Q2 2024 Diodes Inc Earnings Call

Good afternoon and welcome to the DRAC and corporate rated second quarter, 2024 financial results conference call. At this time, I'll participate in a listening mode. At the conclusion of today's conference call, instructions will be given to the question in the answer session.

Operator: All participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference call, please press the star key followed by the zero on your touch-tone phone. And as a reminder, this conference call is being recorded today, Thursday, August 8, 2024. I would now like to turn the call over to Leanne Sievers of Shelton Group Investors Relations. Leanne, please go ahead.

If anyone needs assistance at any time during the conference call, please press the star key followed by the zero in your touchtone phone.

And as a reminder, this conference call is being recorded today, Thursday, August 8th, 2024.

are now like to turn the call over to the NCVers of Shelton Group Investors Relations. Leanne, please go ahead.

Emily Yang: Good afternoon and welcome to Diodes' second quarter fiscal 2024 financial results conference call. Emily Yang, Sievers, President of Shelton Group, Diodes' Investor Relations firm. Join us today, or Diodes President Gary Yu, Chief Financial Officer, Brett Whitmire, Senior Vice President of Worldwide Health and Marketing, Emily Yang, and Director of Investor Relations for Meet Dollar Wall.

Speaker Change: Good afternoon and welcome to Diet 2nd Quarter Fiscal 2024 Fun Nature Results Conference Call, Emily Yang Sievers, President of Shelton Group, Dad's Investor Relations firm.

Speaker Change: Join us today, or dials President Gary Yu, Chief Financial Officer, Brett Whitmire, Senior Vice President of Worldwide Sales and Marketing, Emily Yang, and Director of Investual Relations for Meet Dollar Wall.

Emily Yang: 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 fiscal quarter ending June 30, 2024. 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.

Speaker Change: 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.

Speaker Change: As such, these results are unaudited and subject to revision until the company files its Form 10-Q for its fiscal quarter ending June 30, 2024.

Speaker Change: 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.

Emily Yang: Therefore, the company claims the protection of the safe harbor of a forward-looking statement that is contained in the private securities litigation reform act of 1995. Actress 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 filing with the Securities and Exchange Commission, including forms 10K and 10K. In addition, any projections as to the company's future performance represent management's estimate as of up-to-day August 8, 2024.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: In addition, any projections has as a company's future performance, represent management estimates as of today August 8, 2024.

Speaker Change: 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.

Speaker Change: 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.

Emily Yang: 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 its president, Gary Yu. Gary, please go ahead.

Gary Yu: 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 Dodge website at www.dio.com And now I'll turn the call over to the Dallas President, Gary Yu, Gary, please go ahead

Gary Yu: Welcome everyone, thank you for joining this conference call today. As reported earlier today, the second quarter results exceeded our prior expectations as sales demand began to recover from the low point in the first quarter, especially in the computing market in Asia. Additional positive indicators included improvement in distributor inventory levels with a sequential decrease in channel inventory weeks. The made improvements during the quarter were the most permanent in our computing and market. Where dials, yes, increasingly, participating in the growth of AI surfers.

Gary Yu: Welcome everyone, thank you for joining this conference for today

Gary Yu: As reported earlier today, second quarter results exceed our prior expectations as sales demand began to recover from the low point in the first quarter, especially in the computing market in Asia.

Speaker Change: Additional positive indicators include improvement in computer elementary levels, with the sequential decrease in channel inventory weeks.

Speaker Change: Demand improvement during the quarter was most prominent in our computing and market, where DIOS is increasingly participating in the growth of AI servers.

Brett Whitmire: In fact, POS across the 3C market increased significantly over the prior quarter, and Adaios was able to maintain automotive and industrial product revenue at 41% of total due to content increases in both markets even though the recovery remains low due to the ongoing inventory adjustment. As we look to the third quarter, we are guiding for strong revenue growth of over 8% at midpoint. Supportified over RPOS gross of more than 7% in the second quarter.

Speaker Change: In fact, POS across the 3C market increased significantly over the prior quarter and Adaios was able to maintain automotive and industrial product revenue at 41% of total.

Speaker Change: Due to the content increases in both markets, even though the recovery remains low due to the ongoing inventory adjustment.

Speaker Change: As we look to the third quarter, we are guiding for strong revenue gross of over 8% at a midpoint. Supportify over RPO's gross of more than 7% in a second quarter.

Brett Whitmire: Our near-term expectations for gross margins continue to reflect factory underloading related to our waiver service agreement, as well as our internal demand. However, we expect to continue market expansion toward our target model of 40% as loading improves combined with the resumption of growth in the automotive and industrial end markets. As global demand strengthens, we remain focused on driving further operational improvements to deliver increased earnings and cash flow. With that said, let me now turn the call over to Brett to discuss our second quarter financial results as well as our third quarter guidance in more detail.

Speaker Change: Our near-term expectations for gross margins continue to reflect factory underloading related to our waiver service agreement, as well as our internal demand.

Speaker Change: However, we expect to continue market expansion toward our target model of 40% as loading improves combined with the resumption of growth in the automotive and industrial end markets.

Speaker Change: As global demand strengthens, we remain focused on driving further operational improvements to deliver increased earnings and cash flow.

Speaker Change: With that, let me now turn the call over to Brett to discuss our second quarter financial results as well as our third quarter guidance in more detail.

Brett Whitmire: Thanks, Gary, and good afternoon, everyone. Revenue for the second quarter of 2024 was $319.8 million, compared to $322 million in the first quarter of 2024 and $467.2 million in the second quarter of 2023. Gross profit for the second quarter was $107.4 million, or 33.6% of revenue, which reflects factory underloading at our manufacturing facilities related to our wafer service agreements, as well as internal demand. This compares to $99.6 million, or 33% of revenue in the prior quarter, and $195.4 million, or 41.8% of revenue in the prior year quarter.

Brett: Thanks, Gary, and good afternoon, everyone.

Brett: Revenue for the second quarter, $2,024, was $319.8 million. Compared to $322 million in the first quarter of 2024, and $467.2 million in the second quarter, 2023.

Brett: Gross profit for the second quarter was $107.4 million, or 33.6% of revenue, which reflects factory underloading at our manufacturing facilities related to our wafer service agreements, as well as internal demand.

Brett: This compares to $99.6 million, or 33% of revenue in the prior quarter, and $195.4 million, or 41.8% of revenue in the prior year quarter.

Brett Whitmire: Gap operating expenses for the second quarter were $103.7 million, or $32.4% of revenue. On a non-gap basis, we were $90.9 million, or $28.4% of revenue, which includes an $8.3 million or restructuring charge, $3.9 million, amortization of acquisition-related tangible asset expenses, and $0.6 million for officer retirement. This compares to gap operating expenses in the prior quarter of $86.6 million or $28.7% of revenue. And in the second quarter of 2023, of $105.8 million or $22.7% of revenue.

Brett: Gap operating expenses for the second quarter were 103.7 million dollars, or 32.4% of revenue. In a non-gap basis, we're $90.9 million dollars, or 28.4% of revenue.

