we're putting more and more product over there into our factories although we're quite full. So we're still -- we still have some benefits long term to product end.
Of course as we look forward and I got to move out of sub-contracts as an order to put in our facilities that we can't support it. So we have some opportunity there.
But I think from a customer, the ability to expand the customer base and the product mix and combining the product lines and selling them as one I think is offering us a lot of advantage going forward also on the topline growth.
Joe Whitene
So the way to think about that expansion is also the more and more expanded into North America from a geographic perspective?
Mark King
No, I think in every region. It's the same customers or new customers for Diodes or new customers for Zetex in all regions.
Joe Whitene
Thanks for that. Last question and then I'll step our here.
Rick, the guidance includes operating expense guidance, you guys guided to flat on a percentage basis, just curious looking on longer term, are they temporary cost saving that you guys enacted that will naturally start to kind of fall back as we look at a few quarters or is the kind of flat percentage of sales the most accurate way to model things right now? Thank you.
Richard White
Yeah, I think what you'll find is that we've resented those temporary things like post vacations and salary reductions. So of course those are going to flow back in, and as we increased the utilization, we'll have additional people that needed to be added.
So we see the percent of sales going forward, operating expense as percent of sales going forward as pretty reasonable amount.
Joe Whitene
Okay. Thanks and congrats on a great quarter guys.
Operator
Our next question comes from the line of Steve Smigie of Raymond James.
Steve Smigie
Great. Thank you.
I just want to follow-up on the last question a little bit more. So as we look at to Q4, will there be another sort of -- let's just say your revenue were flat in Q4, would you see a bigger step-up still dollar wise in the OpEx just as more of that stuff comes off or pretty much, everything got taken off starting Q3.
So it would be sort of all in there already?
Keh-Shew Lu
Hey Steve. The thing is we'd really -- we give guidance Q3 but I don't think we have a clear picture on Q4 yet.
And we do not -- we hired in the people, if when we say we hired in people, we're more different through manufacturing, wafer fabs and assembling okay. Now for that expense, we start to spend some additional money to R&D and that's what we said, percentage spread instead of dollars spread, but we are very careful.
We have not going to go crazy in hiring until we see a clear picture. Our business model is we will keep as a percent of the revenue will keep flat and therefore, if the revenue do not significant grow, we want significantly increase that operational cost.
Steve Smigie
Okay, that's fair. I guess just in terms of that the balance sheet, you guys are generating some cash flow would expect that to continue to improve.
Do you use that to continue to pay down some debt as you have or what's the use of cash there? And where do we see the balance sheet over the next month, a year really as you come to the period you're out where you pay that stuff down just if you give some update on that.
Keh-Shew Lu
Well, you know the last month, I think last month we worked on convertible front there using the stock. And we are very careful on the cash.
And yes, we joined cash but we know this is in moment, cash is the king, and so we're very careful. So I probably will not using the cash we generated to buy those.
We might I don't know -- we don't what would be happening, if the opportunity is right, we may buy back some convertible bonds if using either cash or stock but it is really just depend on what kind of opportunity present to us. But we do not really set a goal to buy the convertible bond back using cash or using stock.
We don't set that kind of goal. If opportunity is presented the us, look good, then we will take opportunity.
Steve Smigie
Okay. Last question is just on the revenue side.
You saw a huge pickup here in Asia in revenue of raw and guidance is pretty big. Do you think in Q3, you're shipping back to demand and then, you actually need to see meaningful demand pickup, few things going.
I know you're capturing a lot of shares, but additive to but how much have you caught up with demand? And how much do you actually see demand sort of picking up in Q3 and going forward?
Mark King
I think the Q3 growth is based on a pickup on demand and I think we're relatively caught up with demand at an equal level. Clearly, our inventory levels globally at the channels are very, very low at this point.
I think I mentioned they were 1.1 to 1.5 months in Asia, which is actually quite lean. And so we decreased our inventory another 20% in Europe and inventory was already low and decreased another 5% of the channel in the U.S.
So we're very careful where the product is going right now and it is going into the channel. It's going to customers that are going to take it immediately.
So pretty much it's all passed through at this point.
Steve Smigie
Great, thank you.
Keh-Shew Lu
Yeah. You remember, we mentioned even in second quarter, due to the main capacity implementation with actual trend in inventory too.
So we continue joining inventories. We are now at the base, if you really don't have that much of inventory we can use.
So now we 100% rely on our an output from our manufacturing and virtually, our manufacturing, the people we hired in during the April timeframe are able to put in back to production. You think about two months to trending to hiring the people.
