Earnings Call Transcript - DIOD Q2 2025

Operator, Operator

Good afternoon, and welcome to Diodes Incorporated Second Quarter 2025 Financial Results Conference Call. As a reminder, this conference call is being recorded today, Thursday, August 7, 2025. I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead.

Leanne K. Sievers, President, Shelton Group

Good afternoon, and welcome to Diodes Second Quarter 2025 Financial Results Conference Call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today are Diodes' President and CEO, Gary Yu; CFO, 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 quarter ended June 30, 2025. 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, we 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 7, 2025. 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 in GAAP and non-GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP to non-GAAP items, which provide additional details. Also throughout the company's press release and management 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 and CEO, Gary Yu. Gary, please go ahead.

Gary Yu, President and CEO

Welcome, everyone, and thank you for joining us on today's conference call. As announced in our press release earlier today, our above-expectation revenue results represent our third consecutive quarter of year-over-year growth, indicating the ongoing improvement in market conditions and demand. Product sales increased sequentially across all regions with double-digit growth in Asia. The increasing demand in the quarter also contributed to channel inventory being reduced further with both channel and internal inventory days decreasing. While we continue to see positive signs of a broader market recovery, our consumer end market experienced the strongest growth during the quarter, contributing to less favorable product mix, combined with our higher-margin automotive and industrial markets remaining effectively flat as a percentage of total revenue. Additionally, the channel inventory depletion continued to limit increased loading at our manufacturing facilities, resulting in underloading costs also being a headwind to gross margin expansion. Even when considering those dynamics, we continue to increase gross profit dollars and delivered non-GAAP earnings growth of almost 70% sequentially as we continue to closely manage expenses. As we look to the third quarter, we expect to extend our strong growth momentum with revenue anticipated to increase 7% sequentially and 12% year-over-year at the midpoint, mainly driven by strong demand in Asia for AI-related computing applications and increasing demand in the EV automotive market in China. With that, let me now turn the call over to Brett to discuss our second quarter 2025 financial results as well as our third quarter guidance in more detail.

