Diodes Incorporated (DIOD) Earnings Call Transcript

Good afternoon, and welcome to the Diodes Incorporated Third Quarter 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, Thursday, November 5, 2026. I would now like to turn the call over to Leanne Severs of Shelton Group Investor Relations. Leanne, please go ahead.

Good afternoon, and welcome to Diodes' Third Quarter 2026 Financial Results Conference Call. I'm Leanne Severs, 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 Vice President of Corporate Marketing and 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 September 30, 2026. 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, November 5, 2026. 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 statement 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 third quarter revenue reached record levels, coupled with an over 500 basis point year-over-year increase in gross margin to 36.1%, driving significant expansion in non-GAAP earnings. Global POS was also at a record level in the quarter, increasing more than 30% year-over-year. Our sequential revenue growth of more than 19% was primarily driven by record automotive revenue from continued market share gains, stronger demand for broad industrial applications, and the sustained momentum in AI ecosystem applications that contributed to record revenue in the computing market. Underpinning this growth is the benefit of the targeted investments we made in capacity expansion over the past year coming online. The resulting increase in loading at our manufacturing facilities also benefits gross margin, along with product mix and pricing improvements. Based on our current projection for continued growth in the fourth quarter, we expect full-year revenue to increase approximately 30% over 2025 at the midpoint. In addition to being well above our historical CAGR of 10%, we continue to see strong demand momentum resulting from our new product initiatives, market share gains, as well as increasing content at customers. This anticipated sequential growth is once again coupled with further non-GAAP gross margin expansion of 80 basis points sequentially to 37% at the midpoint, and increasing earnings leverage as well as strong cash flow generation. With that, let me now turn the call over to Brett to discuss our third quarter financial results as well as our fourth quarter guidance in more detail.

Thanks, Gary, and good afternoon, everyone. Revenue for the third quarter of 2026 was $532.6 million, an increase of approximately 36% over $392.2 million in the third quarter of 2025, and up approximately 20% compared to $445.5 million in the second quarter of 2026. Gross profit for the third quarter was $192.5 million or 36.1% of revenue, compared to $120.5 million or 30.7% of revenue in the prior-year quarter, and $147.6 million or 33.1% of revenue in the prior quarter. Non-GAAP gross profit was $192.9 million and non-GAAP gross profit margin was 36.2%, which excluded 0.1% or $0.4 million of inventory accounting associated with the acquisition of Elevate Semiconductor. GAAP operating expenses for the third quarter were $129.1 million, or 24.2% of revenue, and on a non-GAAP basis were $122.1 million, or 22.9% of revenue, which excludes $5.2 million of acquisition-related intangible asset costs and $1.8 million of acquisition-related costs. This compares to GAAP operating expenses in the third quarter of 2025 of $108.9 million or 27.8% of revenue, and $114.3 million or 25.6% of revenue in the prior quarter. Non-GAAP operating expenses in the prior quarter were $108.6 million, or 24.4% of revenue. Total other income and expense amounted to approximately $0.4 million expense for the quarter, consisting of $6 million in unrealized loss on investments, $3 million in foreign currency losses, $0.8 million in interest expense offset by $4.8 million in interest income, $3.8 million on gain on disposal of subsidiary, and $0.8 million in other income. Income before taxes, equity in net earnings of equity investments, and non-controlling interest in the third quarter of 2026 was $63 million, compared to $19.5 million in the prior-year