Diodes Incorporated (DIOD) Earnings Call Transcript & Summary

Good afternoon, and welcome to Diodes Incorporated's First Quarter 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, Thursday, May 8, 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' First Quarter 2025 Financial Results Conference Call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today are Diodes' President, Gary Yu; Chief Financial Officer, 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 March 31, 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, May 8, 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 the 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, 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, we delivered another quarter of year-over-year growth, achieving a 10% increase as the recovery in our target end markets continue to improve. First quarter revenue exceeded our expectation due to better than seasonal performance in the computing market in Asia, primarily driven by increasing opportunity for Diodes' product in AI-related applications. Additionally, we are seeing improving market conditions in Europe and in North America as those regions has begun to show signs of rebounding from recent lows. Our automotive and industrial market totaled 42% of first quarter product revenue as we continue to see expanding automotive content and the design opportunities. Another notable indication of improving conditions is channel inventory dollars and days have continued to decrease, and appear to be more aligned with real demand and historical POS levels. Although the inventory depletion is a positive sign for Diodes and the broader market, the reduction in channel and internal inventory combined with absorbing the Chinese New Year holiday temporarily limited increased loading at our manufacturing facility, and therefore, gross margins. As channel inventory continues to normalize and the global demand improves, we should see a more material expansion to gross margin in future quarters. Additionally, qualifying more products in our internal facility to increase loading combined with recovery in our higher-margin automotive and industrial markets will also contribute to driving future margin improvement. As further evidence of increasing momentum, we are guiding for the third consecutive quarter of year-over-year growth, and with the second quarter also expected to be the first quarter of both year-over-year and the sequential growth in this recovery cycle. Even though the global market remain dynamic, especially with the recent tariff, Diodes is strategically positioned to meet global customers' needs with our hybrid manufacturing model and internal facility located across the U.S., China, Taiwan and the U.K. One final comment before turning the call over to Brett, as you may have seen, we also announced today a $100 million stock repurchase program, which further reiterate our confidence in the business and the future growth prospects. Diodes is in a unique position with our strong cash flow generation and a healthy balance sheet to continue investing both organically and in M&A, while also returning capital to stockholders through this share buyback. With that, let me now turn the call over to Brett to discuss our first quarter 2025 financial results as well as second quarter guidance in more detail.

