DIOD - NASDAQ

Good afternoon, and welcome to Diodes Incorporated Second Quarter 2025 Financial Results Conference Call. [Operator Instructions] 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.

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.

Welcome, everyone, and thank you for joining us on today's conference call. As announced in our press release earlier today, our above expect revenue results represent our third consecutive quarter of year-over-year growth, indicating the ongoing improvement in market conditions and the 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 remain effective 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 dollar 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.

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, $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 stock buyback program. Turning to the balance sheet. At the end of 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 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 $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. With that said, I now turn the call over to Emily Yang.

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 is 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 continuing to be 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 diodes 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 industrial market. Even though the inventory situation is improving, some customers are still going through adjustments. We expect this will last another quarter or 2. 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 continue 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

[Operator Instructions] The first question today comes from David Williams with Benchmark.

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?

David, this is Emily. I think what we've seen in the tariff pooling is really small 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.

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?

Fair, yes.

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?

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 to 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.

Very well. And just one last one, if I may here. Just kind of thinking about your new products, how should we consider the -- maybe the differential on the margin opportunity maybe over some products that you're replacing? And I know you've got a lot of new products that are coming in and really a big driver of the margin. But is there a way to think about what that differential could be?

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 be also cost improvement, smaller dice 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 Instructions] The next question comes from Tristan Gerra with Baird.

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?

Tristan, this is Emily. Yes. So AI related on the hyperscaler with some of the design. Packet switch is definitely one of the product and -- but there's also a lot of other AI-related products that we are selling into the market. When we look at the AI, it's actually a whole ecosystem, not only just on the server, but there's also CPU. There's different units that's attached with the system together, right? So we don't really have a percentage that we can share. But I think just like I mentioned earlier, we're actually expanding this beyond just the AI servers. There's actually a lot of industrial and security-related stuff. And we start seeing multiple designs across all regions. So that's the reason I mentioned this is going to continue to drive a lot of momentum for us for the quarters to come.

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 product we're promoting to AI-related application. However, as we continue to mention about the system solution or total solution is really [indiscernible] drive for. So if we have 1 or 2 hero product 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 one device only.

Okay. That's very useful. And then we've seen at least one large company peer and peers starting to raise pricing. We know -- so how should I look at that? Because I mean, we're clearly in an environment where there is overcapacity. I think, obviously, your positioning will be to gain share. But I wanted to kind of get your sense of the higher cost of raw materials, impact on pricing and what you expect for the rest of this year because it does have implications in terms of how companies are managing inventories?

Yes, Tristan, we definitely read the news as well. So what we're doing is we're monitoring the situation very closely. Like I mentioned before, any time, any of my peers making strategic decision, price increase exit certain markets always create opportunity for Diodes overall to work with the customer. During the last price increase -- during the COVID time, I also openly talked about it. Our view for the business is actually a relationship with the customer long term, it's a lot more important than the short-term benefit, right? So we want to continue to work with the customers and be a strong supplier to them for a long term. So the partnership is a key focus for us overall, and we are not changing our strategy. So we want to leverage this type of opportunity to continue to expand our print positions and continue to grow the relationship into the deeper level and continue to expand our overall designing, design win, demand creation with the customer together. So that will be our focus and will be our strategy moving forward.

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?

Yes. As I mentioned about 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 requirement 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 Instructions] The next question comes from David Williams with Benchmark.

Let me ask a followup. Really, I just wanted to say, Gary, congratulations on the CEO official naming there. It's like...

Appreciate it...

It was after earnings last quarter. I want to make sure I squeeze that in there. But while I have you one other quick question and maybe Brett or Emily or whomever. But on the utilization, is there -- can you tell us about where your utilization is running today and maybe what the mix impact was on the margin side?

Well, actually, utilization is very -- really vary from different fab and APA even from different product line, right? So some product line, the high-end product line that demand is really strong, the utilization is really good. But especially for those like big commodity and then we kind of intentionally try to give away from the utilization for this kind of capacity is kind of low, okay? I won't be able to give you the detail of exact utilization yet. But what we do for the past couple of quarters, we continue to consolidate or migrate those like low-cost commodity capacity into supporting the high-end market in high-end market and high customer demand kind of requirement. So again, with our hybrid manufacturing strategy, as answered the question before, and we continue to load our external product and process into internal. And we are doing the qualification process and even we issued a PCM for the key customer in different segments. And so far, the progress is really good. So I can guarantee you in the future, our loading will continue to grow, okay, with this kind of strategy, we really want to go for that.

Yes. So I think on top of that, we did actually have a very good result 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 continue to drive the 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.

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

Thank you.

Thank you, David.

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

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.