Brett: Which includes an $8.3 million restructuring charge, $3.9 million amortization of acquisition related in tangible asset expenses.

Speaker Change: and $0.6 million for officer retirement.

Speaker Change: This compares to gap operating expenses in the prior quarter of $86.6 million or $28.7% of revenue. And in the second quarter, 2023, of $105.8 million or $22.7% of revenue.

Brett Whitmire: Non-Gap operating expenses in the prior quarter were 87.6 million dollars, or 29% of revenue. Total other income amounted to approximately $9.1 million for the quarter, consisting of $4.2 million of interest income and $4.4 million in unrealized gains from investment. $0.8 million of foreign currency gain, $0.6 million of other income, and $0.9 million in interest expenses. Income before taxes and non-controlling interest in the second quarter of 2020 was $12.8 million, compared to $18.8 million in the previous quarter and $101 million in the prior year quarter. Turning to income taxes, our effective income tax rate for the second quarter was approximately 20.6%.

Speaker Change: Nine Gap operating expenses in the prior quarter were $87.6 million or $29% of revenue.

Speaker Change: Total other income amounted to approximately $9.1 million for the quarter, consisting of $4.2 million of interest income, $4.4 million in unrealized gains from investments.

Speaker Change: $0.8 million of foreign currency gain, $0.6 million of other income, and $0.9 million in interest expense.

Speaker Change: Income before taxes in non-controlling interest in the second quarter of 2024 was $12.8 million, compared to $18.8 million in the previous quarter, and $101 million in the prior year quarter.

Speaker Change: Turning to income taxes, our effective income tax rate for the second quarter was approximately 20.6%.

Brett Whitmire: Gap net income for the second quarter was $8 million, or $0.17 per diluted share, compared to $14 million, or $0.30 per diluted share last quarter and $82 million, or $1.77 per diluted share in the prior year quarter, share count used to compute GAP diluted EPS in the second quarter was 46.3 million shares, non-gap adjusted net income in the second quarter was $15.4 million or 33 cents per diluted share, which excluded net of tax, $7.2 million in restructuring charges, $3.5 million in non-cash mark to market investment value adjustment, $3.1 million of acquisition-related intangible asset costs, and $0.5 million in officer retirement. This compares to $13 million or $0.28 per diluted share in the prior quarter and $73.3 million or $1.59 per diluted share in the second quarter of 2023.

Speaker Change: Gap net income for the second quarter was $8 million or $0.17 per diluted share.

Speaker Change: compared to $14 million, or $0.30 per diluted share, last quarter, and $82 million, or $1.77 per diluted share, in the prior year quarter.

Speaker Change: Share count used to compute GAP diluted EPS in the second quarter was 46.3 million shares.

Speaker Change: non-GAAP adjusted net income in the second quarter was $15.4 million, or 33 cents per diluted share, which excluded net of tax $7.2 million in restructuring charges, $3.5 million in non-cash mark-to-market investment value adjustment,

Speaker Change: 3.1 million dollars of acquisition-related intangible asset costs, and 0.5 million dollars in office or retirement.

Speaker Change: This compares to $13 million or 28 cents per diluted share in the prior quarter and $73.3 million or $1.59 per diluted share in the second quarter 2023.

Brett Whitmire: Excluding non-cash, share-based compensation expense of $3.4 million GAP and $2.8 million non-GAP net of tax for the second quarter, GAAP earnings per share would have increased $0.07 per share and non-GAAP adjusted EPS by $0.06 per share. EBITDA for the second quarter was $41.1 million, or 12.8% of revenue, compared to $48.3 million, or 16% of revenue in the prior quarter, and 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.

Speaker Change: Excluding non-cash share-based compensation expense of $3.4 million GAP and $2.8 million non-GAP net of tax for the second quarter, GAP earnings per share would have increased $0.07 per share and non-GAP adjusted EPS by $0.06 per share.

Speaker Change: Ebeda for the second quarter was $41.1 million or 12.8% of revenue compared to $48.3 million or 16% of revenue in the prior quarter.

Speaker Change: and the $133.5 million or $28.6% of revenue in the second quarter of 2023.

Speaker Change: 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.

Brett Whitmire: Cash flow provided by operations was $14.4 million for the second quarter. Free cash flow was a negative $3.5 million, which included $17.9 million for capital expenditures. Net cash flow was a negative $2.9 million, including the paydown of $22.2 million of total debt.

Speaker Change: Cash flow provided by operations was $14.4 million for the second quarter. Free cash flow was a negative $3.5 million, which included $17.9 million for capital expenditures.

Speaker Change: Net cash flow was a negative $2.9 million including the pay down of $22.2 million of total debt.

Brett Whitmire: Turning to the balance sheet at the end of the second quarter, cash, cash equivalents, restricted cash plus short-term investments totaled approximately $277 million. Working capital was approximately $860 million, and total debt, including long-term and short-term, was approximately $47 million. In terms of inventory at the end of the 2nd quarter, total inventory days were approximately 191 as compared to 184 last quarter. Finished goods inventory days were 79 as compared to 67 last quarter.

Speaker Change: Turning to the balance sheet at the end of second quarter, cash, cash equivalents restricted cash plus short-term investments totaled approximately $277 million.

Speaker Change: Working capital was approximately $860 million and total debt, including long term and short term, was approximately $47 million.

Speaker Change: In terms of inventory, at the end of second quarter, total inventory days were approximately 191 as compared to 184 last quarter. Finished goods inventory days were 79 compared to 67 last quarter.

Brett Whitmire: Total inventory dollars increased $32.2 million from the prior quarter to $461.5 million. Total inventory in the quarter consisted of a $27.1 million increase in finished goods. $3.2 million increase in raw materials and a $1.9 million increase in work in process. Capital expenditures on a cash basis were $17.9 million for the second quarter, or 5.6% of revenue, and within our target range of 5 to 9%. Now turning to our outlook, for the third quarter of 2024, we expect revenue to be approximately $346 million, plus or minus 3%, representing an 8.2% sequential increase at the midpoint, which is the highest sequential growth in the last 14 quarters.

Speaker Change: Total inventory dollars increased $32.2 million from the prior quarter to $461.5 million. Total inventory in the quarter consisted of a $27.1 million increase in finished goods.

Speaker Change: A $3.2 million increase in raw materials and a $1.9 million increase in work and process.

Speaker Change: Capital expenditures on a cash basis were $17.9 million for the second quarter, or 5.6% of revenue, and within our target range of 5 to 9%.

Speaker Change: Now turning to our Outlook.

Speaker Change: For the third quarter of 2024, we expect revenue to be approximately $346 million, plus or minus 3%. Representing an 8.2% sequential increase at the midpoint, which is the highest sequential growth in the last 14 quarters.

Brett Whitmire: Gap Gross Margin is expected to be 34%, 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 27.5 percent of revenue, plus or minus 1 percent. We expect net interest income to be approximately $2.5 million. Our income tax rate is expected to be 18.5%, plus or minus 3%, and the number of shares used to calculate EPS for the third quarter is anticipated to be approximately 46.6 million. Not included in these non-GAAP estimates is amortization of $3.1 million after tax for previous acquisitions.