After we hire, we take about two to three months to training them to put on the production line. And so we now, can we return our sales instead of a huge shipping some of the inventory.
Steve Smigie
Okay. Thank you.
Operator
Our next question comes from the line Tristan Gerra of Robert Baird.
Tristan Gerra
Hi, good morning. I know you don't have too much visibility yet beyond Q3 but what is your visibility beyond your normal three months backlog timeline?
And do you think that there's a chance for lead times to further expand now that shipping is back in line with end demand or do you think that you could see some lead time expansion in Q3?
Richard White
I think we'll still see. I think the industry is going to see some lead time expansion in Q3.
The question is how long that lead time expansion will move in to Q4? I think that more -- we're seeing more and more people having issues on their deliveries, even as recent as last night.
So I think that there will be some industry extended lead time in Q3, which should be positive on ASPs and the general trend.
Tristan Gerra
Okay. And could you say what your utilization rates were front end and what your expectation will be for Q3?
Keh-Shew Lu
Our front end, we have to wait for that, one is in the Kansas City, one is Zetex region, -- I mean one is in Zetex in the UK. And we are in the second quarter, in the second quarter actually Zetex is quite low.
It's about 40% loaded and in the first set it's almost about, I think it's more than 50% of economic capacity point of view. Now main capacity is a bit higher, but from the economic capacity point of view, we did better than 50% and that's in second quarter.
And we look into the third quarter, then Diodes is the both set average probably somewhere up to about 65 to 70%.
Tristan Gerra
Great. That's very helpful.
Thank you.
Keh-Shew Lu
Okay.
Operator
Our next question comes from the line of Harsh Kumar from Morgan Keegan.
Harsh Kumar
First of all congratulations, these all are very good numbers, very good job of managing the business.
Keh-Shew Lu
Thank you.
Harsh Kumar
I have a couple of questions. As you look into your business, there is obviously a tremendous flow that's going on.
Do your customers when you talk to them have any visibility into the actual any consumption or are they going by forecast? Any kind of color you can give us on that would be very helpful.
Mark King
I would say that they are watching the end demand very closely. And I don't think anybody after what they went through in the fourth quarter and the first quarter is being over aggressively with inventory.
Harsh Kumar
Okay.
Mark King
I would say they are watching their ramp-ups quite tightly also.
Harsh Kumar
So it's pretty tight all the way, very well controlled, it sounds like.
Keh-Shew Lu
Yeah, even including the building material to us the fixed cost, we even need to train our people to our vendors to get the fixed part we want. So I think the tightening condition is not just run vacation is very close the whole of '09.
Mark King
Good, good. And then Mark maybe you can answer that.
Sounds like there is a little bit of inventory replenishment left in Europe, but for most part would you say that it's that's played out. This is basically we all to manage that pretty first statement.
Mark King
Yeah, I don't think that there is, in our number so far there is been zero inventory replenishment that's actually been continued inventory decrease at the channel perspective. I think there is clearly opportunities later in the fourth quarter and the in the first quarter where we would want to restructure our inventory back to normal rate.
Or I don't think they will ever go back to the previous normal rates because I think everybody is going to be more sensitive to cash in the next round. But clearly we don't to operative it one month in Asia on inventories, when basically Asia is a pool environment.
So we need to have more inventories in the channel in Asia. I think there maybe even a little bit more decline in Europe over the next two quarters in inventory.
And I believe that North America is right where it needs to be, balanced.
Harsh Kumar
And then, maybe another question for you Mark. Consumer took-off pretty strongly, very strongly is that what is driving September growth more so than computing or is that sort of what you say equally spread?
Mark King
I don't know. I think they run an effect.
Keh-Shew Lu
Yeah.
Mark King
I think we probably had a little bit of extra netbook in Q2. And we probably had a little bit more cell phone in Q3 or in Q2 and the LCD TV's growth really helped the consumer section, so they are balancing.
But all of that is looking relatively strong as part of our guidance going in the Q3.
Harsh Kumar
Thanks guys; great quarter, great guidance. I'll get back in the queue.
Operator
Our next question comes from the line of Vijay Rakesh of Think Equity.
Vijay Rakesh
Hey, hi guys. Good quarter, yes.
Just trying to understand on the industrial side, how are things looking? Are you seeing any signs of life there in any of the geographies?
Mark King
I think the power supply market is looking okay and stand market's looking okay in Asia. I think it's pretty clear that the industrial side in Europe is struggling.