Brett R. Whitmire, CFO

Thanks, Gary, and good afternoon, everyone. Revenue for the second quarter 2025 was $366.2 million, an increase of 14% over $319.8 million in the second quarter 2024 and a 10% increase over $332.1 million in the first quarter 2025. Gross profit for the second quarter was $115.3 million or 31.5% of revenue compared to $107.4 million, or 33.6% of revenue in the prior year quarter and $104.7 million or 31.5% of revenue in the prior quarter. GAAP operating expenses for the second quarter were $105.9 million, or 28.9% of revenue and on a non-GAAP basis were $99.8 million, or 27.3% of revenue, which excludes $5.8 million amortization of acquisition-related intangible asset expenses. This compares to GAAP operating expenses in the second quarter 2024 of $103.7 million or 32.4% of revenue and $103.4 million or 31.1% of revenue in the prior quarter. Non-GAAP operating expenses in the prior quarter were $97.1 million or 29.3% of revenue. Total other income amounted to approximately $43.8 million for the quarter, consisting of $29.6 million in unrealized gains from investments, $13.7 million in gains from disposal of a subsidiary, $7 million in interest income, $0.4 million in other income, $6.4 million in foreign currency losses and $0.5 million in interest expense. Income before taxes and noncontrolling interest in the second quarter 2025 was $53.2 million, compared to income of $12.8 million in the prior year period and a loss of $2.8 million in the previous quarter. Turning to income taxes. Our effective income tax rate for the second quarter was approximately 17%. We continue to expect the tax rate for the full year to be approximately 18%, plus or minus 3%. GAAP net income for the second quarter was $46.1 million, or $0.99 per diluted share compared to net income of $8 million, or $0.17 per diluted share in the prior year quarter and a net loss of $4.4 million or $0.10 per diluted share last quarter. Share count used to compute GAAP income per share for the second quarter of 2025 was 46.5 million shares. Non-GAAP adjusted net income in the second quarter was $15 million or $0.32 per diluted share, which excluded net of tax, $23.4 million noncash unrealized mark-to-market gain on investment value adjustment, $12.7 million gain on disposal of a subsidiary, and $4.8 million of acquisition-related intangible asset costs. This compares to non-GAAP adjusted net income of $15.4 million or $0.33 per diluted share in the second quarter of 2024 and $8.8 million or $0.19 per diluted share in the prior quarter. Excluding noncash share-based compensation expense of $4.6 million for the second quarter, net of tax, both GAAP net income and non-GAAP adjusted net income would have increased by $0.10 per share. EBITDA for the second quarter was $84.5 million or 23.1% of revenue compared to $41.1 million or 12.8% of revenue in the prior year period and $26.2 million or 7.9% of revenue in the prior quarter. 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 $41.5 million for the second quarter. Free cash flow was $21.1 million, which included $20.4 million of capital expenditures. Net cash flow was a negative $18.2 million, including approximately $49.2 million from an increase in equity investment and $10 million for the stock buyback program. Turning to the balance sheet. At the end of the second quarter, cash, cash equivalents, restricted cash, plus short-term investments totaled approximately $333 million. Working capital was approximately $871 million and total debt, including long term and short term, was approximately $54 million. In terms of inventory, at the end of the second quarter, total inventory days were approximately 173 as compared to 187 last quarter, down approximately 14 days sequentially. Finished goods inventory days were 71, a decrease of 9 days from the 80 last quarter. Total inventory dollars increased $11.7 million from the prior quarter to $482.7 million, consisting of a $9.7 million increase in work in process, a $9.1 million increase in raw materials and a $7.1 million decrease in finished goods. Capital expenditures on a cash basis were $20.4 million for the second quarter or 5.6% of revenue, which was at the low end of our targeted range of 5% to 9% of revenue. Now turning to our outlook. For the third quarter 2025, we expect revenue to increase to approximately $392 million, plus or minus 3%, which represents 12% growth over the prior year period at the midpoint, which will be the fourth consecutive quarter of year-over-year growth. GAAP gross margin is expected to be 31.6%, 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 26% of revenue, plus or minus 1%. We expect net interest income to be approximately $1 million. Our income tax rate is expected to be 18%, plus or minus 3%, and shares used to calculate EPS for the third quarter are anticipated to be approximately 46.5 million. Not included in these non-GAAP estimates is amortization of $4.8 million after tax for previous acquisitions.

