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CORPORATE FOCUS—Diodes Expects Integration Move to Keep It Profitable

Summary Business: Mfg. and dist. discrete semiconductors Headquarters: Westlake Village CEO: C.H. Chen Market Cap: $67.9 billion Dividend Yield: N/A* Total Liabilities: $61.7 million P/E: 4.20 Long-Term Debt: $16 million * Diodes Inc. does not pay dividends Market demand for semiconductors in 2000 sank right along with tech stock prices and dot-com upstarts. So Diodes Inc., a Westlake Village-based semiconductor firm, is not alone in predicting revenues for the first quarter of this year to be lower than originally expected. Gross income for the quarter is projected to be between $24 million and $26 million, compared to $26.1 million in the fourth quarter of 2000. The company, a supplier of high-quality discrete semiconductor products, also anticipates a sharp decline in net revenue for the first quarter to between $500,000 and $700,000, compared to $2.8 million in the previous quarter due to the slowdown. However, net income for 2000 was up a record 167.7 percent to $14.9 million, or $1.62 per share, compared to $5.7 million or 68 cents a share the previous year. Year-end revenues for 2000 were $118.5 million, compared to $79.3 million in 1999. And there’s a reason the company has managed to remain profitable through turbulent times. Well before the semiconductor industry took its nosedive particularly in the long-dependable personal computer market Diodes was already preparing to transform itself into a fully integrated distributor and manufacturer of discrete semiconductors. In 1990, Diodes made only about 10 percent of the products it distributed. Today the figure is closer to 60 percent and growing in tandem with the expansion of its manufacturing efforts at its China-based subsidiary in Shanghai. In December, the company completed its first strategic acquisition with the purchase of Kansas City-based chip manufacturer FabTech Inc. Both company representatives and analysts say the purchase will enable Diodes to maintain a strong growth pattern and possibly see its 44th consecutive quarter of profitability. “The acquisition (of FabTech), where raw chips are made, completed the technology loop for Diodes and we now cover the full range of manufacturing, marketing and product development,” said Carl Wertz, Diode’s chief financial officer. Joe Blankenship, an analyst with Peacock, Hislop, Staley & Given in Phoenix, said the company’s move to the manufacturing side of the industry should carry it through the slow period, which he said should start to level off by late spring. “Diodes is a terrific company with a 10-year growth history, which is quite phenomenal for their business,” said Blankenship. “They wanted more control over the design of the chip that heretofore they were buying from others, then packaging and selling. So this integration begins to build for them some type of proprietary product technology which they did not have before.” Despite the strong growth, Diodes has not weathered the market slowdown unscathed. “In many senses, semiconductor companies are like the lead dogs pulling the high-tech sled, and we were the first ones to see the ice cracking,” said Wertz. As part of a long-term strategy to cut operating expenses, the company laid off 26 percent of its global workforce in March. About 300 positions were cut, some of them marketing and sales positions in Shanghai to make way for expansion of the manufacturing entity, the rest at FabTech. Diodes has roughly 750 employees today. Wertz said the layoffs were a necessary part of an internal fat-trimming process in the middle of a fast, unanticipated market downturn. “We’ve kept this commitment to fiscal discipline as conditions softened in the past quarter, instituting cutbacks at both Diodes-China and FabTech to keep the level of employees in line with demand for those devices,” said Wertz. The layoffs, coupled with increases in product sales to new markets as a result of the acquisition, have already produced a reduction in operating expenses for the company which, as of mid-March, represented less than 15 percent of total revenues, compared to 16 percent in 2000. Diodes (DIOD) stock price was trading at $8.73. Blankenship said profitability in the semiconductor industry as a whole was driven by the solid economic climate of the late 1990s: cell phone and PC markets were highly saturated, and more and more automobiles were adding digitized features and applications. But production of cell phones is down about 15 percent so far this year, after an 80-percent growth spike just a little over two years ago.

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