period and $58 million in the previous quarter. Turning to income taxes, our effective income tax rate for the third quarter was approximately 23.2%. In 2026, we continue to expect the tax rate for the full year to remain at approximately 18% plus or minus 3%. GAAP net income for the third quarter was $43.7 million, or $0.95 per diluted share, compared to a net income of $14.3 million, or $0.31 per diluted share in the prior-year quarter, and net income of $46.6 million, or $1.00 per diluted share last quarter. The share count used to compute GAAP diluted income per share for the third quarter of 2026 was 46.2 million shares. Non-GAAP adjusted net income in the third quarter was $54.5 million, or $1.18 per diluted share, which excluded, net of tax, $7.9 million unrealized loss on investments, $4.2 million of acquisition-related intangible asset amortization costs, $3 million gain on disposal of subsidiary, $1.4 million of acquisition-related costs, and $0.3 million of acquisition-related inventory amortization costs. This compares to non-GAAP adjusted net income of $17.2 million, or $0.37 per diluted share, in the third quarter of 2025, and $32.5 million, or $0.70 per diluted share, in the prior quarter. Excluding non-cash share-based compensation expense of $7.4 million for the third quarter, net of tax, both GAAP net income and non-GAAP adjusted net income would have increased by $0.16 per share. EBITDA for the third quarter was $89.7 million, or 16.8% of revenue, compared to $46.6 million, or 11.9% of revenue in the prior-year period, and $83.5 million, or 18.7% 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 $97.2 million for the third quarter. Free cash flow was $43.9 million, including $53.2 million of capital expenditures. Net cash flow was a positive $134.1 million, which includes $35 million for the stock buyback program. Turning to the balance sheet, at the end of the third quarter, cash, cash equivalents, restricted cash, plus short-term investments totaled approximately $578 million. Working capital was approximately $1.1 billion, and total debt was approximately $405 million. During the quarter, we completed a private placement of 0% convertible senior notes due 2031 in the aggregate principal amount of $375 million, including the initial purchasers' exercise of their option to purchase additional notes in full, generating net proceeds of $342.9 million after deducting $10.2 million in debt issuance costs and $21.9 million of capped call transaction premiums. The company also used $35 million of the net proceeds to repurchase 360,119 shares of our common stock in a privately negotiated transaction. In terms of inventory, at the end of the third quarter, total inventory days decreased 11 days to approximately 141 as compared to 152 last quarter. Finished goods inventory days were approximately 44 compared to 51 days last quarter. Total inventory dollars increased $30.5 million from the prior quarter to $535 million, consisting of a $25.1 million increase in work in process, a $14.8 million increase in raw materials, and a $9.4 million decrease in finished goods. The increase in inventory helps to support our customers and expected growth, as well as our longer wafer manufacturing lead times. For the third quarter, there was a $29.5 million addition to inventory associated with the acquisition of Elevate Semiconductor. Without this increase, total inventory dollars would have been approximately flat compared to last quarter. Capital expenditures on a cash basis were $53.2 million for the third quarter, or 10% of revenue, which is above our targeted annualized range of 5% to 9% of revenue, but within the range year-to-date at 8.6% of revenue. Now turning to our outlook. For the fourth quarter, we expect revenue to be approximately $550 million, plus or minus 3%. At the midpoint, this represents a 40.4% increase year-over-year, and a 3.2% increase sequentially. Non-GAAP gross margin is expected to expand to 37%, plus or minus 1%. Non-GAAP adjusted EPS is expected to be $1.35, plus or minus $0.10. With that, I now turn the call over to Emily Yang. Thank you.

