Earnings call transcript: Diodes Q3 2025 reports mixed results, stock gains

Diodes Incorporated reported its third-quarter earnings for 2025, revealing a mixed financial performance. The company missed its earnings per share (EPS) forecast slightly, reporting $0.37 against an expected $0.39. However, it exceeded revenue expectations with $392.2 million, compared to the forecast of $392.13 million. Despite the slight EPS miss, Diodes' stock saw a 1.6% increase in after-hours trading, closing at $53.23.

Key Takeaways

• Diodes missed EPS expectations but slightly surpassed revenue forecasts.
• The company introduced 180 new part numbers, focusing on AI and automotive markets.
• Inventory management improved with a reduction in inventory days and finished goods.
• Diodes anticipates a 12% full-year growth with improved gross margins.
• The stock rose 1.6% in after-hours trading, reflecting positive market sentiment.

Company Performance

Diodes Incorporated reported a robust performance in Q3 2025, with revenue reaching $392.2 million, marking a 12% year-over-year increase and a 7.1% rise from the previous quarter. The company continues to gain market share in the automotive sector and strengthen its position in AI computing applications. Efforts to expand product offerings in industrial markets have also been noted.

Financial Highlights

• Revenue: $392.2 million, up 12% YoY and 7.1% QoQ
• Gross Profit: $120.5 million, representing 30.7% of revenue
• GAAP Net Income: $14.3 million, $0.31 per diluted share
• Non-GAAP Adjusted Net Income: $17.2 million, $0.37 per diluted share
• Cash Flow from Operations: $79.1 million
• Free Cash Flow: $62.8 million, $1.35 per share

Earnings vs. Forecast

Diodes reported an EPS of $0.37, slightly below the forecast of $0.39, resulting in a negative surprise of 5.13%. Revenue, however, came in at $392.2 million, marginally above expectations. The EPS miss is relatively minor compared to previous quarters, suggesting stable performance.

Market Reaction

Following the earnings announcement, Diodes' stock experienced a 1.6% increase in after-hours trading, closing at $53.23. This positive reaction reflects investor confidence in the company's strategic initiatives and future growth prospects, despite the slight EPS miss. The stock remains within its 52-week range of $32.93 to $67.4.

Outlook & Guidance

Looking ahead, Diodes forecasts Q4 2025 revenue at approximately $380 million, with a potential variation of 3%. The company anticipates a 12% full-year growth and improved gross margins through product mix optimization, manufacturing efficiency, and increased factory loading. Diodes projects 2026 as another growth year with double-digit revenue increases.

Executive Commentary

Gary Yu, President and CEO, expressed optimism about the company's future, stating, "We do believe that year 2026 will be another good year for Diodes." Emily Yang, SVP of Worldwide Sales and Marketing, highlighted the importance of AI across various segments, noting, "AI is not just in the computer segments. We also see AI related in the industrial power supply."

Risks and Challenges

• Potential supply chain disruptions could impact production and delivery.
• Market saturation in key segments like automotive and computing may limit growth.
• Macroeconomic pressures, including inflation and interest rate changes, could affect consumer spending.
• Increased competition in AI and industrial markets may challenge market share.
• Regulatory changes and tariffs could influence operational costs and pricing strategies.

Q&A

During the earnings call, analysts inquired about Diodes' strategies for navigating tariffs and the company's focus on AI and automotive/industrial segments as growth drivers. Executives emphasized ongoing product qualification efforts and the importance of maintaining R&D investments to support future growth.

Full transcript - Diodes Incorporated (DIOD) Q3 2025:

Conference Call Moderator: Good afternoon and welcome to Diodes Incorporated's third quarter 2025 financial results conference call. At this time, all participants are in a listen-only mode, and at the conclusion of today's conference call, instructions will be shared 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 an operator will assist you. As a reminder, this conference is being recorded today, Thursday, November 6, 2025. I'd now like to turn the call over to Leanne Sievers of the Shelton Group Investor Relations. Leanne, please go ahead.

Leanne Sievers, President of Shelton Group, Investor Relations, Shelton Group: Good afternoon and welcome to Diodes third quarter 2025 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes Investor Relations firm. Joining us today are Diodes President and CEO Gary Yu, CFO Brett Whitmire, Senior Vice President of worldwide sales and marketing Emily Yang, and Vice President of marketing and investor relations for Meet 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 10Q for its quarter ended September 30, 2025. In addition, management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions.