And then in North America I don't know I think it's just kind of moving along flat, there is no real decline but there is really no sign of any great increase in those areas.
Vijay Rakesh
Got it. And just looking at any guess, demand side here, I mean look at the point of sales trends here in July, August now.
How is that held up in U.S., Europe and China?
Mark King
No. I think that there in Asia POP and POS are going to match.
I think Europe, I think that they'll probably pretty close to match. But the POP trend will be up because they need the parts.
And in U.S. I think we'll see a slight uptick in both.
Vijay Rakesh
Got it. And lastly, when you look at the gross margin side, I know you mentioned the fab loading side should have.
But just as Zetex picks up, shouldn't there be a product mix component also to the margin, to gross margin line and shouldn't that help you kind of move above where your historical trend has been?
Keh-Shew Lu
I think our business motto is, we want to go to 35% TPM. And don't forget we really business motto is profitable growth.
We paid more attention to gross margin, growth instead of gross, gross margin percent. We more pay attention gross profit, okay.
So if we can grow very fast then we might sacrifice a little bit of either ASP or as a percent, gross margin percent. And so I really don't want to put it say how projected it gets to 35% and 110%, okay.
So right now if, we grow at 30, 70%, we are looking at 10 to 15% growth. We're going to continue driving the growth.
In helping it, when we grow, we'll put the load in SK and improve the load in our vapor fab. Then appropriate automated genre in coming up vended of the gross margin will be automatic get there.
So we don't spend that much of efforts, just look at the percent. I really spent a lot of effort striving for the revenue.
Vijay Rakesh
Got it.
Keh-Shew Lu
Yeah. And when the GTech and the new product come off, product mix will automatically shift.
When the GTech product gets to the market, okay and we know GTech product where it can give us a better growth margin. At the same time, when the new product coming up that's even more margin.
And when those product mix give us that advantage, the margin will come up. But I'm really striving more on the growth and get more and more revenue and get that growth margins down.
Vijay Rakesh
Sure.
Keh-Shew Lu
Generally more.
Vijay Rakesh
Okay, great. Good job there thanks.
Keh-Shew Lu
Thank you.
Operator
Our next question comes from the line of John Vinh of Collins Stewart.
John Vinh
Hey there, congratulations on the quarter guys.
Keh-Shew Lu
Thank you, John.
John Vinh
First, I just ask you question. Your OpEx side, was there any stock comp in the quarter?
Keh-Shew Lu
We... in the past, we always put our stock option cost in a packet away from GAAP.
But Rick can tell me, I am not allowed to do that. They don't want to do that.
So, that could not pick up, okay. So, actually, the option cost is included in that number and do not really pick it up from non-GAAP basis.
I don't like it, but Rick is boss here, he can detail me. We cannot pick it up.
Richard White
As for John to answer your question, there was... in the second quarter 2009, there was approximately $2.2 million of share grand expense, including our issues and stock option expense.
And the details of all that will be in our Q, which I think we're getting ready to publish tomorrow or early Monday.
Keh-Shew Lu
So, if you want to back it also off, you can use that number and --
Richard White
But we have not done that in our adjusted net GAAP or adjusted income. And if you look at the charge at the back of our earnings release, you can see exactly what we've backed out of operating expense, other income and the tax impact of those and this share grand expense is not there.
John Vinh
Okay. All right.
I want to get a coupon guidance, but can you just give us a quick reason why you're not reconciling that your non-GAAP numbers to you're your peers team that kind of back that out?
Keh-Shew Lu
SEC do not allow us to do that.
Richard White
Yes. SEC comment weather and we were requested not to do that specifically because it's a recurring expense.
And so because it's recurring and has recurred several quarters and years, they do not believe that it's an adjustment necessary. So we agreed that we would not do that.
John Vinh
Okay, fair enough. And --
Keh-Shew Lu
So what you do is you can add those backup.
Richard White
If you can go to the Q and find the data and make any adjustments you feel are necessary.
Keh-Shew Lu
That's right.
John Vinh
Okay, fair enough, fair enough. Of course this is a follow-up question from Mark on channel inventory.
To your point, channel inventories have come down substantially last couple of quarters. It seems like they are pretty lean especially in Asia.
Why would you not expect to this use of bills a little bit of their inventory into Q3 here as we had in seasonal kind of period here. I expected it won't have a little bit more relative to the first half levels.
Mark King
I think they are going to try to. It's our goal not to allow them to.
We want to make sure that we service as many customers as we possibly can with the product that we have available. And we don't believe that there's enough product available for us to allow them to build inventory.