Thank you, Brad, and good afternoon. As Gary and Brad mentioned, revenue in the third quarter was up 19.5% sequentially and up 35.8% over the prior-year period, exceeding the midpoint of our guidance. This was mainly driven by very strong demand across all regions, led by North America, followed by Asia and Europe. Pericom product revenue reached a record high, which is greater than 3x since the acquisition. Global POS also reached record revenue, driven by the Americas, followed by Europe and Asia. Channel inventory decreased in terms of weeks again this quarter, with weeks lower than our normal range of 11 to 14 weeks. While supply continues to be tight, we remain strategically focused on long-term sustainable business and demand creation. Our third quarter results and the expectation for continued growth into the fourth quarter reflect our commitment to the supply chain, our focus on key customer partnerships, as well as market share gains combined with our strong operational performance, capacity expansion activities, and the success of our hybrid manufacturing strategy. Looking at the fourth quarter, we see continuous strength in automotive, industrial, and AI-related applications. With a strong backlog and demand pipeline, we're guiding more than 3% quarter-over-quarter growth compared to our usual 5% to 6% down. During the quarter, our margin also improved 300 basis points from 33.1% to 36.1%. This was mainly driven by product mix improvement, price adjustments, and capacity underloading improvement. Our fourth quarter guidance of 37% underscores our continuous momentum in margin improvement. Looking at global sales in the third quarter, Asia represented 79% of the revenue, Europe 11%, and North America 10%. In terms of our end markets, computing was 27% of Diodes' product revenue, industrial 24%, automotive 22%, consumer 17%, and communication 10% of product revenue. Automotive and industrial revenue combined totaled 46% of product revenue, which was up 2 percentage points from last quarter. Now, let me review the end markets in greater detail. Starting with the automotive market, revenue grew 26% sequentially and almost 60% year-over-year to reach a quarterly record, driven by content expansion and market share gains. This momentum is extending into the fourth quarter as demand remains strong. We continue to benefit from the application trend of connected driving, advanced vehicle electronics, and electrification, which are driving higher semiconductor content per vehicle. During the quarter, we saw continuous design win momentum across ADAS, telematics, infotainment, and digital cockpit applications. As vehicles incorporate more displays, sensors, processors, and communication interfaces, demand for our timing, connectivity, and power management solutions continues to increase. We also saw strong traction across lighting, body electronics, and safety applications supported by new production ramps and design wins for LED drivers, smart power devices, current monitors, and protection products. In electrification, we secured additional wins in EV power systems, onboard charging, and battery-related applications. Overall, our expanding content position across connected driving, vehicle electronics, lighting, safety, and electrification continues to create growth opportunities across both ICE and EV platforms and support our long-term automotive growth strategy. Turning to the industrial market, revenue increased 26% sequentially and 50% year-over-year. Market demand continues to strengthen, especially for expanded content opportunities across AI infrastructure, automation, energy, smart metering, and emerging robotic applications. In humanoid robotics, we secured design-ins for our level shifter portfolio on robot control boards. Demand for power management solutions also remains strong across smart meters, energy systems, embedded systems, industrial automation, cooling applications, smart buildings, outdoor lighting, and power adapters. We also continue to strengthen our position in AI data center power structures, seeing increasing demand for our silicon carbide solutions in high-power 800-volt and 400-volt server and AI platform power supplies. Through our acquisition of Elevate, we are benefiting from favorable conditions in the semiconductor automated test equipment market, which is experiencing one of the strongest growth cycles in its history. Industrial growth is being driven by increasing demand for higher voltage and more capable test platforms. We believe Elevate is well positioned to capitalize on this trend with its differentiated high-voltage product portfolio and new product introductions. In the computing market, revenue increased 16% sequentially and 33% year-over-year to reach a quarterly record and remain the largest end market for Diodes. During the quarter, we continued to see strong momentum in AI server, data center, and enterprise, whereas notebook demand was a little bit soft. We expect AI server, data center, and enterprise storage will continue to drive momentum in the fourth quarter to offset the slowdown in the notebook and PC market. AI infrastructure investment is also driving growth across our broader server portfolio. Our configurable low-power PCI Express packet switch business saw significant growth. Demand for our PCI Express 6.0 and 7.0 timing products remains strong, with new clock generators, multiplexers, and buffers gaining adoption across next-generation AI server platforms. Our PCI Express timing portfolio has gained huge traction with several recent design wins with major AI cloud and server customers. We're also seeing solid momentum in enterprise SSDs and AI data center storage supported by growing NVMe SSD demand. Increasing AI server power density is creating additional opportunities across power management, monitoring, protection, and thermal management. Overall, increasing AI infrastructure complexity and power requirements are expanding our content opportunities across timing, connectivity, storage, power management, protection, and thermal management, positioning computing as an important growth driver for Diodes. In the consumer market, revenue increased over 20% sequentially and 30% year-over-year. We continue to see positive momentum in our consumer business supported by growth across premium home audio, consumer controls, energy-efficient lighting, USB-C power, and protection products. USB-C adoption continues to expand across connected consumer devices, including TV set-top boxes, routers, and handheld gaming systems, driving growth for our USB-C power solutions as the interface becomes more widely used for both charging and data connectivity. This opportunity demonstrates the increased breadth of our product portfolio across audio, power, protection, connectivity, and timing for consumer applications. Lastly, in the communication market, revenue increased 10% sequentially and approximately 6% year-over-year, representing 10% of our total product revenue. Networking driven by AI applications continues with strong momentum, while the smartphone market in China remains soft. AI-driven networking is creating new growth opportunities, with continued demand for 800G optical modules and the beginning of the 1.6T ramp expanding opportunities for our connectivity and timing products. Our timing solutions are also gaining traction with optical module manufacturers. As data centers move to higher network speeds, optical transceivers require increasingly precise, ultra-low jitter timing to support high-speed connectivity between servers and cloud infrastructure. This plays to core Diodes strengths in quartz-based timing solutions, including differential oscillators used as reference clocks for optical modules and other communication applications. In summary, we are very pleased with the achievement of our record quarterly revenue and strong gross margin expansion as we benefit from an improved product mix through record revenue in automotive and computing markets combined with pricing and loading improvements. With our broad portfolio and diversified end markets, we are less dependent on any one market segment. Our key focus areas of automotive, industrial, and AI applications are well balanced and will continue to drive Diodes' future growth momentum. In the fourth quarter, we are guiding for further expansion across revenue, gross margin, and non-GAAP earnings, which puts us well ahead of our timeline towards achievement of our three-year financial goals. With that, we now open the floor to questions. Operator.