Speaker Change: Gap gross margin is expected to be 34%, plus or minus 1%.

Speaker Change: non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition-related intangible assets, are expected to be approximately 27.5% of revenue, plus or minus 1%.

Speaker Change: We expect net interest income to be approximately $2.5 million.

Speaker Change: Our income tax rate is expected to be 18.5%, plus or minus 3%, and shares used to calculate EPS for the third quarter are anticipated to be approximately $46.6 million.

Speaker Change: Not included in these non-GAAP estimates is amortization of $3.1 million after tax for previous acquisitions. With that said, I will now turn the call over to Emily Yang.

Emily Yang: With that said, I will now turn the call over to Emily Yang.

Emily Yang: Thank you, Brett, and good afternoon. Finally, in the second quarter, revenue increased 5.9% sequentially, and with higher than the midpoint of our guidance, our global POS increased more than 7% in the quarter, and our distributed inventory decreased. As Gary mentioned, we are excited to see continuous improvement in demand going into the third quarter, with stronger beginning backlog and both to build racial, especially in Asia. Looking at global sales in the second quarter, Asia represented 77% of revenue, Europe 15%, and North America 8%.

Emily Yang: Thank you, Brett and good afternoon. Revenue in the second quarter increase, 5.9% sequentially, and was higher than the midpoint of our guidance.

Speaker Change: are global POS increase more than 7% in the quarter and are distributed inventory decreased.

Speaker Change: As Gary mentioned, we are excited to see continuous improvement in the demand going into the third quarter with stronger beginning backlog and book-to-bill ratio, especially in Asia.

Speaker Change: Looking at the global sales in the second quarter, Asia represents 77% of revenue, Europe, 15% and North America, 8%.

Emily Yang: In terms of our end markets, industrial was 23% of Diodes product revenue, automotive 18%, computing 26%, consumer 19%, and communications 14%. Our automotive industrial end markets combined total 41%, which is comparable to the last quarter on the percentage basis, but slightly higher on the dollar basis. This is the ninth consecutive quarter above our target model of 40 percent.

Speaker Change: In terms of our end markets, Industrial was 23% of Dio's product revenue, Automotive 18%, Computing 26%, Consumer 19%, and Communications 14% of the product revenue.

Speaker Change: Our automotive industrial and markets combine total 41% which is comparable to the last quarter on the percentage basis, but slightly higher on the dollar basis. This is the 9 consecutive quarter above our target model of 40%.

Emily Yang: Now let me review the end markets in greater detail. Starting with the automotive market, revenue was 18% of our total product revenue, which was flat to the last quarter on a percentage basis but a 7.6% sequential increase in product revenue. Inventory rebalancing continued in the second quarter, and we expect this will extend into the third quarter. However, we're also seeing some customers' inventory getting into healthier levels, and demand is more stabilized with some new programs starting to ramp. So we expect a gradual recovery throughout the second half of the year.

Speaker Change: Now let me review the end markets in greater detail.

Speaker Change: Starting with the automotive market, revenue was 18% of our total product revenue, which was flat to the last quarter on the percentage basis, but 7.6% sequential increase in product revenue.

Speaker Change: Inventory rebalancing continued in the second quarter, and we expect this will extend

Speaker Change: into the third quarter. However, we're also seeing some customers' inventory getting into healthier levels, and demand is more stabilized with some new programs starting to ramp. So we expect a gradual recovery throughout the second half of the year.

Emily Yang: Our demand creation momentum remains strong throughout the quarter, with expanding design ins and design wins across all focus areas, including connected driving, comfort style safety, and electrification. From a product perspective, our LDL product family, DCDC buck converters, transistors, and gay drivers receive strong demand from power supply while charging, infotainment, telemetic, and lighting applications. We also support design wings for USB PD type C charging and VDL Our silicon carbide shock heat diodes and MOSFETs are also gaining traction for inductive charging signals.

Speaker Change: Our demand creation momentum remains strong throughout the quarter, with expanding design inns and design wings across all focus areas, including connected driving, comfort-style safety, and electrification.

Speaker Change: From a product perspective, our LDO product family, DC-DC buck converters, transistors, and gate drivers receive strong demand from power supply, wireless charging, infotainment, telematic, and lighting applications.

Emily Yang: We also secure design wings for USB PD Type-C charging and video controls for EV cars. Our silicon carbide shock key diodes and MOSFETs are also gaining traction for inductive charging systems.

Emily Yang: We're also seeing traction for our linear LED controllers in taillights and aftermarket applications. Diodes SBR products continue to experience strong momentum from our car display, headlight systems, infotainment, and sensor lighting applications. Also during the quarter are TVS diodes and transistors when designed and are ramping up volume in DC fans, protection, ADAS, and battery management systems. We also continue to see opportunities for automotive clock buffers and PCI Express clocks, along with USB Type-C switches, USB Type-C DisplayPort retimers, and active crossbar moxes in Real-C Entertainment, Infotainment, ADAS, and Smart Copy applications

Speaker Change: We are also seeing traction for our linear LED controllers in taillights and aftermarket applications.

Dio: Dio's SBR products continue to experience strong momentum from our car display, hot-light systems, infotainment and sensor lighting applications.

Emily Yang: Also, during the quarter, our TVS diodes and transistors went de-sized and are ramping up volume in DC fans, protection, ADAT, and battery management systems.

Speaker Change: We also continue to see opportunities for automotive clock buffers and PCI Express clocks, along with USB Type-C switches, USB Type-C display poor retimers and active crossbar boxes. In real-see entertainment, info-tainment, 8S, smart topic applications.

Emily Yang: Additionally, our hot sensor growth momentum continued this quarter with wins in multiple applications, including fans for the car seat, engine cooling system valves, and window lift motors. Dio also continued to focus on expanding our product portfolio for folio with the introduction of 130 new automotive compliance products in the second quarter, covering powered protection, battery management system, brush DC motors, motor control, infotainment, smart copy, A-DAS, data-line I-O, ESC protection, power management, backlighting, and LED lighting applications.

Emily Yang: Additionally, our hot sensor growth momentum continued this quarter with wings in multiple applications including fans for the car seat, engine cooling system valve, and window lift motors.

Emily Yang: Diode also continued to focus on expanding our product portfolio with the introduction of 130 new automotive compliance products in the second quarter, covering power protection, battery management system, brushless DC motors, motor control, infotainment, smart copy, ADAS, interline IO, ESC protection, power management, backlighting, and LED lighting applications.

Emily Yang: In the industrial market, second-quarter revenue represented 23% of total product, which was flat to the last quarter but up on a dollar basis. Similar to the auto market, the recovery remained slow due to ongoing inventory rebalancing and slower than expected demand recovery, which may last until the end of the year.

Emily Yang: [inaudible]

Emily Yang: In the industrial market, second quarter revenue represented 23% of total product, which was flat to the last quarter, but up on the dollar basis.

Emily Yang: Similar to the auto-market, the recovery remains slow due to ongoing inventory rebalancing and slower than expected demand recovery, which may last until the end of the year.