Therefore, the company claims the protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission, including forms 10K and 10Q. In addition, any projections as to the company's future performance represent management's estimates as of today, November 6th, 2025. Diodes assumes no obligation to update these projections in the future, as market conditions may or may not change, except to the extent required by applicable law. Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms.

Included in the company's press release are definitions and reconciliations of GAAP to non-GAAP items, which provide additional details. Also, throughout the company's press release and management statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days in the investor relations section of Diodes' website at www.diodes.com. I will now turn the call over to Diodes President and CEO Gary Yu. Gary, please go ahead.

Conference Call Moderator: Welcome everyone, and thank you for joining us on today's conference call. As announced in our press release earlier today, revenue in the quarter increased 7% sequentially and 12% year over year, driven by strong demand across the general computing market, including for AI-related server applications as well as data center and edge computing. Our global point of sales increased the strongest in Asia, followed by North America. Additionally, our channel inventory is at a healthy level, decreasing again this quarter in terms of dollars and weeks, with overall inventory dollars decreasing over 25% from peak levels. Even though the rate of recovery in the automotive and industrial market continues to be slower than expected, revenue increased both sequentially and year over year in both of these end markets.

When coupled with the computing market growing the strongest along with the consumer also increasing sequentially, product mix unfavorably weighted on the gross margin during the quarter. Future margin expansion will be driven by ongoing improvement in the product mix, as the pace of recovery accelerates in our higher margin automotive and industrial end markets, combined with increased new product introductions in our target markets, as well as improved loading across our manufacturing facilities. At the midpoint of fourth quarter guidance, we expect to achieve approximately 12% growth for the full year. Looking forward, we are gaining increasing confidence in broader demand improvement in the automotive and industrial market. Diodes is gaining increasing market share in the automotive market, with new programs scheduled to launch early next year, combined with increasing content in industrial applications like AI robotics, power management, medical, and factory automation.

With that, let me now turn the call over to Brett to discuss our third quarter 2025 financial results, as well as our fourth quarter guidance in more detail.

Brett Whitmire, CFO, Diodes Incorporated: Thanks, Gary, and good afternoon, everyone. Revenue for the third quarter 2025 was $392.2 million, an increase of 12% over $350.1 million in the third quarter 2024. A 7.1% increase over $366.2 million in the second quarter 2025. Gross profit for the third quarter was $120.5 million, or 30.7% of revenue, compared to $118 million, or 33.7% of revenue in the prior year quarter, and $115.3 million, or 31.5% of revenue in the prior quarter. GAAP operating expenses for the third quarter were $108.9 million, or 27.8% of revenue, and on a non-GAAP basis were $103.1 million, or 26.3% of revenue, which excludes $5.9 million amortization of acquisition-related intangible asset cost. This compares to GAAP operating expenses in the third quarter 2024 of $96.1 million, or 27.5% of revenue, and $105.9 million, or 28.9% of revenue in the prior quarter.

Non-GAAP operating expenses in the prior quarter were $99.8 million, or 27.3% of revenue. Total other income amounted to approximately $7.5 million for the quarter, consisting of $8.5 million of interest income, $2.4 million in unrealized gains from investments, $0.4 million in other income, $3.3 million in foreign currency losses, and $0.5 million in interest expense. Income before taxes and non-controlling interest in the third quarter 2025 was $19 million, compared to income of $18.8 million in the prior year period and $53.2 million in the previous quarter. Turning to income taxes, our effective income tax rate for the third quarter was approximately 18.7%. We continue to expect the tax rate for the full year to be approximately 18%, plus or minus 3%.

GAAP net income for the third quarter was $14.3 million, or $0.31 per diluted share, compared to net income of $13.7 million, or $0.30 per diluted share in the prior year quarter, and net income of $46.1 million, or $0.99 per diluted share last quarter. The share count used to compute GAAP income per share for the third quarter of 2025 was 46.4 million shares. Non-GAAP adjusted net income in the third quarter was $17.2 million, or $0.37 per diluted share, which excluded net of tax $4.8 million of acquisition-related intangible asset cost and $1.9 million of unrealized gain on investments. This compares to non-GAAP adjusted net income of $20.1 million, or $0.43 per diluted share in the third quarter of 2024, and $15 million, or $0.32 per diluted share in the prior quarter.

