Good afternoon, and welcome to Diodes Incorporated second quarter 2020 financial results conference call. At this time, all participants are on the 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 0 on your touchtone telephone. As a reminder, this conference call is being recorded today, Thursday, August sixth, 2020. I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead.
Good afternoon, and welcome to Diodes second quarter 2020 financial results conference call. I'm Leanne Sievers, president of Shelton Group, Diodes investor relations firm. Joining us today are Diodes Chairman, President, and CEO, Dr. Keh-Shew Lu, Chief Financial Officer, Brett Whitmire, Vice President of Worldwide Sales and Marketing, Emily Yang, and Director of Investor Relations, Laura Murrell. Before I turn the call over to Dr. Lu, 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 second quarter 2020.
Management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission, including Forms 10-K and 10-Q. Any projections as to the company's future performance represent management's estimates as of today, August sixth, 2020. 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.
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. 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'll turn the call over to Diodes President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.
Thank you, Leanne. Welcome everyone, and thank you for joining us today. Second quarter revenue was better than expected, increased 2.8% sequentially, driven by market share gain across all key product groups due to improving demand and design win momentum. Additionally, our quarter benefited from strong sequential and year-over-year growth in the consumer market for gaming console and IoT device, as well as in the computing market as our Pericom IC products continued to gain traction in high-end servers, storage, data center, and notebooks, as well as in automotive applications. In fact, our Pericom products achieved the second highest revenue quarter since the acquisition. Our solid results reflect our team's ability to maintain a high level of efficiency and productivity despite the market disruption and the delay caused by the COVID-19 pandemic.
Our performance also serves as a testament to our diversified product portfolio and end markets, as well as solid positioning with long-standing tier 1 customers. Although the general market remains uncertain, we believe we were well-positioned to continue gaining market share in the third quarter and are focused another quarter of sequential growth. In supporting of this growth, we took the initiative to build internal inventory, which also provided a level of assurance to our customers against possible supply disruption and the shifting demand requirement due to the global pandemic. It is important to note that our distributor channel inventory was flat in the quarter and expected to be within our target range in the third quarter. In summary, I'm proud of our consistent performance and financial result achieved during those unprecedented times.
Our total solution sale approach, combined with our test design win momentum, continues to pay dividends for our business as a trust supplier of the product to our customers. With that, let me now turn the call over to Brett to discuss our second quarter financial result and our third quarter 2020 guidance in more detail.
Thanks, Dr. Lu, and good afternoon, everyone. As part of my financial review today, I will focus my comments on the sequential change for each of the line items and will refer you to our press release for a more detailed review of our results, as well as the year-over-year comparisons. Revenue for the second quarter 2020 was $288.7 million, an increase of 2.8% as compared to $280.7 million in the first quarter 2020. Gross profit for the second quarter was $101.5 million, or 35.2% of revenue, an increase of 5.9% or 110 basis points compared to the first quarter 2020 of $95.8 million, or 34.1% of revenue. GAAP operating expenses for the second quarter 2020 were $70.6 million, or 24.5% of revenue, and on a non-GAAP basis were $64.5 million, or 22.3% of revenue, which excluded $4.4 million of acquisition-related costs and $1.7 million of board retirement costs.
This compares to non-GAAP operating expenses in the prior quarter of $65.4 million, or 23.3% of revenue. Total other expense amounted to approximately $4.8 million for the quarter, including $3.6 million of foreign currency loss and $2.7 million in interest expense, partially offset by $1.3 million of other income and $200,000 of interest income. Income before taxes and non-controlling interest in the second quarter of 2020 was $26.1 million, compared to $25 million in the previous quarter. Turning to income taxes, our effective income tax rate for the second quarter was approximately 17.9%. GAAP net income for the second quarter 2020 was $21 million, or $0.40 per diluted share, compared to GAAP net income of $20.2 million or $0.38 per diluted share in the first quarter of 2020. The share count used to compute GAAP diluted EPS for the second quarter 2020 was 52.6 million shares.