Emily Yang: While the overall demand is still soft, we are also seeing pockets of growth in areas like medical and aerospace, which are experiencing improving demand. Despite the market's softness, we continue to make progress and gain momentum across a number of products, including our silicon carbide products that are gaining traction in the power factor correction, energy storage system, heating, validation, air condition, as well as server power supply applications. Also in the industrial market are shocked and ratified products, aligning in the power products, while bipolar transistors are being designed into solar inverter applications.

Emily Yang: While the overall demand still south, we are also seeing parties of growing areas like medical and aerospace, which are experiencing improving demand.

Emily Yang: Despite the market softness, we continue to make progress and gain momentum across a number of products, including our silicon carbide products that are gaining traction in the power factor correction, energy storage system, heating, validation, air condition, as well as server power supply applications.

Emily Yang: Also in the industrial market are shocked and ratified products, aligning in the power products, while bipolar transistors are being designed into solar inverter applications.

Emily Yang: And our LDO saw solid demand for fans, power tools, and e-meter applications. We also secured a number of design wins for our contact image sensor product in automated optical inspection, printers, panels, printed circuit boards, and battery film inspection applications.

Emily Yang: and our LDO saw solid demand for fans, power tubes and emitter applications.

Emily Yang: We also secured a number of design wins for our contact image sensor product in the automated optical inspection, printers, panels, printed circuit board, and battery film inspection applications.

Emily Yang: In the computing market, revenue increased approximately 12% sequentially, with healthy channel inventory and signs of stronger backlog in Asia. A key highlight in the computing market is DIOS' growing content in the AI server area. As the AI data center volume continues to expand, we are excited to share that our PCI Express packet switch has been designed into Tier 1 AI data center projects, along with our PCI Express cloud buffers, less full translators, standard logic, as well as other discrete products that have started to ramp into production.

Emily Yang: In the computing market, revenue increased approximately 12% sequentially with healthy channel inventory and signs of stronger backlog in Asia.

Speaker Change: A key highlight in the computing market is style growing content in the AI software area.

Emily Yang: As the AI Data Center volume continues to expand, we are excited to share that our PCI Express packet switch has been designed into Tier 1 AI Data Center project.

Emily Yang: Along with our PCI express cloth buffers, let's fold translators, stand their logic, as well as other discrete products that started to ram into production.

Emily Yang: Recently, a Tier 1 EMS customer also named DIOS as one of the key suppliers supporting their AI ecosystem. Due to the record-high power requirement in AI data center applications, we also have additional content opportunities with our power MOSFETs and other discrete products that are being designed into power supply units, backup battery units, thermo DC fan, as well as DC DC bricks and high-graced switch capacitor units. Diodes Timing solutions, including crystal oscillators, PCI Express clock ICs, and power management solutions, are also seen in AI computing applications.

Emily Yang: Recently, a Tier 1 EMS customer also named Diodes as one of the key suppliers supporting their AI ecosystem.

Emily Yang: Due to the record increasing power requirement in the AI data center applications, we also have additional content opportunities with our power MOSFETs and other discrete products that are being designed into Power Supply Unit.

Emily Yang: Backup Battery Unit, Thermo DC Fan, as well as DC DC Bricks and Highbricks Switched Capacitor Unit.

Emily Yang: DIOS timing solutions, including crystal oscillators, PCI Express clock ICs, and power management solutions are also seeing traction in AI computing applications.

Emily Yang: As one of the industry's major suppliers of PCI Express Gen 5, Gen 6 clocks, Diode has been benefiting from the worldwide data center infrastructure built out. Our SSD switches and power switches both have solid demand from SSDs and HDD in the storage and data center applications. We are also seeing increased adoption of our HDMI re-drivers, USB crossbar moxes, and MIPI re-drivers for laptops, desktops, and PCs, while our linear re-drivers are being adopted for GPU cards and gaming notebooks.

Speaker Change: As one of the industry's major suppliers of PCI Express Gen 5, Gen 6 clocks, Dio has been benefiting from the World Wide Data Center infrastructure built out.

Emily Yang: Our SSD switches and power switches both have solid demand from SSD, HDD in the storage and in the data center applications.

Emily Yang: We are also seeing increased adoption of our HDMI re-drivers, USB crossbar moxes, and MIPI re-drivers for laptops, desktops, PCs, while our linear re-drivers are being adopted for GPU cards and gaming notebooks.

Emily Yang: Also in the computing market, our Sharkey Retrifier has been receiving strong demand from notebook adapters, Think-DC fans, and power applications, while our HiSearch TVS and ESC protection devices are winning designs in the DRAM modules. Turning to the communication market, on the enterprise side, due to slower than expected demand, the inventory depletion rate has been slow, and we expect this may last into the second half before returning to healthy levels. Within the smartphone market, even though inventory is clean, the recovery will likely be gradual over the coming quarters due to slower than expected demand.

Emily Yang: Also, in the computing market, our Shaqi ratifier has been receiving strong demand from Noble adapters, St. D. C. S. and Power applications, while our high-sert TVS and ESC protection devices are winning the science in the DRAM modules.

Emily Yang: Turning to communication markets, on the enterprise side, due to slower than expected demands, the immigration rate has been slow and we expect this may last into the second half before returning to the healthy levels.

Emily Yang: Within the smartphone market, even though inventory is clean, the recovery will likely be gradual over the coming quarters due to slower-than-expected demand.

Emily Yang: On the design wings in the communication market, our ultra-low jitter crystal oscillators are being designed into gigabit switches and optical modules for AI networking and data center applications. And DIOS protection devices are being adopted in the mobile phone application, while our low-voltage MOSFETs are also being designed into mobile phones for battery management applications.

Emily Yang: On the design wings in the communication market, our ultra-low jitter crystal oscillators are being designed into gigabit switches and optical modules for AI networking and data center applications. And DIOS protection devices are being adopted in the mobile phone application, while our low-voltage MOSFETs are also being designed into mobile phone for battery management applications.

Emily Yang: And lastly, in the consumer market, similar to the PC market, inventory is relatively clean. Although the overall demand in this market was not as strong as we expected, we anticipate some of the new designs will start to ramp up in the third quarter. In terms of design momentum, our adjustable current limits, power switches, and LED controllers saw solid demand in large screen TVs as well as USB HDMI applications in TVs and monitors. We also see solid traction for our boost converters in point of cell machines and ports of devices.

Emily Yang: And lastly, in the consumer market, similar to the PC market, inventory is relatively clean. Although the overall demand in this market was not as strong as we expected, we anticipate some of the new designs will start to ramp in the third quarter.

Emily Yang: In terms of design momentum, our adjustable current limits, power switches and LED controllers saw solid demand in the large screen TVs as well as USB HDMI applications in TVs and monitors. We also see in solid traction for our boost converters in point of cell machines and port of devices.

Emily Yang: Additionally, we are securing increasing design wins and ramping production of our LED and low-power PCI Express clock generators in sports cameras, smart watches, and home security cameras.