Excluding non-cash share-based compensation expense of $5.4 million for the third quarter net of tax, both GAAP net income and non-GAAP adjusted net income would have increased by $0.12 per share. EBITDA for the third quarter was $46.6 million, or 11.9% of revenue, compared to $46.9 million, or 13.4% of revenue in the prior year period, and $84.5 million, or 23.1% 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 $79.1 million for the third quarter. Free cash flow was $62.8 million, which included $16.3 million of capital expenditures. Net cash flow was a positive $59.3 million.

Free cash flow per share was $1.35 per quarter and $4.02 per share for the trailing 12 months, approaching the historical high of $4.34 per share in 2021. Turning to the balance sheet, at the end of third quarter, cash, cash equivalents, restricted cash, plus short-term investments totaled approximately $392 million. Working capital was approximately $890 million and total debt, including long-term and short-term, was approximately $58 million. In terms of inventory, at the end of the third quarter, total inventory days were approximately 162, as compared to 173 last quarter, down approximately 11 days sequentially. Finished goods inventory days were 62, a decrease of 9 days from the 71 days last quarter.

Total inventory dollars decreased $11.8 million from the prior quarter to $470.9 million, consisting of a $17.3 million decrease in finished goods and a $1 million decrease in work in process and a $6.5 million increase in raw materials. Capital expenditures on a cash basis were $16.3 million for the third quarter, or 4.2% of revenue, which was below our targeted annualized range of 5%-9% of revenue. Now turning to our outlook. For the fourth quarter of 2025, we expect revenue to be approximately $380 million, plus or minus 3%. At the midpoint, this is better than typical seasonality from third quarter and represents a 12% increase over the prior year period and will be the fifth consecutive quarter of year-over-year growth. GAAP gross margin is expected to be 31%, 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% of revenue, plus or minus 1%. We expect net interest income to be approximately $1 million. Our income tax rate is expected to be 18.5%, plus or minus 3%, and shares used to calculate EPS for the fourth quarter are anticipated to be approximately 46.4 million shares. Not included in these non-GAAP estimates is amortization of $4.8 million after tax for previous acquisitions. With that said, I now turn the call over to Emily Yang.

Emily Yang, Senior Vice President of Worldwide Sales and Marketing, Diodes Incorporated: Thank you, Brett, and good afternoon. Revenue in the third quarter was up 7.1% sequentially and at the midpoint of our guidance, mainly driven by strong demand in Asia, especially in Taiwan for the AI computing applications. Our global point of sales increased in Asia, followed by North America, and our channel inventory decreased both in dollars and in weeks. During the quarter, we continue to drive our new product initiative with approximately 180 new part numbers, of which 60 were for automotive applications. Looking at the global sales in the third quarter, Asia represented 78% of the revenue, Europe 12%, and North America 10%. In terms of our end markets, industrial was 22% of Diodes' product revenue, automotive 19%, computing 28%, consumer 18%, and communications 13% of the product revenue. Our automotive industrial revenue combined was 41%, which was one percentage point lower compared to the last quarter.

Even though automotive industrial revenue increased quarter over quarter, the computing end market experienced stronger growth than the 7% of the company average for the quarter, and the industrial market grew at a lower rate than the average. Now let me review the end markets in greater detail. Starting with automotive, revenue in the quarter grew 8.5% sequentially and 18.5% in the first three quarters over last year, even though as a percentage of the total product revenue was flat to the last quarter due to the growth in the other markets. The revenue increase during the quarter served as further evidence that the inventory situation continued to improve, even though the overall demand remained dynamic and the pace of recovery is slower than expected. The other positive news is that we are starting to see more new programs scheduled to run early next year.

Our controllers and MOSFET combination from the low-voltage MOSFET product line has established a strong presence in the automotive DC source applications. Our newly released 50A 650V automotive-grade silicon carbide Schottky Barrier diodes are specifically seeing traction in energy storage systems, and our small SINO bipolar junction transistors devices packaged in DFN are proving to be valuable for general-purpose SINO switching, offering flexibility and compactness for various electronic designs. Additionally, our latest NPN and PNP bipolar junction transistor products feature industry-leading low-saturated voltage, making them ideal for a range of automotive applications. These products are ideally suited for voltage regulation, DC-DC converters, motors, as well as LED lighting, engine control units, power management, and linear controllers. Diodes' TVS products are being designed into battery management system applications, providing robust surge and over-voltage protection for reliable automotive battery performance.