Non-GAAP adjusted net income in the second quarter was $28.6 million, or $0.54 per diluted share, which excluded, net of tax, $6.3 million of acquisition-related costs and $1.3 million of board retirement costs. This compares to non-GAAP adjusted net income of $23.9 million, or $0.46 per diluted share in the first quarter of 2020. EBITDA for the second quarter was $55.3 million, or 19.2% of revenue, compared to $52.9 million, or 18.9% of revenue in the prior quarter. We have included in the 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 generated from operations was $33.1 million for the second quarter 2020. Free cash flow was $16.5 million for the second quarter, which includes $16.5 million for capital expenditures. Net cash flow for the second quarter was a positive $283.7 million.
Turning to the balance sheet, at the end of the second quarter, cash and cash equivalents plus short-term investments totaled approximately $507 million. Working capital was $801 million, and long-term debt, including the current portion, was $295 million. Both our cash and debt balances increased in the quarter as a result of actions we took to prepare for our pending acquisition of Lite-On Semiconductor, which is expected to close in the second half of this year. As a reminder, on May 31st, we secured the financing for the Lite-On acquisition, consisting of a $520 million term loan and a $150 million revolver. We were very pleased to be able to secure the $670 million credit facility at favorable terms in the midst of the COVID financial crisis.
During the second quarter, we took advantage of the low interest rate environment and started drawing on our credit line to begin purchasing New Taiwan dollars as a natural hedge against the U.S. dollar, since the transaction will be funded in New Taiwan dollars. As of the end of the quarter, we had borrowed and converted the equivalent of $200 million, resulting in our debt and cash balances increasing accordingly. In terms of inventory at the end of the second quarter, total inventory days increased slightly to approximately 119 in the quarter compared to 115 last quarter. Finished goods inventory days were 30 compared to 29 in first quarter 2020. Total inventory dollars increased $23.6 million to approximately $255.8 million, which reflects a $15.4 million increase in finished goods, a $4.8 million increase in work in process, and a $3.4 million increase in raw materials.
As Dr. Lu mentioned, we took the initiative to build internal inventory during the quarter to support our expected growth in third quarter, while also providing a level of assurance to customers against possible supply disruptions related to the uncertainty associated with the global pandemic. Capital expenditures on a cash basis for the second quarter 2020 were $16.5 million, or 5.7% of revenue, which remains at the low end of our target model of 5%-9%. Turning to our outlook. For the third quarter 2020, we expect revenue to increase to approximately $304 million, ±3%. We expect GAAP gross margin to be 35.5%, ±1%. Non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition-related intangible assets, are expected to be approximately 23% of revenue, ±1%. We expect non-GAAP net interest expense to be approximately $1.5 million.
Our income tax rate is expected to be 18%, ±3%. Shares used to calculate diluted EPS for the third quarter are anticipated to be approximately 52.8 million. Please note that purchasing accounting adjustments of $3.3 million after tax for Pericom and previous acquisitions are not included in these non-GAAP estimates. Also not included is $2.4 million of Lite-On acquisition-related financing costs. I now turn the call over to Emily Yang.
Thank you, Brett. Good afternoon. In the second quarter, revenue increased 2.8% quarter-over-quarter, which was at the high end of our guidance, primarily due to better-than-expected demand recovery in Asia. Looking more closely at second quarter revenue, POS was up due to strong demand in Asia, increased more than 15% quarter-over-quarter. Both North America and Europe POS were down due to factory closure and shelter-in-place mandates that are still largely in place. Distributor inventory in terms of weeks was flat from last quarter and remains slightly above our targeted range of 11-14 weeks. We expect distributor inventory to be within our normal range in the near term. Looking at global sales in the second quarter, Asia represented 77% of revenue, Europe 15%, and North America 8%.
In terms of our end market, consumer represented 27% of revenue, industrial 22%, communications also 22%, computing 19%, and automotive 10% of revenue. Let me review the end markets in greater detail. Beginning with automotive market, we continue to make great progress in this end market, even though the revenue was down 6% sequentially, which is still far less than the decline in the broader automotive market. Automotive revenue represented 10% of the total revenue compared to 11% last quarter, reflecting the temporary impact of factory closures in North America and in Europe due to the pandemic. This was partially offset by the increased demand momentum in Asia, especially our Pericom products. We continue to focus on capturing additional shares with new and existing products for an expanding number of automotive applications.