Emily Yang: In summary, as indicated by our comments today, we are encouraged by the science of improving demand, especially in Asia and in the 3C markets.

Speaker Change: Coming off the low point in the first quarter, we're guiding for continuous strengthening of demand into the third quarter, which at the midpoint of a rapid guidance represents over 8% growth and the highest sequential increase in the last 14 quarters for dials.

Emily Yang: And when combined with our strong design momentum across our end markets, we are well positioned for increasing growth and margin expansion as the global market recovers. With that, we now open the floor to questions, Operator. Thank you.

Emily Yang: And when combined with our strong design momentum across our end markets, we are well positioned for increasing growth and margin expansion as the global market recovers.

Emily Yang: With that, we now open the floor to questions, operator.

Speaker Change: Thank you. And ladies and gentlemen, at this time we will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone.

Speaker Change: If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And at this time, we'll pause momentarily for the first question.

Speaker Change: And our first question today will come from William Stein with True Securities. Please go ahead.

William Stein: Great, thanks so much for taking my question. Congrats on a good quarter, especially the above seasonal revenue guidance. And that's what I wanted to ask about. The sequentials that you're guiding to are, you know, as you highlighted, strongest in a while and certainly above typical seasonality. It sounds like either all of that or the majority of it is in the compute and data center AI applications. Is that the right way to interpret the guidance, or is the question, where is the better than seasonal guide or broad base?

William Stein: Thanks so much for taking my question. Congrats on the good quarter and especially the above seasonal revenue guidance.

William Stein: And that's what I wanted to ask about, the sequentials that you're guiding to are, you know, as you highlighted the strongest in a while and certainly above typical seasonality, it sounds like...

William Stein: either all of that or the majority of it is in...

William Stein: and Markets specifically for data center AI applications. Is that the right way to interpret the guidance or is the, or is the better than seasonal guide or broad base than that?

Emily Yang: Hi Will, this is Emily. Let me address the question. First of all, thank you. I think the 8% guidance is actually based on a couple areas we look at, right? So we did mention second quarter POS came in very strong, and we expect similar momentum into the third quarter as we look at the beginning of the backlog. We look at the book to bill ratio. I think you are right. The majority of the growth is driven by computing, especially in the AI server data center area with some of the design wins and the ramping of production.

Emily Yang: Hi, well, this is Emily. Let me address the question. First of all, thank you. I think that 8% guidance is actually based on a couple of areas we look at, right? So we did mention second-quarter POS, came in very strong. And we expect similar momentum into the third quarter. We look at the beginning of the backlog, we look at both to Bill Ratio. I think you are right, majority of the growth is driven by the computing, especially on the AI surfer data center area with some of the design wings and the ramping of the production. But at the same time, right? If you look at consumer, usually 3Q is a peak.

Emily Yang: But at the same time, right, if you look at consumer electronics, usually 3Q is the peak for consumers because of the holiday bill. And then if you look specifically under communication, the smartphone area, it also follows a similar pattern, right? So based on all these assumptions, that's the reason we actually came up with 8.2% guidance growth for the third quarter.

Emily Yang: for consumer, because the holiday deal, and then if you look

Emily Yang: Specifically, under communication, the smartphone area, it also follows a similar pattern, right? So based on all these assumptions, that's the reason we actually came up with the 8.2% guidance growth for the third quarter.

Emily Yang: And then a question about channel inventory. Can you maybe offer us a bit more detail in terms of what that level of inventory is currently and maybe where you expect it to be at the end of next quarter and how long before it's normalized and it's less of a, well, let's say, no longer a drag? Thank you.

Emily Yang: Thank you. And then a question about channel inventory. Can you maybe offer us a bit more detail in terms of...

Emily Yang: What that level of inventory is currently and maybe where you expect to be at the end of next quarter and how long before it's normalized and it's less of a, well, let's say no longer a drag.

Emily Yang: Yeah, definitely. So I mentioned, first of all, we have strong POS growth, and we also have a decrease in terms of channel inventory. And, you know, it's still higher than our defined normal range of 11 to 14 weeks. So we definitely want to continue to focus on POS growth for the third quarter and continue to drive the channel inventory down to the normal level. It is a little bit hard to estimate the timeframe.

Speaker Change: Leanne Sievers, Emily Yang, Emily Yang

Emily Yang: Thank you. Yeah, definitely. So I mentioned, right, first of all, we have a strong POS growth, and we also have a decrease in terms of channel inventory.

Emily Yang: And, you know, it's still higher than our defined normal range of 11 to 14 weeks.

Emily Yang: So we actually definitely want to continue to focus the purest world.

Emily Yang: for the third quarter and continue to drive the channel inventory down to the normal level. It is a little bit hard to estimate the timeframe, but on the other hand, just assume the inventory dollar is the same amount.

Emily Yang: But on the other hand, just assume the inventory dollar is the same amount. As soon as the POS starts growing, the channel inventory weeks will change or decrease significantly, right? So that's really where our focus is. At the same time, because of the dynamic market situation, we also start seeing a lot more urgent orders or short lead time orders, right? And in order for us to better serve our customers, we also feel like a little bit higher channel inventory or internal inventory actually better positions us and gives us the flexibility to gain this kind of quick order and market share.

Emily Yang: As soon as the PUS start growing, the Channel Inventory Weeks will change or decrease significantly So that's really where our focus, at the same time, because of dynamic market situation, we also start seeing a lot more urgent older or shortly-time others, right? And in order for us to better surf our customer, we also feel like a little bit higher Channel Inventory or Internal Inventory, actually better position us, and giving us the flexibility to gain this kind of quick order and market share

Emily Yang: The expedited course.

Speaker Change: the expedite expedited worse.

Emily Yang: Sorry, you said expertise. Yes, we are seeing a lot of expertise, two aims of the order, and also very short time orders or urgent orders from customers more now than before, right? So we view that as also a very positive indicator of the market turning around.

Emily Yang: I'm sorry, so you said expertise? Yes, we start seeing a lot of expertise, pull-ins of the orders and also a very short lead time orders or urgent orders from customer more now than before, right? So we view that as also a very positive indicator of the market turning around.

David Williams: And our next question will come from David Williams with Benchmark. Please go ahead.

Speaker Change: and our next question will come from David Williams with Benchmark. Please go ahead.

David Williams: Hey, good afternoon. Thanks for letting me ask the question, and congratulations on the execution and the growth here. It's good to see that you like it. Thank you. I guess maybe, yeah, maybe first, Emily, it's just kind of thinking about the strengths that you're pointing to in the AI server, particularly in Asia. Do you get a sense that we're seeing any, maybe, orders that are stockpiling ahead of other restrictions that may come down later this year, or do you feel like you are shipping maybe to in-consumption for, for consumption that's happening more near-term and not something that's just being built? Yeah,

David Williams: Hey, good afternoon. Thanks for letting me ask the question and congrats on the execution and the growth here. It's good to see that return and the strength there.

Speaker Change: Thank you. I guess we'll be.