In addition to our TVS products, our switching diodes, Zener diodes, and SBR products have design wins in autonomous driving, telematics, and infotainment applications. Our USB 2.0 linear booster devices are being adopted for in-car charging solutions and other compact electronics, enabling stable signal transmission in long-cable environments. We have also seen strong demand for our low-quiescent current LDO operating at 40-60V, driven by increased production of MCU power supply systems. Our automotive Hall effect sensors, including latch and OmniPolar switch variants, have experienced double-digit growth, driven by new design wins in the C motors, window and tailgate lifters, cooling fans, and glove box sensors. This momentum is expected to continue as automotive design becomes increasingly more sophisticated. Lastly, our LED drivers are seeing solid demand, supporting a diverse range of applications such as gear shift control indicators, interior cabin lighting, and mood lighting.

Turning to industrial markets, similar to the automotive market, the inventory situation continues to improve gradually, with revenue in this market growing almost 4% sequentially and 13% for the first nine months. We continue to expect the overall inventory situation will begin to normalize next year. We are seeing applications such as AI robotics, medical, and factory automation gaining strong demand momentum. With the increasing power consumption by new systems, the importance of power supply and backup power solutions for AI servers is becoming increasingly critical. Next-generation server power supply systems are transitioning from the current 48V system to 400V and 800V systems and adopting a standalone power rack design. Diodes SBR products, silicon carbide MOSFETs, ideal diode controllers, are gaining traction in these innovative applications and are increasingly being adopted by a range of power supply customers.

Additionally, our portfolio of 50A 1200V silicon carbide Schottky Barrier diodes products is achieving success in energy storage applications, delivering efficient and reliable performance. Our silicon carbide MOSFETs are also seeing increasing adoption, especially for applications such as EV chargers and power supply for AI servers and data center applications. In the industrial, Diodes TVS products are being integrated into power adapters to provide robust ESD and surge protection, enhancing device reliability. Our high-voltage sensors, low dropout regulators, and voltage reference solutions are demonstrating strong momentum in a variety of industrial applications, including fan motors, household appliances, power tools, and e-motors. In the computing market, we saw the strongest growth this quarter, increasing almost 17% sequentially and 22% in the first nine months compared to last year. The highlight continues to be the strong demand momentum for AI-related applications.

With the chipset refresh cycle underway, we are gaining strong traction and market share across our connectivity and timing product line, with particular strength in PCI Express 5.0 and 6.0 clock solutions. This growth is fueled by increasing demand within AI, data center, and edge computing applications. Our level shifter products are also seeing notable expansion, especially in server applications with major customers. Additionally, our signal integrity and high-speed switch portfolio, including USB 4 and PCIe 5 and 6, has gained significant traction. These products are being widely adopted in key applications such as AI servers and solid-state drives. Our ESD protection devices are also increasingly being integrated into SSD applications, showing a positive ramp-up. We also continue to secure design wins for our PCI Express 4.0 and 5.0 re-driver solutions and are now entering the solid production phase in both notebook and SSD applications.

Our power switches are in high demand for the data center SSDs, while USB-C source switches are being utilized in power ports for the desktop and docking stations. Our linear LED drivers are also seeing increased deployment in servers. In the consumer market, revenue also increased 8.5% sequentially and 7% for the first nine months, even though flat as a percentage of the total product revenue. Diodes bridge rectifiers are being designed into multiple power adapters that are ramping up, fueled by increased demand in the gaming systems. The adoption of DP 2.0 re-drivers is on the rise in high-resolution gaming monitors, supporting enhanced image quality and faster refresh rates. Additionally, adoption of our MIPI switches and re-drivers is also ramping up as they are being incorporated into augmented reality glasses, signaling rapid growth opportunities in wearable display technologies.

Lastly, in the communication market, overall growth was relatively flat sequentially and a slight decrease for the first nine months. We are, however, seeing pockets of growth driven by the AI and high-speed interconnect applications. This demand is being driven by Diodes' introduction of new crystal oscillators that offer significantly lower jitter, less than 60 femtoseconds, and also support higher frequency, now reaching 312.5 megahertz in addition to the previous 156.25 megahertz. These advanced oscillators are gaining adoption in the optical transceiver modules, which are integral to the high-speed 800G and 1.6T optical communications within data centers. The auto-directional level shifter and the low dropout regulators experience strong demand, driven by the growth of AI-enabled smartphone applications. In summary, our continued year-over-year growth momentum is a result of our past design wins and content expansion initiatives across our target end markets.