More specifically, we saw demand for our new product in infotainment, lighting systems, battery management systems, communication equipment, powertrain systems, body control modules, and controllers. In the second quarter, we released the industry's first automotive-grade redriver supporting USB Type-C alternative mode. This device is on Qualcomm reference design for an infotainment application, which is building traction for new designs in all regions. To capitalize on the increasing demand for USB Type-C, Diodes released USB Power Delivery and data line over voltage protection products and design in both infotainment systems and USB chargers. We also continue to see design wins for our newly released DC-DC converters, transistors, and LED drivers for in-vehicle lighting, battery management systems, e-bike, and wireless charger modules that reside in the car console for recharging personal equipment like mobile phones.
Additionally, automotive-grade Hall sensor products continue strong design-in momentum in power seat applications, while our Super Barrier Rectifier, Schottky diodes and rectifiers have shown solid growth momentum and new design wins with multiple automotive customers across regions. In the industrial market, we saw greatest impact from the pandemic with a large number of customer factory shutdowns, primarily in North America and Europe. We are making every effort to assist our customers in the ongoing global fight against COVID-19 by supporting many medical applications, including diagnostic and tomographic imaging systems, such as ultrasound monitors, X-ray systems, and pulse oximeter monitors. Diodes delivered switching diodes products for personal protective equipment used by first responders and healthcare providers so they can provide excellent care while still maintaining their own health and safety.
Similarly, our MOSFETs, diodes, crystals, and crystal oscillators have been adopted in a number of medical applications, ranging from testing equipment to ventilators, especially those to fight COVID-19. We are also pleased to support green factory automation and efficiency improvement effort with our rectifier, bridge rectifier, and protection products in applications including automated QR scanners, computer numeric control machining equipment, and robotics. Diodes supported our customers on various green energy initiatives, including solar cell systems, wind power generators, and the conversion to fully electric vehicle systems. In addition, we saw strong momentum for many discrete products and wide Vin LDOs in traditional applications such as elevators, power supplies, metering, security systems, and DC fans. We also saw solid growth for newly released 18-volt DC-DC converter for building automation projects.
In the consumer market, we continue to achieve solid growth, primarily due to strong demand in Asia for gaming consoles and IoT devices like intelligent vacuum cleaners and smart speakers. We also continue to secure increasing design wins for quick chargers and USB Type-C applications, even though the high-end mobile phone market has slowed. Diodes' new AC-DC charger solutions are well positioned as they are capable of supporting USB Type-C Power Delivery fast charging function and other fast charging protocols. We have also seen strong demand for rectifier, bridge rectifier, and standard linear and logic products in home appliance applications like air conditioning, vacuum cleaners, smart audio systems, dishwashers, dryers and washing machines, and automated espresso machines.
Additionally, demand for larger size monitors, smart TVs, and IP phones is increasing, and as a result, Diodes is seeing expanding traction for SBR Schottky switching diodes, LED drivers, and controllers optimized for monitor and TV backlight applications. Turning to the communication market, as I mentioned previously, smartphone demand has slowed considerably as a result of pandemic, contributing to the revenue being down both sequentially and year-over-year. However, video conferencing needs and demand has increased dramatically as business travel, education institution, conferences, concert, and exhibition has become virtual globally. In the hardware design area, PCI Express 2.0 packet switch are being deployed as the endpoint expansion associated with AI, video, and networking processors. We also saw a wide range of USB Type-C switching and video switching demand for the video conferencing hardware.
Additionally, the global rollout with 5G networks is beginning to create a substantial increase in demand for our TVS and MOSFET products. Speed upgrades and increasing bandwidth needs are also driving demand for 80-150-volt performance PMOS and 100-150-volt ultra low RDS(on) NMOS in 5G power station to save power consumption. Diodes saw momentum in both of these areas in the quarter. Our small size, low capacitance TVS product in the small DFN package provide best-in-class surge performance for Gigabit Ethernet source-based PoE application. Similarly, the smartphone market require components with thin package that offer high efficiency and high performance since power density is the key requirement. Diodes products are well suited for this requirement, and we continue to launch new products leveraging our wafer design combined with DFN and CSP packaging technology.