David Williams: Yeah, I mean, first, Emily, it's just kind of thinking about the strength that you're pointing to in AI Server, particularly in Asia. Do you get a sense that we're seeing any maybe orders that are stockpiling ahead of other restrictions that may come down later on this year? Or do you feel like you are shipping maybe to in-consumption for for consumption that's happening more near-term and not something for this just being built?

Emily Yang: Yeah, David, we actually work with the customer very closely, and we manage closely with their actual forecast, right? So we believe this is actually an actual real bill instead of, you know, an advance bill or stuff like that.

Emily Yang: Yeah, so David, we actually work with the customer very closely.

Emily Yang: And we manage closely with their actual forecast, right? So we believe this is actually an actual real bill instead of a, you know, events bill or stuff like that. So, you know, we also have the forecast more than just...

Emily Yang: So, you know, we also have the forecast for more than just this month and next month. The forecast is extended to next year, so we do see good momentum. This is just the beginning of the REM, so we're actually pretty confident that this will continue.

Emily Yang: This month, next month, the forecast extended to next year, so we do see a good momentum. This is just the beginning of the REM, so we are actually pretty confident that this will continue.

Emily Yang: Great. And then maybe just on the computing side, if you kind of look across the demand trends you're seeing there, obviously, the AI server is doing well. But if you kind of think about your AI, or excuse me, your server versus client-side mix, how do you think about that? And then maybe, as well, if you think about growth, not just this, you know, in the coming quarter, but longer term, how do you see those two performing over the next several quarters? Yes, I think overall, right, AI services...

Emily Yang: Great. And then maybe just on the computing side, if you kind of look across the demand trends you're seeing there, obviously AI server is doing well, but if you kind of think about your AI, or excuse me, your server versus client-side mix, how do you think about that? And then maybe as well, if you think about growth, not just this, you know, in the coming quarter, but the longer term, how do you see those two performing over the next several quarters? Thank you.

Speaker Change: Yu, Leanne Sievers,

Emily Yang: I'm...

Speaker Change: Yes, I think overall, right, AI surfer or data center ramp up the volume definitely faster than the regular surfer, right? I think even with a regular surfer, we see a lot of stability, and it's going to be a slower ramp, but taking into account that inventory is really clean, so any of the improved from the demand is going to drive additional momentum of the orders and the backlog and the revenues, right? So overall, AI surfer is still a very small percentage amount of the overall surfer market, right? And we also see the continuous of increasing the percentage overall. So I think the next big one will be more in...

Speaker Change: to the Edge AI area, and that would definitely continue to drive a lot more momentum as well as a faster refresh of the generation. So that's really what we are counting on.

Operator: In our next question...

Speaker Change: Thank you again.

Speaker Change: And our next question will come from Matt Ramsey with TD Cowan. Please go ahead.

Matthew Ramsay: Thank you very much. Good afternoon, Emily Knuth.

Emily Knuth: Thank you very much. Good afternoon.

Matthew Ramsay: I couldn't have three sentences on an earnings call this day without talking about AI, so I'll go ahead and clock that again. I wonder if you could spend a little bit of time on it; it's kind of one thing to emphasize. Maybe unit dynamics and demand dynamics for AI servers. But I wonder if you might be able to be a little bit more granular and talk about content. Just what is that? If one or two server makers are ODMs, or is it much broader than that across the board?

Speaker Change: Emily Naka Smith

Matthew Ramsay: We can't have three sentences on an earnings call this day without talking about AI, so I'll double-click on that again. I wonder if you could spend a little bit of time, it's kind of one thing to emphasize.

Matthew Ramsay: They'd be unit dynamics and demand dynamics for AI servers, but I wonder if you might be able to be a little bit more granular and talk about content just what is this.

Speaker Change: AI server content with.

Matthew Ramsay: Maybe you could give us a little bit of an idea of the specific components that you're selling. And if you think about at the server level, what kind of dollar content are we talking about in the ballpark? Like, just anything to sort of calibrate investor expectations because when folks hear AI server wins, they can let their imaginations do a lot of different things. And I just wanted to be a little bit more precise there, if we could. Thank you.

Matthew Ramsay: One or two server makers or ODMs or is it much broader than that across the board? Maybe you could give us a little bit of an idea of the specific components that you're selling in and if you think about

Matthew Ramsay: At the server level, what kind of dollar content are we talking about ballpark? Just anything to sort of calibrate investor expectations, because when folks hear AI server wins, they can let their imaginations do a lot of different things, and I just wanted to be a little bit more precise there if we could. Thank you.

Emily Yang: Yes, definitely, right? We're a component, right? So, we definitely support the, you know, the, I would say, complementary chips surrounding the main chipsets and the memory modules and stuff like that. So, you know, I did mention a little bit earlier that we are really, really excited, especially for a key wing that is actually on the PCI Express bus, which we call the packet switch. Some of the other competitors just call them PCI Express switches. So, this is actually, you know, with the function of expanding additional PCI Express ports. So, this is really exciting. It's actually definitely a new, you know, momentum that we didn't see before.

Emily Yang: Yes, definitely, right, we're a component, right, so we definitely support the, you know, the, I would say complementary chips surrounding the main chipsets and the memory modules and stuff like that. So, you know, I did mention a little bit earlier, we are really, really excited, especially for a key wing that is actually on the PCI Express, we call the Packet Switch, some of the other competitors just call the PCI.

Emily Yang: Express switches. So this is actually, you know, with a function to expanding additional PCI Express ports.

Emily Yang: So this is really exciting. It's actually definitely a new, you know, momentum that we didn't see before. And so this is definitely more on the content expansion, right? So on top of the PCI Express package switch, we're also seeing like our PCI Express clock, clock generators and buffers, crystal oscillators. And there's a wide range of different discrete products being used, right? And this is not just on the GPU card or the main board. This is actually beyond. It can be a power supply unit.

Emily Yang: And so, this is definitely more content expansion, right? So, on top of the PCI Express packet switch, we're also seeing, like, our PCI Express clock, clock generators and buffers, crystal oscillators, and there's a wide range of different discrete products being used, right? And this is not just on the GPU card or the main board. This is actually beyond. It can be a power supply unit supporting the AI servers. It can be a backup battery unit, thermal DC fans, or even a DC-DC brick.

Emily Yang: supporting the AI surfers. It can be a backup battery unit, thermal DC fans, or even a DC-DC brick, you know, so this is really expanding more just on one board. I think that's really exciting, right? So like I said, right, overall AI surfers or data center, still a small percentage overall, but we do expect the percentage will continue to ramp and, you know, when the GPU supply continue to improve, right, we actually start getting a lot of momentum on the inquiry as well as the design-ins and design-wins, and all this will be ramping next year. So, you know, like I said, this is the initial, you know, traction.

Emily Yang: So this is really expanding more on just one board. I think that's really exciting. So like I said, overall, AI servers or data centers, still a small percentage overall, but we do expect the percentage will continue to rise. And when the GPU supply continues to improve, we actually start getting a lot of momentum on the inquiry as well as the design-ins and design-wins. And all of this will be ramping up next year. So, like I said, this is the initial traction that we've seen, and we do expect this to continue to expand.