Thanks, Gary, and good afternoon, everyone. Revenue for the first quarter 2025 was $332.1 million, compared to $302 million in the first quarter of 2024, and $339.3 million in the fourth quarter of 2024. Gross profit for the first quarter was $104.7 million, or 31.5% of revenue, compared to $99.6 million, or 33.0% of revenue, in the prior year quarter and $110.9 million or 32.7% of revenue, in the prior quarter. GAAP operating expenses for the first quarter were $103.4 million, or 31.1% of revenue, and on a non-GAAP basis were $97.1 million, or 29.3% of revenue, which excludes $5.8 million amortization of acquisition-related intangible asset expenses, $0.3 million in restructuring charges, a $0.2 million in acquisition-related costs. This compares to GAAP operating expenses in the first quarter of 2024 of $86.6 million, or 28.7% of revenue and $99 million, or 29.2% of revenue in the prior quarter. Non-GAAP operating expenses in the prior quarter were $95.5 million, or 28.1% of revenue. Total other expense amounted to approximately $4.1 million for the quarter, consisting of a $5.8 million impairment of an equity investment, $4 million in unrealized losses from investments, $0.5 million in interest expense, $0.2 million of foreign currency losses, and $5.8 million of interest income and $0.6 million in other income. Losses before taxes and noncontrolling interest in the first quarter of 2025 was $2.8 million compared to income of $18.8 million in the prior year period and income of $12.3 million in the previous quarter. Income taxes in the quarter were $20,000 primarily as a result of the geographical mix of pretax income and loss across tax jurisdictions. We expect the tax rate for the full year to be approximately 18%, plus or minus 3%. The GAAP net loss for the first quarter was $4.4 million, or a loss per share of $0.10, compared to net income of $14 million, or $0.30 per diluted share in the prior year quarter and net income of $8.2 million, or $0.18 per diluted share last quarter. The share count used to compute GAAP loss per share for the first quarter of 2025 was 46.4 million shares. Non-GAAP adjusted net income in the first quarter was $8.8 million, or $0.19 per diluted share, which excluded net of tax for $4.8 million for amortization of acquisition-related intangible assets, $4.8 million for impairment of an equity investment, $3.2 million noncash mark-to-market investment value adjustment, $0.2 million restructuring charges, and $0.1 million of acquisition-related costs. This compares to non-GAAP adjusted net income of $13 million, or $0.28 per diluted share in the first quarter of 2024 and $12.5 million, or $0.27 per diluted share in the prior quarter. Excluding noncash share-based compensation expense of $5 million for the first quarter, net of tax, both GAAP net loss and non-GAAP adjusted net income would have increased by $0.11 per share. EBITDA for the first quarter was $26.2 million, or 7.9% of revenue, compared to $48.3 million, or 16% of revenue in the prior year period and $40.7 million, or 12% 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 $56.7 million for the first quarter. Free cash flow was $40.8 million, which included $15.9 million of capital expenditures. Net cash flow was a positive $26.2 million. Turning to the balance sheet. At the end of first quarter, cash, cash equivalents, restricted cash plus short-term investments totaled approximately $349 million. Working capital was approximately $868 million in total debt, including long term and short term, was approximately $52 million. In terms of inventory, at the end of the first quarter, total inventory days were approximately 187 as compared to 193 last quarter. Finished goods inventory days were 80 compared to 82 last quarter. Total inventory dollars decreased $3.9 million from the prior quarter to $471 million. Total inventory in the quarter consisted of a $5.2 million decrease in finished goods, a $1.2 million increase in raw materials and a $49,000 increase in work in process. Capital expenditures on a cash basis were $15.9 million for the first quarter or 4.8% 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 second quarter of 2025, we expect revenue to increase to approximately $355 million, plus or minus 3%, representing 11% growth over the prior year period at the midpoint, which will be the third consecutive quarter of year-over-year growth. GAAP gross margin is expected to be 31.8%, 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 28% of revenue, plus or minus 1%. We expect net interest income to be approximately $1.5 million. Our income tax rate is expected to be 18%, plus or minus 3%, and shares used to calculate EPS for the second quarter are anticipated to be approximately $46.4 million. Not included in these non-GAAP estimates is amortization of $4.8 million, after tax, for previous acquisitions. With that said, I will now turn the call over to Emily Yang.