Emily Yang, Senior Vice President, Worldwide Sales and Marketing

Thank you, Brett, and good afternoon. Revenue in the quarter was up 10.3% sequentially and above the high end of our guidance, mainly driven by strong demand in Asia, especially AI-related computing and consumer ramp-up for new programs. Our global POS increased across all regions with double-digit growth in Asia. And our channel inventory decreased again this quarter, both in terms of dollars and weeks. We are also seeing this momentum extend into the third quarter with strong beginning backlog. During the second quarter, we further expanded our new product initiatives with over 100 new part numbers introduced, of which over 50% were automotive parts. Looking at global sales in the second quarter, Asia represented 78% of revenue; Europe, 12%; and North America, 10%. In terms of our end markets, industrial was 23% of Diodes product revenue; automotive, 19%; computing, 26%; consumer, 18%; and communications, 14% of product revenue. Our automotive industrial markets combined totaled 42% at the end of this quarter. We are beginning to see signs of gradual demand improvement in this market, but there are still pockets of channel inventory to work through. Now let me review the end markets in greater detail. Starting with the automotive market. During the quarter, we continued to see improvement even though there's been continuing inventory digestion at some customers, as I mentioned. We're also beginning to see increasing demand and strength in the EV auto market in China as we move into the third quarter. The China automakers are increasingly focused on the in-cabin experience with more features like ADAS, infotainment, smart cockpit, telematics and lighting, which is driving demand for Diodes products and our content per car. Specific to the second quarter, we saw increasing adoption of our growth of USB Type-C redrivers, retimers, switches and active crossbar Mux along with new design wins for TVS and ESC protection devices in rear-seat entertainment and smart cockpit applications. We also received solid demand for overcurrent protection switches in electronic control unit systems and are also gaining design-win momentum for protection devices in vehicle display and power distribution unit applications. We're also seeing strong demand in design wins for our automotive compliance, DC-to-DC devices, LDOs, ideal diode controllers as well as our FBR products for ADAS, telematics and infotainment systems. Additionally, Diodes LED controllers are winning designs in ADAS front lighting applications and our linear LED drivers are winning designs in the rear exterior lighting and EV car charging indicator applications. Also during the quarter, we added multiple new products through the introduction of LD MOSFET for DC/DC, battery management system, brushless DC motors, 80-volt and 100-volt tall products and 1,700-volt and 1,200-volt silicon carbide MOSFETs. Turning to the industrial market. Even though the inventory situation is improving, some customers are still going through adjustments. We expect this will last another quarter or two. From a demand perspective, we are seeing good recovery and strong momentum for applications such as AI robotics, medical and automation. During the quarter, we continued to gain strong design traction for our silicon carbide Schottky barrier diodes and photocouplers in energy storage systems and our silicon carbide MOSFETs in EV charging platforms for fast charging infrastructures. We have also secured new designs for our Schottky barrier diodes, SBR and Zener diodes in DC fans, power over Ethernet and adapter applications across industrial power segments. Also during the quarter, our wide-wing LDOs received solid demand from fans, power tools and e-meter applications, while our multichannel LED drivers ramped up in signage applications. We are also seeing traction for SBR products in power supply applications for telecom, desktop PC and server switch mode power supply and our protection devices are winning designs in battery management systems. In the computing market, the highlight continues to be strong demand momentum for AI-related applications. And with the current chipset refresh cycle, we are seeing increasing opportunities and strong share gains. Our PCI Express 3.0 packet switches are leading the momentum in the AI applications, but are also expanding beyond AI servers into other applications like industrial and security. In fact, we have multiple designs for our packet switches from various applications across all regions that should drive further growth for our products. Also during the quarter, we are seeing increased adoption of HDMI, display core, USB-C redrivers, Crossbar Mux switches as well as clock buffers with LSF0 shifters in various computing applications like workstations, gaming, notebooks, desktop, docking stations, monitors and mini PCs. In terms of product introduction, we introduced several new products, including PCI Express clock buffers, clock MOSFETs, and Crossbar Muxes that are seeing strong momentum in server and data center applications. The demand for high-speed data processing has significantly increased in recent years, and Diodes is well positioned to gain increasing shares with our broadened product portfolio. As an example, our SBR products provide excellent server protection for high-speed data applications, along with our 40-volt boost controllers and DC-DC Buck converters in server and data center applications. In the consumer market, the revenue increase was the strongest of our end markets and was mainly driven by customers ramping up new designs for applications such as wearables, audio, charging, camera, game consoles and personal care combined with overall market share gains. During the second quarter, we saw rapid adoption of our MIPI D-PHY redrivers in robots, drones, mixed reality and embedded MMC switches in gaming console applications, while current-limited power switches saw solid demand from physical interface power cords such as USB and HDMI. Also in the consumer market, our LED drivers and power factor correction LED controllers had multiple design wins for IoT devices and personal care devices. We also achieved solid growth from audio products in the consumer applications like health monitors and tractors. And with our small signal diodes as well as Zener diodes saw strong increases while our protection products and LDOs are being designed into tablets and smartwatches. Lastly, in the communications market, our timing products are seeing growth driven by AI and IoT applications in the networking segment for switches and routers, while our ultra-low jitter family of crystal oscillators dominate in the smart network interface cards in data centers, AI servers and networking applications. And our 5-volt high PSRR LDO saw solid demand from camera networking applications. In summary, we are very pleased with the solid momentum in our business as we continue to see improving market conditions and demand across our end markets. As the demand continues to drive utilization improvement and inventory digestion expands across the automotive industrial market, in particular, we are very well positioned with a broadened portfolio of products and increasing design wins to drive continuous growth and future margin expansion. With that, we now open the floor to questions.

Operator, Operator

The first question today comes from David Williams with Benchmark.