Additionally, our continuous investment in new product introductions in our high-margin end markets of automotive industrial positions us well for a return to strong growth in those markets as the recovery accelerates. With a return to more healthy inventory levels and shipments more closely reflecting true end demand, we expect to see increased loading at our manufacturing facilities and improving margins over the coming quarters. With that, we now open the floor to questions, operator. Thank you very much. To our audience joining today over the phones, at this time, if you would like to ask a question, simply press the star followed by the digit one on your telephone keypad. Pressing star and one will place your line into a queue, and I will open your lines one at a time. Once again, ladies and gentlemen, that is star and one.

If you find your question has been asked or answered, you may remove yourself by pressing star and one once again. Again, ladies and gentlemen, that is star and one. We'll take our first question today from the line of David Williams at Benchmark. Hey, good afternoon, everyone, and congrats on the solid results here. I guess maybe first question, Emily, you kind of touched on this at the end on the increased loadings. As you kind of think about the gross margin for the year and what those loadings could look like, can you kind of give us a sense of what your expectations are for growth and maybe how those loadings should look as we move through next year? Yeah. I think if you look at the gross margin, there's a couple of areas that we believe is going to improve over time.

Number one, we do expect the product mix will continue to improve throughout the quarters. With a lot of pipeline, we have a lot of success in the automotive. With the key focus introducing a lot of new products, we are actually confident that the combination of the product mix will continue. If we look at the Paracon product family, we continue to focus on the AI areas. We believe that will continue to help us from the product mix. On top of that, we have new products introduced throughout the quarters, especially focusing on the automotive area and some other areas. Again, that is part of the product mix. For the longer term, 2026, we do expect the revenue to be a growth year. Naturally, when we grow the revenue, that will increase the loading of our factories.

We also aggressively port our product into our factories from outside to inside and balance overall the loading as well. Gradually, that will show some improvement, I think. Going down to manufacturing efficiency, I think overall, Gary and the company is driving very aggressively for cost down and continued improvement in that area. I would say if you add all these things together, that's actually the reason that we believe. On top of that, I also talk about that if we look at the channel inventory, we believe the ship-in, the ship-out is going to be more balanced moving forward. We have been depleting quite a lot for the last few quarters, and that's actually going to get more stabilized. I would say that's another angle to think about it. Yes. Okay. Great.

Maybe on the tariff side, it seems like some of your peers have had a challenging time kind of sidestepping some of the earlier-in-the-year pull-ins. That did not seem to have impacted you, and we are not seeing it here in the fourth quarter. Maybe talk about that, how you are able to navigate that. Are you seeing that impact, or could you potentially see that as we move into next year? Is there anything, I guess, from that perspective that we should be thinking about? Thank you. David, I want to make sure you are talking about the tariff importing into the U.S.? Yes. Just the general demand trends that we saw with the tariffs that were driving some earlier loadings for production that come into the U.S. Just the demand dynamics around that and the channel inventory associated with it.

I would say overall, we didn't really see the big spike or change overall for the demand point of view. I think tariff is not new just for the last quarter. It has been in place for quite some time. I think we are working aggressively, leveraging our flexible manufacturing site and moving things around to minimize the tariff overall impact for U.S. revenue. I think on top of it, majority, or there's quite a lot of revenue within North America is actually importing into Mexico or Canada. That's actually also a different story. I would say all in all, if you look at the overall percentage of the business for North America, still a very small percentage. That's the reason that we are working different angles, but the overall impact is relatively small for Diodes. I would like to add a comment on that.

The market is very dynamic, especially country-to-country just kind of geopolitical issues. Diodes always want to keep our flexibility to support customers anywhere they want it. Okay. All right. Very good. Certainly appreciate that. Maybe just lastly for me is on the automotive side, you've talked about things getting better there, inventories better. How do you see maybe your position, given your content growth and these programs that are ramping next year? How do you think we should look at the revenue growth trajectory for automotive specifically as we get into next year? Thank you. Yeah. Current percentage for automotive for us based on the Q3 result is 19%. We definitely expect our automotive percentage will continue to improve in 2026. Especially with the market share gain and the content expansion that you just mentioned. Thanks so much. Thank you.