Thank you, Brett, and good afternoon. As Brett and Gary mentioned, revenue in the first quarter was above our original expectations and represented a 10% growth over the prior year period and down 2.1% sequentially, which is better than the typical seasonality. Our global POS increased in the quarter and our channel inventory was lower in terms of both dollars and weeks. Looking at global sales in the first quarter. Asia represented 78% of the revenue; Europe, 13%; and North America, 9%. We are seeing improvements across all regions with a higher book-to-bill ratio and a stronger beginning backlog going into the second quarter. In terms of our end markets, industrial was 23% of Diodes product revenue; automotive, 19%; computing 27%; consumer, 17%; and communication, 14% of the product revenue. Our automotive industrial revenue combined totaled 42% and which is comparable to the last quarter. Our ability to maintain this level of revenue as this end markets undergo inventory and demand adjustments reflects the success of our path and ongoing content expansion and design win initiatives. Let me now review the end markets in greater detail. Starting with automotive market, we maintained product revenue at 19% and are seeing the overstock situation continue to improve. We see some demand recovery, but visibility is still limited. Our focus remains on the content expansion and market share gain to position Diodes for the growth as the auto market recovers. In terms of our demand creation, momentum remained strong throughout the quarter with expanding design-ins and design wins across all focus areas, including connected driving, comfort, style, safety and electrification. Several examples include our SBR product win several designs in ADAS and automotive panel applications, while our buck converters newly released MOSFET, silicon carbide MOSFETs and 400-volt TVS product were designed into DC-DC, onboard charging and EV charging applications. Additionally, our low IQ LDO family and high current LDOs received solid demand for always-on MCU power supply and wireless charging applications. We're also seeing rapid adoption of our small lane count PCI Express Packet Switches, USB Type-C ReDrivers and active Crossbar Muxes for rear-seat entertainment and smart cockpit applications. Our bidirectional TVS Diodes are also being designed into cockpit T-Box applications while our high-power-rated TVS products are being designed into several automotive applications. Additionally, our dual line CAN bus protector have been selective for the protection in the battery managed system applications and our 5-volt overcurrent protection switches saw solid demand for electronic control unit systems. Also in the auto market, we extended the strong design-in momentum for our linear LED drivers and multi-mode controllers being used in rare and backup lighting and headlight applications. Our CMOS crystal oscillator and spread-spectrum crystal oscillators are seeing traction in image sensor reference clock driven by higher data rate for sensor resolution. Turning to industrial market. The inventory correction continues similar to the automotive market, although we are seeing some signs of improvement at certain end customers. Overall demand still slow to recover, visibility is also limited in the industrial market, and we are seeing more short lead time orders. Despite the slow demand recovery, we continue to make progress and gain design momentum across a number of products and applications. Our silicon-carbide Diodes and MOSFETs have been winning designs in 850-volt PC power supplies and elevator power applications, while our bridge rectifiers are being designed into switching power supplies telecom, desktop and server applications and power delivery adopters. Also in the industrial market, our buck converters are winning designs for industrial gate drivers and open control applications. And our wide Vin LDOs saw solid demand for fans, power tubes and e-meter applications. We're also securing strong design wins for our linear LED drivers in traffic and transportation signs. Our bidirectional TVS product has several design wins for interface IO and battery management system cell protection in multiple industrial applications. Additionally, our Contact Image Sensor product for AOI are being utilized in battery film inspection, glass and printing measurements, panel inspections, barcode printers as well as check scanner applications. In the computing end market, our ongoing design momentum in the AI server and data center applications continue to be a key highlight for Diodes in the quarter. We secured wins for our newly released PCI Express 6.0 clock generators and Cross Muxes buffers as well as PCI Express Package Switches to expand the CPUs I/O requirements as well as BMC controllers, USB host controllers, security encryption processors and MCIO cables. Also for the AI servers and high-speed data applications, our SBR products have win increasing design-ins while our crystal oscillators are gaining traction in optical modules for faster data rate and our ultra-low jitter crystal oscillators are seeing traction in smart network interface cards. Within the broader computing market, demand remains solid for Diodes bus switches in enterprise SSD applications and our eUSB2 repeater solutions has become the standard interface for CPUs and SoC processors. Additionally, our MIPI D-PHY ReDrivers are being used in laptop, PC camera applications to enable a higher bandwidth camera interface. And our newly introduced MOSFET are seeing traction for DC-to-DC power converter applications in servers and laptops, while our PCI Express 5.0 clock generators and protection devices are being designed into docking station applications. In the consumer market, we are gaining design win traction with our SBR and TVS products for AC-DC power supplies for TVs, printers, gaming adopters and chargers applications. And our protection devices are being adopted in brushless DC fans and air conditioning applications for smart home appliances. Also in the consumer, our bus switches solution enjoyed steady revenue for SSDs and next-generation portable gaming console applications and our 5-volt overcurrent protection switches received strong demand for physical interface power ports, such as USB and HDMI. Additionally, Diodes' newly released level shifter product family also achieved design wins in applications such as PC memory, smart watches and other computer applications. Lastly, in the communication market, Diodes' ESC protection products are winning designs in smartphone camera applications with AI features, while our MOSFETs are being designed into mobile phones for battery management applications. We are also seeing traction in 5G applications for our protection devices. Additionally, our ultra-low jitter crystal oscillators are being utilized in gigabit switches and optical modules for AI networking and data center applications. One final comment. The recent U.S.-China tariff increases and related impact remains a very dynamic situation, especially the potential effect on our customers. We are working closely with our customers to monitor the situation while also reviewing the potential exposure across our products. Since Diodes has multiple manufacturing facilities located around the globe, and many parts are alternative manufacture flow qualified. We anticipate any material impact. Additionally, our hybrid manufacturing model provide us with the flexibility to adjust capacity planning between internal and external as well as supply chain arrangements, thereby mitigating the cost impact related to the trade tariffs. In summary, as evidenced by our comments today, our business is gaining increasing momentum with achievements of consecutive quarters of year-over-year growth. Additionally, our overall inventory has continued to improve and are position us to benefit from a broadening recovery of demand across our end markets. And although the current tariffs create economic uncertainty, Diodes hybrid model and global manufacturing footprint enable us to strategically meet the needs of our customers. We remain highly optimistic about our growth perspective in 2025 and beyond. With that, we now open the floor to questions. Operator?

[Operator Instructions] And your first question today will come from David Williams with Benchmark.