David Neil Williams, Analyst

Congratulations on the really strong results here. It's great to see. So maybe first, just kind of thinking about the geographic drivers and Asia is clearly doing better for you all. And it sounds like this is more designing and more demand coming in. But I guess how do you parse out how much of this could potentially be related to tariff-driven pull-ins, which we've heard from nearly all companies reporting this earnings season. Is it fair to assume that some of this demand is related to that? Or do you feel like you're able to isolate that out and maybe that's not what's driving some of this demand?

Emily Yang, Senior Vice President, Worldwide Sales and Marketing

David, this is Emily. I think what we've seen in the tariff pulling is really small and immaterial overall, right? What we've seen is really driven by the strong demand and also the market share gains together with some of the new designs and new programs ramping up.

David Neil Williams, Analyst

So you feel pretty comfortable that it really is kind of self-directed and not really related to the tariff pull-in. Is that fair?

Emily Yang, Senior Vice President, Worldwide Sales and Marketing

Fair, yes.

David Neil Williams, Analyst

Okay. All right. Very good. And then as you kind of think about how much digestion still remains and you talked about pockets remaining in automotive. But how do you think about what is left there remaining? I know it kind of depends on your OEM. But like I say, geographically, is there a way to kind of think about the inventory levels where there's still excess that need to be digested?

Emily Yang, Senior Vice President, Worldwide Sales and Marketing

Yes. I think overall, you are absolutely right. A lot is driven by the OEMs. What we see in the market is still dynamic. It varies a lot from customer to customer, program to program and part to part, right? So it's kind of hard to draw a line, say, everything equal. But all in all, we're actually seeing a lot of improvement. So if we look at automotive, even we maintained 19% quarter-over-quarter as a percentage of the product revenue. If I compare the actual year-to-year, we actually increased about 23.5%. I believe that can give you a strong indication that even we still have some inventory digestion that we're going through, but the market overall is improving.

David Neil Williams, Analyst

Very well. And just one last question, if I may. When considering your new products, how should we view the potential difference in margin opportunities compared to some of the products you're replacing? I know there are a lot of new products on the way, which are significantly driving the margin. Is there a way to estimate what that difference could be?

Emily Yang, Senior Vice President, Worldwide Sales and Marketing

Yes. So let me address this question. So product mix improvement initiative has been a key focus for Diodes for a period of time. In general, when the product, they usually have a production cycle. The newer product, the new release product usually provide some additional features and functions and the customer is actually willing to pay more of the premium for the functions and features. And a lot of time, it can also be cost improvements, smaller dies and better packaging and stuff like that, right? So that's usually the behavior for new products. So for a product, if we sell this for more than like 15, 20 years, every year, there's a price degradation. So a lot of time at the end of the production cycle, the cost is more expensive at the end, right? So that's the reason why we're pushing a lot of new product introduction, not only to gain additional market, but also to improve the overall cost structure by providing more functions and features and basically a value add to the customers.

Operator, Operator

The next question comes from Tristan Gerra with Baird.

Tristan Gerra, Analyst

You talked about AI being a driver. Is it fair to assume that a lot of that is your PCIE packet switch? Any way to quantify as a percent, what it's now representing a few data center revenue? And also what type of growth should we expect? And I think you've described in the past that it's not just AI data center, but it will be also general purpose data center. So how meaningful is that opportunity as a percentage?

Emily Yang, Senior Vice President, Worldwide Sales and Marketing

Yes, this is Emily. Regarding AI in the hyperscaler segment, the packet switch is certainly one of the products we offer, but we have a variety of other AI-related products in the market as well. AI represents an entire ecosystem that extends beyond servers, including CPUs and other components that work together. While I can't provide a specific percentage, it's important to note that we are expanding our focus beyond just AI servers. There are many applications in industrial and security sectors as well, and we are seeing multiple designs emerging across various regions. This suggests that we will continue to gain significant momentum in the upcoming quarters.

Gary Yu, President and CEO

Right. And Tristan, I would like to put more color on that. When we're talking about the PCIe, PCIe is only one of the hero products we're promoting to AI-related applications. However, as we continue to mention about the system solution or total solution is really key to drive for. So if we have one or two hero products in one segment, I really want to bring our advanced analog, mixed signal and also other discrete components to serve together. So that's going to create more value on this only device.