Next, we will hear from the line of Tristan Gerra at Baird. Hi. Good afternoon. You mentioned insourcing as a gross margin catalyst for 2026. How should we look at the gross margin benefits for an analog product currently outsourced in Korea or in Japan versus once it moves internally? And is it fair to say that the qualification process for your South Portland main fab is ongoing? It sounds that perhaps it is more of a second half of next year dynamic, given that industrial and automotive are still somewhat in recovery mode. Okay. Tristan, this is Gary. Let me help you answer this question for you. By moving external to internal, definitely going to benefit Diodes a lot. For example, if I sub-contract my wafer to our sub-contract partner, they are definitely going to earn some premium from Diodes. This will save the premium.

By loading internally with our kind of very, very effective cost, this kind of model on that. We can definitely enjoy the benefit of moving external to internal. As for the analog part, we continue loading or qualifying the process, new product into our SP fab. We do see very, very good progress so far. We do have our new product, our re-qualified product from this wafer fab being qualified in our key customer site. We do see the PO coming in just recently from the previous couple of quarters. To offset our OEM customer underload issue or continue to drive the demand, we do significantly improve our loading in those particular SP fabs to offset this kind of underloading issue in the cost.

For year 2026, I do believe loading will be improved, and the GP coming from this wafer fab will improve too. Great. That's very useful. You mentioned AI as a key driver of computing, but you also mentioned computing being a negative on mix. What percentage of your computing revenue right now is data center? Any way to quantify how much of the growth is coming from AI-related products? Yeah. Tristan, this is Emily. We're sorry right now we actually don't have the breakdown information. If you look at our Q3 result, computing is a strongest growth market segment for us. We actually achieved 17% sequentially and 22% just compared to the first three quarters. The majority of this growth is driven by AI. I think the other thing I want to point out, AI is not just in the computer segments.

We also, for example, see AI related in the industrial power supply. Or some other edge AI applications that's driving some of the refresh cycle. That's actually the reason we haven't been able to break it out. I think on top of that, if you really think about our product, it's really fitted for a lot of applications, not just limited to AI. I would say all in all, it's really positive. We're actually excited to see the performance and the growth, especially in the computing market segment. Yeah. Just like Emily said, no matter the AI in compute or in industrial, we do see this kind of market segment will continue to grow next year and even a year after next year. At the same time, we continue to introduce a new product into this segment.

This new product, usually, we can enjoy much better GP on that. That is really what we are going to put our R&D focus on, but continue to grow our GP % in the future. Okay. Great. Just one quick last one. Do you see yourself as a benefit from the disruptions around Xperi? Because my understanding is that it is a lot of discrete product. Are you second sourcing some of that? Is that a tailwind for next year? Yeah. Tristan, we are definitely aware of the situation. Discrete, diodes, rectifiers, MOSFETs, logic, definitely part of our broad portfolio. It does cross over to some of our peers like Xperi. Like I mentioned before, anytime there is a change of supply situation, strategic decision, whether change price or supply or low margin focus, it always creates opportunity for Diodes.

We always utilize this type of opportunities to really expand and build a stronger relationship with our strategic customers and also the focus in automotive market segment. We do review all this business very carefully and engage in the areas that fit into our overall long-term strategy and focus. Our goal at the end is really better serve the customers overall. Very useful. Thank you very much. Thank you, Tristan. A reminder, ladies and gentlemen, that is star and one if you would like to ask a question. We'll hear next from William Stein at Truist. Hi. This is Elliot on for Will. Thanks for letting me ask a question. You mentioned 2026 being a growth year, and it looks like recent top-line growth is holding in around. Plus 10% year over year. Is that a reasonable level for us to expect through 2026?

I'm wondering if you could give us some examples of end markets or products or applications that could maybe trigger a more robust recovery than, say, plus 10%. All right. This is Gary. Let me try to help answer this question. Yeah. The answer to you is yes, for sure. We do believe that year 2026 will be another good year for Diodes. Not only the revenue growth, like a double-digit, I want to drive on that way, but also I want to make sure our profitability also grows in line with our revenue growth. That's our commitment to the shareholder. As for which segment we are looking for the most aggressive growth, one is AI, just as Emily mentioned about in the previous answer. Another one will be automotive plus industrial.