Congratulations on the solid execution here. Yes. So I guess my first question is really through earnings season, it's been pretty clear that demand has been better than anticipated. And as you kind of think through that, I'm curious if you're seeing any demand pull forward, just kind of given where inventory levels were we had largely tried to digest those and then lead times have gotten pretty short. And then now we have the tariff situation. So it feels like there could be some pull in here. And you kind of think -- at least we have to think there's some demand destruction that is ongoing. So I guess how do you square that with just the momentum that you have in the business? And is there anything you would point to that kind of gives you more confidence that the instability of the demand that you're seeing today.

Yes, David, this is Emily, right? So definitely tariffs created uncertainty, especially on the end demand with our customers. So the only thing we can do is actually work very closely with the customers and watching the situation to really kind of understand the longer-term impact from the business side. I think regarding pull-ins, to be honest with you, we don't really see a lot of pull-ins activities. But I think on the other angle, if you look at the channel inventory, it definitely depleted more, right? I talked about POS increase as well as channel inventories in terms of weeks, also in terms of dollars, both decreases. So this is all positive signs, right? So on the other hand, if I look at the backlog, if I look at a book-to-bill ratio, they all improved. I think from the actual business point of view, I also talk about automotive, industrial. We're definitely seeing the inventory improvement. Overall, we definitely see more of the activity going through as well as POS increase, right? So I think all of those are positive signs that we're definitely going through a recovering period. So I think that's pretty much what we've seen so far.

Great. Appreciate the color there. And I know you all are really close to your customers, so I think your insight is helpful. Secondly, I guess just as you think about your manufacturing footprint, and you've had an ongoing strategy to really report internal versus external. Does any of this tariff situation, does that change that strategy or maybe the pace at which you try to bring some of that stuff internal, so you have greater flexibility? Or just how do you think about that?

Yes. Actually, David, this is Gary. Let me help to answer this question here, right? As you know, we manage our hybrid manufacturing model very well throughout the past few years. And then we will continue to drive to porting our external -- our product from external to our internal wafer fabs. This will not change at all. And actually, we are doing very well and we do see quite a few good milestone to qualify our processing product in our internal wafer fab facility. And also, we do see our external customers to qualify our product and start to receive those PO from those key customers in several key segments. So this will be the direction from Diodes continue to doing that regardless of the tariff issue. But the good advantage for Diodes, we don't have so much tariff impacts because of the hybrid manufacture model as well as our footprint across the three different regions, right? That's really kind of not focused only on one region, and that would be very easy to tell my customer. We can easily have second source in a different kind of region and to supply customer need. So that's why we so-called the flexibility to support the customer need, right? So as Emily mentioned about it, we don't really see a lot of pull-in because -- or Diodes product is kind of flexible, but we do see the customer request us to replace maybe somebody else, and we are very easy can catch that up and support their demand.

Yes. So I think if you look at the overall supply chain change a lot, right, from globalization to regionalization, to maybe countrylization, wherever you want to call it, we believe we actually have a good structure in place both front end and back end to really support wherever the need or the future change requirement will be.

Okay. Perfect. And then just one last one for me, if you don't mind. Just kind of on the AI CapEx trend, those are clearly moving in the right direction. You have some nice exposure there, I believe. Can you talk maybe about where you're seeing that demand regionally? And then if there's maybe any shift in terms of the AI CapEx? Or just any color around that -- those trends, I think, would also be helpful.

Yes. So I think we have to probably look at the AIs in different portions, right? The one we're actually seeing with actual ramping up demands ongoing with a lot of new designs is really more on the hyperscalers doing the more data center areas, right? What we've seen that's still ongoing. Here and there, there's a little bit up and down. But all in all, it's really positive especially with the pipeline, expanding more customers with the newer designs and we'll be ramping up more. I think on the other areas really on the edge computing side, we're also seeing a lot of new opportunities that really working down from hyperscaler to the next level. I think that's actually going to be an even bigger opportunity for Diodes overall because that's going to consume a lot of different board sizes and different applications and different customer base. So I would say, all in all, we're still seeing the beginning of the ramp. We didn't really see significant adjust from the CapEx expansion point of view, what we've seen really more on the positive side. The other thing we've been focused talking about really on the content expansion, right? So if you look at -- we compare AI server versus a regular server, you can actually increase from $68 to $90-some right? So that will continue to be the focus overall for Diodes in the future.

And your next question today will come from Tristan Terra (sic) [ Tristan Gerra ] with Baird.