Emily Yang: that we've seen, and we do expect this will continue to expand.

Matthew Ramsay: Thank you for that additional color. I guess as my follow-up question for the team, I'd like to dig in a little bit to gross margin, which obviously has had an obviously period where the cyclicality of the industry has been pretty violent over the last, I don't know, 36 months. We went way up, and then we went way down, and now we're coming back out, which is great to see. Has anything changed at all with some sort of rules of thumb about ways to model gross margin as revenue continues to recover for the company? Any newer, different variables there? Any comments on utilization? I just want to make sure we're understanding how the margin impact will be as the company grows forward from the recovery.

Matthew Ramsay: Thank you for that additional color. I guess as my follow-up question for the team, I'd like to dig in a little bit to gross margin.

Matthew Ramsay: had obviously a period where the cyclicality of the industry has been pretty violent over the last, I don't know, 36 months. We went way up, and then we went way down, and now we're coming back out, which is great to see. And maybe you could...

Matthew Ramsay: Has there anything changed at all with rules of thumb about ways to model gross margin

Matthew Ramsay: Recover for the company, any newer, different variables there, any comments on utilization. Just want to make sure we're understanding how the margin impact will be as the company grows forward from the recovery here.

Brett Whitmire: Yeah, Matt. Hey, this is Brett.

Brett Whitmire: Oh, yeah, Matt, hey, this is Brett. Make a few comments. I think Gary may follow up on it. I think that some of the principal things we've used in the past still definitely apply. The biggest knob that clearly is a part of what we're driving is the mix of our product and the influence that has on margin. And I think something to point to that you see is that we've kind of reiterated foundationally we've gotten and provided stability to this over 40% this auto and industrial.

Brett Whitmire: I make a few comments. I think Gary may follow up on that. I think that some of the principles things we've used in the past still definitely apply. The biggest knob that clearly is a part of what we're driving is the mix of our product and the influence that that has on margin. And I think something to point to that you see is that we've kind of reiterated, foundationally, we've gotten and provided stability to this over 40%, this auto and industrial.

Brett Whitmire: But if you look back a year ago, you know, that percentage was probably 6 or 7% higher than we are today. And that's kind of understandable given we're still kind of going through that auto industry correction. And we're actually quite pleased that in the midst of that.

Brett Whitmire: But if you look back a year ago, that percentage was probably 6 or 7 percent higher than we are today, and kind of understandable given we're still kind of going through that auto industrial correction, and we're actually quite pleased that in the midst of that,

Brett Whitmire: We've been able to maintain that above 40%, and as we go forward, what our expectation is is that there will be multiple tailwinds that would support our margin improving over time.

Brett Whitmire: We've been able to maintain that above 40% and as we go forward what our expectation is is that there'd be multiple tailwinds that would support our

Brett Whitmire: You'll have the mix of auto and industrial that continues to maintain and grow. The regions that drive a lot of that will continue to strengthen. We're continuing to see the correction and the strength that's particularly in Asia today.

Brett Whitmire: Margin improving over time you'd have the mix of auto and industrial that that continues to maintain and grow

Brett Whitmire: You know, the regions that, you know, drive a lot of that will continue to strengthen. You know, we're continuing to see the correction and the strength that's particularly in Asia today. I think we'll see that more broadly as we go forward. We also will see that overall demands and the volumes that we're driving be able to increase that will improve our utilization.

Brett Whitmire: I think we'll see that more broadly as we go forward. We will also see that overall demands and the volumes that we're driving will be able to increase, which will improve our utilization. We're also making a lot of progress in getting a more broad portfolio of things qualified in some of the factories that we've bought over the last four or five years, particularly pointing to our SPFAB and our GFAB, which is really to get flexibility across our hybrid model, across our analog portfolio, and our discrete portfolio.

Brett Whitmire: And we're also making a lot of progress in getting a more broad portfolio of things qualified in some of the factories that we've bought over the last four or five years, particularly pointing to our SPFAB and our GFAB, which is really to get flexibility across our hybrid model, across our analog portfolio and our discrete portfolio. And I think each of those elements has a...

Operator: Thank you, and ladies and gentlemen, at this time, we will now begin the question and answer session. To ask a question, you may press star then one when you touch your toe and foot. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And at this time, we will pause momentarily for the first question, and our first question today will come from William Stein with Tristan Gerra. Please go ahead.

Brett Whitmire: I think each of those elements has a fairly significant impact on firing on all cylinders and continuing to drive growth as we march back to our business model in total. So Gary, do you want to follow that? Yes.

Gary Yu: fairly significant impact.

Gary Yu: to fire in on all cylinders and continuing to drive growth as we march back to our business model in total. So Gary, you want to follow that? Yes, actually, I think Brett bring a very good point here as an attribute for the automotive and this real, you know, I think we're kind of driving a lot of what a content increasing those two areas.

Gary Yu: Actually, you know, I think Brett brings a very good point here as we refer to automotive and industrial. You know, I think we're kind of driving a lot for content increase in those two areas. And we released a lot of new products, you know, quarter by quarter in those two areas, which could increase our content, you know, in the near future. I'm very confident about that. Okay, the second one here is for the loading.

Gary Yu: And we released a lot of new products, you know, quarter by quarter in those two areas which can increase our content, you know, in the nearly future. I'm very confident on that.

Gary Yu: As Brett mentioned about it, it's all about process, and product porting from external foundry is what we're driving for a couple of quarters already. And so far, the qualification progress is going very well, and we have achieved several key milestones. Okay, so we do serial product and also qualify several key customer sites, and we're starting to receive EPO in a short time. So I've got pretty good confidence in the load for those two major wafer fairs in the future.

Gary Yu: Okay, the second here is for the loading. As I've mentioned about it, it's all on process and product reporting functional fungry is what we're driving for a couple quarters already.

Gary Yu: The sole product qualification progress is very well, and cheap several key milestones. Okay, so we do see your product and also qualifying several key customer side, and we're starting to re-sing if you're on your time. So I've got a pretty good confidence on loading for those two major wifers in the future.

Speaker Change: Thank you very much for all the detail, Guy. I really appreciate it. Thanks.

Operator: And once again, if you would like to ask a question, please press star then one. Our next question will come from Tristan Gerra with Baird. Please go ahead.

Speaker Change: And once again, if you would like to ask a question, please press star then 1. Our next question will come from Tristan Gerra with Baird. Please go ahead.

Tristan Gerra: Hi, good afternoon. So for Q3, you talked about AI content and PC demand, and PC demand, notably in Asia. You also talked about consumers potentially picking, and part of that is seasonality. How do you see the overall demand environment in China? There's been some companies this week talking about incremental weakness in the Chinese automotive market. Are you seeing those trends, and what are the kind of divergent trends that you see in Asia currently from an end-to-end standpoint for this coming quarter?

Tristan Gerra: Hi, good afternoon. So for Q3, you've talked about...

Speaker Change: content and PC demand. In PC demand notably in Asia you also talked about consumer potentially picking and part of that is seasonality.