Because we do see the automotive and industrial in the near future, not only the segment increase, but also we do have a newer product introduced into this segment and been designing since the past couple of quarters. We do see the revenue is going to be significant growth in just two segments. Yeah. I think on top of that, we went through a period of inventory adjustment. We believe that by 2026, even with few customers, inventory situation will continue to improve, and that naturally is going to drive some of the demand as well. Exactly. Okay. Thanks. One more, if I can, on. We have talked previously about a 20% operating margin target. I am wondering if you could give us some color and maybe be a little more prescriptive in terms of the different variables you gave earlier about margins improving of how you can get to.

Potentially that 20% range again from the, call it, mid-single digits today. What's the lion's share? Anything like that you can provide. Thank you. Okay. Let me try to give you the very high-level direction I want to drive on that. The first one, drive top line, means revenue is going to be gross. And along with the GP and GP % improvement on that direction and on the gross mode. At the same time, I really want to keep our SG&A flat or last percentage while the revenue grows, but I really want to put more focus on R&D expenditure along with the revenue growth. With that, I do believe we can improve more on our bottom line. Let me emphasize again, revenue growth, and along with the GP %, GPM growth, we keep SG&A percentage flat or reduced.

At the same time, I want to focus on invest more on R&D. Yeah. A couple of things I would add to that, this is Brett, is that when you think about that 20% margin, the building blocks to that are principally two things: our gross margin continuing to improve and working its way back to 40-plus percent. And you've basically got the OpEx that we've shown that at the higher revenue levels will be around 20%. As Gary mentioned, the goal is to, and what you can see in our investment is leaning heavier into the R&D piece than we are on the SG&A. I think those are the two main components. The big one we spend the time on is on the gross margin and the real drivers to that and building on the differentiated, more quality products across our portfolio.

While then, in addition, not adding to our manufacturing footprint while we do that, but getting the entitlement of it that's in place. So those things together, it will accelerate the margin improvement and will basically transition back to margin that we saw a few years ago. Thank you. Thank you. And now we'll take a follow-up from Mr. David Williams at Benchmark. Hey. Thanks again for letting me ask another one here. No problem, David. Thanks, Gary. On the AI side, is there a way to kind of parse out the demand or new demand that you're seeing relative to maybe the content expansion? And the reason I ask, I'm just trying to understand, are you driving—and I guess that you're probably driving both—but what is the bigger one?

Is it just increased demand all around, or are you just able to sell more products into each one of these solutions? I think it's really a combination of both. I think it's important that we continue to drive new product introductions. Like I mentioned, there's a lot of change, even with the AI data center, with some shifting of transitioning from 48-volt to 400-volt and 800-volt, which also means that there's a new set of requirements that need to be fitted into the application. I think it's important for Diodes to continue to focus on the technology, continue to focus on new product introduction that will be well-fitted into the new application. At the same time, the volume will continue to grow. When you combine these two together, it's going to get the best result overall. Yeah.

Another important information I'd like to share is that Diodes' advantage is a very good relationship with those tier-one customers, no matter any company or other company. That is why we understand from their architecture, from our system point of view, we know what they want three years, five years from now. That is why we cooperate with them to develop the product they wanted. Okay. All right. That is a great color there. Maybe just on the inventory side, do you get a sense that some of your customers have started to replenish if you look across your inventory levels? Is that something that has helped here, or do you think that is still in front of us, just kind of given where inventory levels are today? I believe a lot of customers' inventory situation changed a lot. There are still some pockets of customers.

Especially, I would say, in the industrial market segment that's still going through some corrections. We also expect situations should be improved or completed by the beginning of next year. Yeah. David, one way to think about that too is that you've seen the last two quarters, the internal inventory, as well as, as we've described, our channel inventory continue to come down. As long as that is happening in that way, you're not getting the full entitlement of the market on our margins. I think going forward, we feel a more balanced, basically ship in and ship out, and then the ability to have the entitlement of the full demand coming through our margin. As Emily said, we think you'll start to see that as we transition into probably second quarter next year, especially as we start to see the strength.

Keep up the good work. Looking forward to seeing your success. Thank you. Thank you, David. Thank you. We have no further questions from our audience today. I'm happy to turn the floor back to Mr. Gary Yu for any additional or closing remarks. Thank you, everyone, for participating on today's call. We look forward to reporting our progress on next quarter's conference call. Operator, you may now disconnect. Ladies and gentlemen, thank you for joining today. You may now disconnect your lines.

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