Could you talk about the gross margin catalysts that you see in the second half or any potential headwinds? You've talked in your prepared remarks about some acceleration potentially in gross margin. And I know that contractually, you have opportunities in the second half to increase in-sourcing versus what you're currently doing with outside fabs. So how should we look at all of this in terms of gross margin direction and perhaps quantifying kind of the key factors, including utilization rates in terms of their contribution to gross margin expansion?

Yes. So Tristan, this is Emily. Let me walk you through the margin impact currently what we've seen, right? So the Manufacturing Service Agreement, the loading is definitely lower than our expectation. And then if you look at the overall inventory bill, if we compare the Q1 with the Chinese New Year versus last year, as evidence that our internal inventory decrease as well as the channel inventory decrease, right? So this is all the signs that we are actually adjusting some of the inventory build and also because of the Chinese New Year, right? On the other hand, I think it's normal. We've been talking about price pressure, 1% to 2%. We've definitely seen some from there, but still within our normal range, so I would say that's pretty stable. So I think all in all, you're getting pressures in different areas. So what we're actually doing is actually, like you said, we will continue to push the internal loading -- porting, loadings as well as qualification of the product. But I want to be really honest with you because the economy situation the customer approving the change -- a product change notice is definitely a little bit longer than what we expected, but overall progress is really good, so that's going to continue to drive some of the margin improvement in the second half. We also expect second half revenue growth. And that will also increase some of the loading to minimize some of the underloading costs, right? At the same time, we will continue to drive the manufacturing cost down together with the product mix improvement initiative with a new product introduction, replacing some of the old products with new product focus on auto, industrial, the Pericom product as well as the analog power discrete. So this will continue to be the focus. With everything combined together, we are confident that we will see margin improvement throughout the next few quarters.

Yes. So -- for my second question, and I don't know, Gary, if you wanted to add on to my question here -- yes. So we're going to see probably some of your peers unloading capacity 150-millimeter analog capacity in the U.S., possibly worldwide as some of your peers have clearly excess capacity. Does that present opportunities for you to get assets at a good price towards your medium-term revenue goal? Or would you say adding capacity near term is not on the table given the current macro?

Well, I will say that, Tristan, I do believe our capacity currently is kind of stable, right, and especially on the utilization, as Emily mentioned about. But I do believe that this year is going to be the great year for Diodes, our utilization is going to get improved. However, even though you see the first quarter, second quarter utilization compared to like a second half, it could be lower. But our product mix could be some utilization were 100% loaded, and that's why I will not start investing any CapEx to expand our capacity to support customer needed. At the same time, I will try to do our best to make sure our internal capacity more efficient way to be used and I will consolidate capacity into the capacity which we still have a very high demand or short lead time requests coming in and to support customer need. I would say that, yes, I will do -- I will continue to put the CapEx into the capacity, which is very, very hot at this moment. But also at the same time, I'm going to reduce capacity, especially for those like commodity stuff, consolidate into the capacity where we need it. So we just need to make sure we use our capacity utilization very, very carefully at this moment, okay? Make the right investment is what we want to do.

Yes, Tristan, I think one thing to think about would be that the -- some of the excess capacity that others may make available we see that disruption as maybe opportunities in our top line versus necessarily thinking we need to increase our manufacturing footprint right now.

Especially, we are doing very well on our hybrid model, right? Because if there's really some capacity, if we don't really want to invest probably those low-end commodity, we can always go to the [indiscernible].

Okay. That's very useful. And then just a very quick one. Have [indiscernible] inventories normalized within your target range. I know it's improving. But is it now at a level you're comfortable with? Or is there a little bit some more progress to get to those targeted levels?

So we define the normal range, 11 to 14 weeks. Right now, the inventory is still slightly higher than that. But if we look at the market outlook, without the tariff consideration, right, remove that, we definitely expect the second half will be a growth compared to the first half. So with that situation in place, we're actually pretty comfortable with the inventory level that we have in the channel, really supporting the targeted growth coming.

Yes, because progression in weeks calculation is backward looking. And as we look at it, we really feel like what we've done to get the right mix in the channel is quite good. And so we're pretty -- we're in -- we feel like we're in a good place to drive growth and have good availability.

Right? And the most recently, I think already know, short lead time PO is going up a lot, which means like that customers try to change their build location dynamically, right? Just due to the tariff issue. So we want to make sure we have the inventory available, even the WIP to cover the customer urgent needed no matter where it is.

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.

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