Tristan Gerra: How do you see the overall demand environment in China? There's been some companies this week, you know, talking about incremental weakness in the automotive China market, are you seeing those trends and what are kind of the divergent trends that you see in Asia currently from an end of an end of an end-to-end point for this coming quarter?

Emily Yang: Hi Tristan, this is Emily. So let me address this question, right? In Asia, in China specifically, we continue to focus on content expansion, especially on the auto industrial side, right? So overall, demand is a little bit soft, especially in the 3C area from the end consumer consumption point of view, but we're also seeing some improvement as well. So I would say, all in all, right? We actually view China as still a really good potential territory for us, and we actually are looking at the customer. They really look at something called cost performance value, CP value.

Emily Yang: Hi, Tristan. This is Emily. So let me address this question, right? In Asia, in China, specifically, we continue to focus on content expansion, especially on the auto-industrial site as well, right? So overall, the demand is a little bit soft, especially on the three sea area from the end consumer, consumption point of view, but we also see some improved as well. So I would say all right, we actually view China still a really good potential territory for us, and that we actually looking at the customer, they really look at it's called...

Emily Yang: As long as Diodes continues to focus on driving the technology and introducing new products focused on features and functions, you know, walking away from a lot of deep commodity products, which we see most of the competition from the local suppliers, we still see there's a really strong and positive path for Diodes overall to be successful in China and also in Asia overall.

Emily Yang: cost performance value, CP value. As long as Diodes continue to focus on driving the technology and introducing new products, focus on features and functions, you know, walking away from a lot of deep commodity product, which we see most of the competition from the local suppliers, we still see there's a really strong and positive path for Diodes overall to be successful in China and also in Asia overall.

Gary Yu: Okay, that's great. And then in the past, I think it's fair to say that most of the M&A that you've done was centered around increasing capacity, and I'm assuming that it's probably not on the table even for next year. Are there any technologies where you feel that could be incremental from a mixed standpoint, and how should we be looking at your M&A strategy over the medium term?

Gary Yu: Okay, that's great. And then in the past, I think it's fair to say that most of the

Gary Yu: The M&A that you've done was centered around

Speaker Change: Increasing your capacity and the assuming that it's probably...

Gary Yu: not on the table even for next year. Are there any technologies where you feel that could be incremental from a mixed standpoint and how should we be looking at your M&A strategy over all medium term?

Gary Yu: Well, actually, no. Hi Tristan, this is Gary again. Nice to talk to you.

Gary Yu: So, basically, as you know, there are two wafer fads we acquired in the past couple years. One is the G-Fad in Scotland, and the other one is the P-Fad in the U.S. And basically, we identify our G-Fad as our discrete wafer fad, and as well as the S-P-Fad as our analog wafer fad. So, we have quite a few technologies, like split-plate battery fads and a change modes fad, kind of porting from our external wafer foundry into this wafer fab in Scotland, and also a very advanced kind of analog process foundry as well, externally, and porting internally into the fab in South Portland.

Gary Yu: Well, actually, no. Hi, Tristan, this is Gary again. Nice to talk to you.

Gary Yu: So basically, you know, as you know, there's two wafer fads we acquired in the past couple of years. One is the G-Fad in Scotland, the other one is P-Fad in the U.S.

Gary Yu: And basically, we identify our GFAT as our discrete wafer fat and as well as SPFAT as our analog wafer fat. So we got quite a few technology like split plate battery fat and change modes fat kind of porting from our external wafer foundry into this wafer fat in Scotland and also very advanced kind of analog process from the foundry as well externally and porting internally into the fat in South Portland. So I would say that those two kind of big project probably will be the most important project in BIOS, try to make sure the technology and process wise and we can cap that internally.

Gary Yu: So, I would say that those two kind of big projects probably will be the most important projects in BIOS, trying to make sure the technology and process-wise, and we can cap that internally. At the same time, our design team also developed a newer process and a product within these two wafer fads instead of just a porting process.

Gary Yu: At the same time, our design team also developed a newer process and a product within this to wafer, those two wafer fab, okay, instead of just a porting process.

Brett Whitmire: Well, and I think, Tristan, to add to that, in terms of the M&A that you would most likely see us looking at would be things that would help enable the top line and be complementary to the manufacturing footprint we can provide. And so I think over the past, we've had a combination of organic and acquisition-related growth. That activity of Gary and Dr. Liu continues, and we are actively continuing to look in that area. Yeah.

Brett Whitmire: Well, I think, Tristan, to add to that...

Brett Whitmire: In terms of the M&A that you would most likely see us looking at would be things that would help enable top line and be complementary to the manufacturing footprint we can provide. And so I think over the past we've had a combination of organic and acquisition related growth. That activity of Gary and Dr. Liu continues and we actively are continuing to look in that area.

Gary Yu: Yeah, actually, you know, um, we are very, very careful about us setting the right target for the MMA. And now, we're not only looking for the size but also looking for any synergy, you know, it can help that you think thoughts before more gross revenue and the GP person wise, like that. So definitely, we're looking for that.

Tristan Gerra: Great. Thank you very much.

Tristan Gerra: Yeah, actually, you know, we are very, very careful about the right target for the MMA. And we're not only looking for the size, we're also looking for any synergy, you know, to kind of help that, you know, Diodes to be more, more gross revenue and the GP percent wise like that. So, definitely, we're looking forward to that.

Gary Yu: and they will conclude our question and answer session. I'd like to turn the conference back over to Gary Yu for any closing remarks.

Gary Yu: Great. Thank you very much.

Speaker Change: And if we'll conclude our question today at the session, I'd like to turn the conference back over to Gary Yu for any closing remarks.

Operator: 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.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect your lines at this time.

Operator: Well, 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.

Operator: The conference is now concluded. Thank you for attending today's presentation and you may now disconnect your lines at this time.

Gary Yu: Thank you very much for all the details, guys. I really appreciate it.

Emily Yang: Yes, I think, overall, A.I. Surfer, or data sent her to rent up the volume that's only faster than the regular surfer, right? I think even with the regular surfer, we see a lot of stability, and it's going to be a slower rent, but taking into account that inventory is really clean. So any improvement from the demand is going to drive additional momentum of the orders in the back loss and the revenues, right? So overall, A.I. Surfer feels like a very small percentage amount of the overall surfer market, right?

Emily Yang: Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information and gap and non-gap terms, including the company's press release or definitions and recommendations of gap to non-gap 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 gap net income.

Emily Yang: Additionally, we are securing increasing design wings and ramping production of our LED and low power PCI Express clock generators in sports cameras, smart watches, and home security cameras. In summary, as indicated by our comments today, we are encouraged by the signs of improving demand, especially in Asia and in the 3C markets. Coming off the low point in the first quarter, we are guiding for continuous strengthening of demand into the third quarter, which at the midpoint of our revenue guidance represents over 8% growth and the highest sequential increase in the last 14 quarters for Diodes.

Emily Yang: And we also see the continuous loss increasing the percentage overall. So I think the next fake one would be more into the A.I. area, and that would definitely continue to drive a lot more momentum as well as a faster refresh of the generation. So that's really what we are counting on.