So yes, some of them will win. But our goal will be that we try to maximize, we maximize the product for our customers and then position inventory at times where demand isn't quite as high.
John Vinh
Okay. Does that suggest that if you're successful of doing that, that Q4 could be slightly up from Q3 levels if they don't build any inventory?
Mark King
Assuming that quarter tracks on POS like we're projecting it so track then that could be an outcome from that.
John Vinh
Okay. And then just to clarify, you talked about being labor constrains on the Q2.
Were you labor constrained in July?
Keh-Shew Lu
Yes.
John Vinh
Okay.
Keh-Shew Lu
I still feel today, feel in our fully main capacity, fully it's a dignity. That's why even we say we are talking about third quarter 90%.
We still are the demand more than what we need, what we can supply.
John Vinh
Okay. So you think you'll be...
as you constrained will go away by the end of the quarter?
Keh-Shew Lu
Well, it depend on the markets. Okay, see the point is nobody have a clear picture on plucking on how we'd be going on.
In the second quarter nobody can tell, well you go alone third quarter or even the first quarter. So we digest, we hired in the people by estimates what will be in the first quarter.
And the time when you get to there is two days, you are wrong because it takes about two months to three months to be able to put in production line.
John Vinh
Okay.
Keh-Shew Lu
So, I start to hiring the people in April. And, so those people start to putting specs to '09 in June.
But unfortunate is that in the April timeframe when we I look forecast on third quarter, I really don't expect a thirty something percent growth in the second quarter and another 10 to15% growth in fourth quarter. Nobody really forget that kind of growth.
Yeah in the 10 to 15 third quarter. And therefore, if you ask, why do I don't hire enough people in April.
So, third quarter I should not be people dignity. All I wish I have a crystal ball, but I am not that interested to hiring the people.
John Vinh
Got it.
Keh-Shew Lu
In April timeframe.
John Vinh
Got it. Okay.
And then the last question for me on LCD TVs. Obviously that seem like we have big growth over Q2.
How much of that was China domestic versus rest of the world roughly?
Mark King
To be honest I don't have those --
Keh-Shew Lu
We cannot really tell. We go to our customer, okay, say Samsung, AUL, and Siemens and those and we really cannot distinguish where their pin will go.
John Vinh
Got it. Okay.
Thank you very much.
Operator
Our next question comes from the line of Brian Piccioni of BMO Capital Markets.
Brian Piccioni
All right. Can you hear me okay?
Keh-Shew Lu
Yeah.
Mark King
Yeah.
Richard White
Yes, we can.
Brian Piccioni
Thanks for taking my question. As you can imagine most of the questions are probably been asked and answered by now.
But I'll give it a shot. You were talking earlier about the capacity utilization.
It sounds like its sort of overall capacity utilization is going to be around 90% in the third quarter. We had some questions about that earlier.
What sort of capital expenses in this sort of thing are going to be required as you approach a 100%, because obviously you can't by tens of fab or something like that?
Keh-Shew Lu
When we took in the capacity, we are more talking about packaging capacity. When we say 90%, we're talking about packaging capacity.
We've been taking these capacity, you do able to 18, two, three men in each time on different package.
Brian Piccioni
Okay.
Keh-Shew Lu
So, we are able to do that. And as and we give our forecast of 8 to 12 million on our capital for third quarter.
Brian Piccioni
Okay. It doesn't look like there is any real need for major capital expenses that at this for the foreseeable future anyways, right?
Keh-Shew Lu
No, but in vapor fab we are okay.
Brian Piccioni
Okay, super. And I think you've answered this about three or four different ways.
But just to be sure, you had mentioned earlier that you had turned down some business in the quarter. You had also mentioned that the inventory of your customers is very, very low.
And am I correct in saying that you're trying to manage very carefully to ensure that your customers are not over ordering to offset concerns of shortages in the future?
Mark King
Yeah, I think that we have a pretty clear understanding that our customers are not double ordering.
Keh-Shew Lu
It was based... sometimes they pay to a money job shift from our factories.
So you know if they view in up inventory, they won't do that. And we do as the customer says I need it right away overnight.
And it's so well, we need to pay the job shift, they will. So you can see we know the customer is not needy double ordering.
Mark King
And in the channel, we track the POS run rate versus the order run rate of the distributor by part with them pretty closely. So we can see whether distributors just trying to grab.
So we'll watch it relatively closely. Some orders we would hope that they were double orders so that we don't have to deliver our shares.