Tristan Gerra, Analyst

That's very useful. We have observed at least one major competitor starting to increase their prices. How should I interpret this, considering we are clearly in an environment of overcapacity? Your strategy seems to focus on gaining market share. However, I would like to understand your perspective on the impact of rising raw material costs on pricing and your expectations for the remainder of the year, as this will affect how companies manage their inventories.

Emily Yang, Senior Vice President, Worldwide Sales and Marketing

Yes, Tristan, we are also following the news closely. We are monitoring the situation carefully. As I mentioned earlier, whenever my peers make strategic decisions, such as increasing prices or exiting certain markets, it creates opportunities for Diodes to engage with customers. During the last price increase related to COVID, I talked about this openly. Our focus for the business is to maintain a long-term relationship with our customers, which we believe is more important than short-term gains. We aim to be a reliable supplier over the long term. Therefore, building partnerships is crucial for us, and we are not altering our strategy. We intend to take advantage of these opportunities to strengthen our market presence and deepen our relationships, working together with our customers to expand design wins and demand creation. This will be our focus and strategy moving forward.

Tristan Gerra, Analyst

And then just last quick question, if I may. In terms of qualifications for customers in analog migrating back to in-house capacity, are we still looking at the first half of next year? What's the timing on this shift from outsourcing?

Gary Yu, President and CEO

Yes. As I mentioned so many times, Tristan, we are proactively qualifying our product and process into our internal wafer fab, right? And as I mentioned that the progress went very well so far, and we see quite a few key customers already working on our PCN requirements and working on that to see if we can continue to support them with our internal wafer fab wafer facility. So again, this is a very important message from Diodes. I really want to emphasize to everybody here is like we really want to qualify our internal wafer fab to offset the headwind from our wafer service agreement to kind of slow down demand in the future. So we do see the good progress on that too.

Operator, Operator

The next question comes from David Williams with Benchmark.

David Neil Williams, Analyst

Let me ask a follow-up. Really, I just wanted to say, Gary, congratulations on the CEO official naming there.

Gary Yu, President and CEO

Appreciate it...

David Neil Williams, Analyst

While I have you one other quick question and maybe Brett or Emily or whomever. But on the utilization, can you tell us about where your utilization is running today and maybe what the mix impact was on the margin side?

Gary Yu, President and CEO

Utilization varies significantly between different fabs and product lines. For high-end product lines with strong demand, utilization is quite good. However, for larger commodity products, we intentionally manage utilization levels, which tend to be lower. I can't provide specific utilization figures at this moment, but over the last few quarters, we have focused on consolidating or shifting lower-cost commodity capacity to support the high-end market, which has high customer demand. As part of our hybrid manufacturing strategy, we have been integrating external product processes into our internal operations. We're currently in the qualification stages and have issued a Product Change Notification for key customers across various segments. The progress so far is promising, and I can assure you that our loading will continue to increase as we pursue this strategy.

Emily Yang, Senior Vice President, Worldwide Sales and Marketing

Yes. So I think on top of that, we did actually have very good results in the second quarter. We also guided above seasonality growth for the third quarter. When the revenue continued to increase, of course, supported by POS growth, we actually will continue to minimize the underloading cost, right? I think on top of that, one of the things we're also kind of driving for margin improvement is continuous product mix initiative improvement from that point of view. Auto industrial will remain our key focus, and we want to continue to drive the growth. New product introduction, we talked a little bit earlier, will be other key focus for us overall. Some good products like the Pericom division of the product family will continue to be the focus, right? So I think combined with what Gary just mentioned and combined with continued cost-down-driven manufacturing efficiency, we are actually confident that you're actually going to start seeing some margin improvement as well. So even you didn't ask it, but I want to make sure I put it there because I think that's really the real question behind that you want to ask.

David Neil Williams, Analyst

Yes. Thanks so much for the color there. And congrats again on execution. Keep up the good work.

Emily Yang, Senior Vice President, Worldwide Sales and Marketing

Thank you.

Gary Yu, President and CEO

Thank you, David.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Gary Yu for any closing remarks.

Gary Yu, President and CEO

Thank you, everyone, for participating in today's call. We look forward to reporting our progress on next quarter's conference call. Operator, you may now disconnect.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.