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from David Williams with Needham. Please go ahead.

I guess maybe first thing that comes to mind, and Emily mentioned this, but your three-year targets you set earlier this year are looking a bit out of date, given your success here. Just curious if that is something you would revisit here in the near term or if there's anything we should be thinking about in terms of those targets and how you're thinking about the growth over the next year?

Yes. Hi, David, this is Emily. We will definitely revisit again during probably the next earnings call to reset some of the goals. But now for this quarter, I think our IR material will actually reflect the results as of today or as of the end of Q3, so you should be able to get some of the information out from the IR presentation. But thank you.

All right. Very good. And then just kind of thinking about the lead times and the inventories, can you talk a little bit about the pricing environment that you did mention, but also how are your lead times trending and is that creating any issues in terms of are you able to meet demand and maybe how long your forecast customers are providing you?

Thanks. Yeah, so in general, lead time is still extended, right? The supply is still a little bit constrained. What we are doing is actually working with the customers, understanding their true demand, and providing the best support we can. If you look at overall unit shipment that we provided, I think calendar year 2025, we shipped about 45 billion units, and using the Q3 run rate, we are actually at a run rate of about 60 billion units. So as you can see, we actually increased the shipment volume significantly. This is actually driven by some of the aggressive initiatives that we put together, including capacity expansion, product mix improvement, and stuff like that. I would say, all in all, it's a good representation of the increased focus on expanding our capacity and better supporting the customer.

Okay, great. And if I could sneak just 1 last one in, and that is on the AI infrastructure or AI opportunity for you all. That's been a very big area of growth. Is there a way for us to think about the magnitude of what that contribution is today in terms of your total revenue base?

Yes, we haven't really broken out the AI revenue and reported it that way, but I did mention before the whole AI ecosystem, data center servers are definitely a major portion of it. We also mentioned the total content per box is about $109. But on top of that, we have industrial applications, including all the power supplies. We see that as a big potential upside for us, especially next year, with some of the new designs, transition to 800-volt, 400-volt, and stuff like that. We also see networking as an example, whether it's switches or routers. Also, the transceivers, the optical modules will continue to drive a lot of momentum. But I would say all in, this is really positive for us and we are excited for the growth. But 1 thing I do want to point out, right? I know AI is a really hot topic today or for the last few months, but 1 thing about Diodes is we have very well diversified into a lot of different end markets. Using the example of automotive, we actually grew more than 60% or close to 60% year-over-year. Even industrial, we actually grew 50% year-over-year, right? So I think that's 1 thing I want to point out. AI will continue to drive the momentum as well as automotive, industrial, and some other applications.

All right. Thanks so much.

The next question comes from Will Stein with Truist. Please go ahead.

Hi, this is Elliot on for Will. First, if we could start with margins. As we move into calendar year '27, can you help us think about potential margin expansion and incrementals for both gross and operating, and maybe just generally the puts and takes as we get outside of the next couple of quarters?

Sure. Yes, Elliot, this is Brett. I'll make a couple of comments here. I think as we've kind of said before, I think we'll continue to have improvement of our margin and leverage based on improved utilization in our wafer fabs that we have positioned for expansion. We're also going to see improved margin as our revenue grows, which we would expect that to continue. I think we're growing at a really great rate in the back half. We would expect to continue to grow to gain share as we go into next year. And so I think those are the main—from an additional leverage, we have the manufacturing, but you've also got the improved product mix and the improvement that we're going to be making that will benefit us on the margin side.

Yes, this is Gary. At this moment, we are hitting on 37% as we keep building guidance in the fourth quarter. I think our target model is like $2.5 billion with a 40% margin, and we're marching forward on the right track toward that direction.

Okay, great. Thank you. And then for my follow-up, could you talk a little bit about just demand linearity you saw through such a strong quarter? Did it build as the quarter went? You've guided for more accelerating growth as we move forward. So how did the linearity trend throughout the quarter and maybe anything you've seen in October relative to your prior such strong quarter? Thanks.

Yes, so this is Emily. I think Q4 usually is a down quarter, about 5% to 6%. For us, we guided more than 3% quarter-over-quarter. This is actually based on the strong backlog and the design pipeline that we actually have visibility on. I think if you really look at the end market, automotive, industrial, and AI-related applications will continue to drive some of the momentum into Q4. October, compared to the previous quarter, we definitely have good visibility from the backlog, as well as a very strong beginning backlog. So with all these factors put together, we actually provided much stronger guidance than our usual seasonality.

Thank you. The next question comes from Tristan Gerra with Baird. Please go ahead.