But it's not working on that way.
Brian Piccioni
Okay. That's great new because course string inflection points in the industry that has happened in the past.
Thank you very much.
Keh-Shew Lu
Yeah, that's right. We have enough experienced on that.
Don't forget. We are in the semiconductor for a long time.
Brian Piccioni
Thank you.
Keh-Shew Lu
Yeah.
Operator
Our next question comes from the line of Stephen Chin of UBS.
Stephen Chin
Great. Thanks for taking my question.
Mark King
Yeah Stephen. How are you?
Stephen Chin
Hi. I want to review some of the comments about share grand especially in the handset market.
Is that coming from new products or is that I think you'll buy new products proprietary to digest where that more commodity orientated products? Were you better able to shift products compared to your peers strongly?
Mark King
I think we've had some gains in our proprietary products and we've had continued expansion in our standard product. I wouldn't necessarily say all of them are commodity price.
We don't really have a significant amount of commodity product in the cell phones because we don't target that part. But there is some that are differentiated or limited in your vendor basis and so on.
So we do have some proprietary in the cell phone area also.
Keh-Shew Lu
Yeah, you know in the past we spoken about above a year ago when we start to introduce call center, we spoken about call centers going to end the deal cell phones as to trip into the cell phone business. And we are successfully but using the whole sense of gain to cell phone business.
And now with that relationship, we are able to expand the design wins of much more of products of ours. And therefore we have a good growth in that area.
Stephen Chin
And related to that from a pricing perspective, is the stable HD environment that you're seeing, is that for underlines for the commodity more into products or is that more of a blended ASP that you are referring to that includes a potentially more proprietary products that are going to production currently.
Mark King
All right. Right.
We've seen actually even in the second quarter and going into the third quarter, we've seen continued declines on some of the most commoditized devices in our area. And we intended to back away from those devices and let that be taken.
Now we're starting to see that some of that pricing via past to lack of delivery. So we're going to see where is some changes going could occur in that, in the next month or so.
So there is still, let's be clear. We still live in a very competitive pricing environment and most people aren't just full, and most people are never full as we try to keep ourselves.
So yes, there is still always pressure on price in our product line. But I think we'll see pretty stable through Q3 and hopefully deep into Q4.
Stephen Chin
Great. And last one, either for Dr.
Lu or for you Mark. Just from on overall government stimulus spending program impact say impact, that's why I think last quarter you mentioned China stimulus programs or rebates for consumer products as this having a big impact.
But looking at more on the industrial side, is there much impact so far from infrastructure spending in China and certainly for U.S. whenever you think that comes in the play, how should we look at the impacts in Q3 and probably the rest of this year?
Mark King
I don't think from an infrastructure standpoint we can see a lot of impacts or find a way to measure that impact. A lot of our product is high volume, lower mix board, medium volume, medium boards and infrastructure will be higher ticket item devices.
So I don't think we did see some benefits in China from some of the consumer electronic devices and so forth. I think most of those have run out, but the demand is remaining.
The demand for TVs and phones in China is quite good right now. And so, but I don't think we can say anything from an infrastructure standpoint.
Stephen Chin
Okay.
Keh-Shew Lu
So you can see a lot of our growth really is not just coming from the market environment growth, okay. Our growth has often coming from new return wins, new customer, new vacations we get into it.
So, we separately gain in the market share to roll a down wind, if you remember us a several times. You don't marking over say how many design win.
Design win actually took a very good growth, and now it's asking ways they are meaning. And now the rain is start to came in.
And as and this way we see our growth, majorly our growth coming from. So, yes, China similar package to sales, but the market is up but then if you look at our growth relative to our comparison, we actually drop much at home than our comparison.
We remember 1Q, we only done 10%, why we bought it down much more. And this time on top of that, we are absolutely 30% and now we took in about 10 to 15% growth, that's actually we grow much faster than.
And that's our business motto. We want to grow 2x better than our competitor and that's our business motto.
And that's again when you go that side actually.
Stephen Chin
Okay, great. That's very helpful.
Good job in the quarter guys.
Keh-Shew Lu
Thank you.
Operator
Ladies and gentlemen, that concludes the Q&A portion of presentation We'd now like to turn the call back over to Dr. Lu.
Keh-Shew Lu
Well, thank you for all your participation today. Thank you very much.
I'll talk to you probably three months later. Operator, you may now disconnect.
Operator
Thank you, sir. Thank you, ladies and gentlemen for your participation in today's conference.
This concludes the presentation. You may now disconnect.
Have a good day.