Our state-of-art MOSFET for the low switch and battery protection applications are seeing increasing design-in activities. In addition, CSP package SBR Schottky product experienced further uptake in battery pack during the quarter. Our Class D audio amplifier product family has also received multiple design wins in the monitor market for audio applications. Additionally, we are seeing increasing demand for high performance low switch with new design wins and volume production in cell phone and PTA applications. Newly released 18-volt DC-DC converters, timing, TVS, and bipolar power transistors are capturing design wins in the networking applications like router, switch, and RF antennas. Lastly, in the computing market, revenue increased as work from home mandates drove stronger demand for notebook, motherboard, server, and storage applications, in particular for our Pericom product family. As Dr. Lu mentioned, our Pericom product reached the second highest revenue quarter since the acquisition.
In fact, our clock IC and connectivity ASIC product reached the record high in the quarter. We also secured a number of new design wins for our high current LDO product family, power switches, SBR, and Schottky product in PC, projector, USB PD, and ATX power applications. The computing segments also continued to drive solid demand for TVS, rectifier, and bridge rectifier product in display and power supply applications. The power block used PowerDI3333 package MOSFET and revenue from this device is also picking up significantly, along with the demand for 600-volt MOSFET. In summary, our second quarter result once again demonstrated the resilience of our business and the team's ability to effectively manage through the current environment. We are well positioned with customers and have strong design win momentum across a broadened product portfolio that continues to drive increasing market share and consistent growth for our business.
With that, we now open the floor to questions. Operator?
Thank you, ma'am. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Gary Mobley from Wells Fargo Securities. Please go ahead.
Good afternoon, everybody. Thanks for taking my question. Hope everybody's well. I wanted to first start with some questions about Lite-On. You're obviously taking steps to close that acquisition in the second half of the year, but I think maybe some of your most recent comments would indicate that you might get the final approval, regulatory approval for that acquisition, maybe later this month, and then a close perhaps in the October timeframe. Is that still your expectation? Lite-On obviously is a publicly traded company, so we can see that the revenue has been trending quite nicely in this COVID environment. I'm wondering if the profitability assumptions that you originally had when you announced the acquisition are still intact. In other words, is it still as accretive as your original expectations?
Well, Gary, let me first talking about the status of the antitrust and national security approval from the two agency review in China. Okay? First, so far we answer, and the LSC answer all the questions which raised by these two agents. Typically is when they give an question, then we will give them an answer, then come back, then they will have the review, have the meeting, have the survey. Then for the agency, they ask, or they survey, they typically would generate more question, then again, they go back to ask us. We give them an answer, then they will go back to survey the agents. That's typically the process. Till today, we have several week now to not get any additional question answered. We, till today, we believe we answer all the question they raised.
They still continue survey the other agency to make sure there are no issue for the consideration. That's where they are. We really don't know when they're going to be approval, because if they have more question generated by other review agent, they'll come back to ask us, they'll go back to the same loop. Okay? Only thing we can say is we don't have any more question answered for several week now. We hope that is the final check, but we don't know. Even after they give us the approval, you go back to Taiwan for the deal process, and it take about two week, I'm sorry, two month of the deal process. We cannot, even they give us an answer, let's say end of this month, we still cannot close it, the deal, until end of October.
That's the process, that's why we say we're hoping we will close it by end of this year or second half of this year. That's where the status. The second question, I think you are talking about the business, the revenue, right? Okay.
Well, yeah. Most of the accretion is expected to come from retiring Diodes shares, but I'm just curious if Lite-On might be more profitable or less profitable underpinning that original accretion assumption.
Okay. In the past, they actually consulted the On-Bright business, On-Bright business making money. Okay? If you go to look at all their old financial result publication, they show they're making money. When we make the acquisition, we make an assumption we will not consult On-Bright, On-Bright will be sold out. Therefore, based on that consultation, I think we already say we don't using the profit made by LSC as the synergy. Okay? We only looking at, number one, the corporate cost. They will not have the board. They will not have the corporate entity. We will have the synergy by not acquisitive, by not have the corporate entity. We'll assume, later on, we're able to load in their underloaded manufacturing facility. From that, we can get some acquisitive too.
Since day one, when we propose to purchase LSC, we do not put in any profit generated by LSC as the synergy or as the accretive effect. We basically say, immediately short term, we can get rid of corporate cost. From long term, within one year, we should be able to load in their product by increased loading from Diodes, and we can pull some of the loading currently Diodes outside, loading from outside, we can pull in to LSC. That is the synergy or the accretive within a year. From the long term, over one year, then we can make the accretive from product. We sell their product. We design in the major customer. We have using their product. There's so many different kind of synergy. I think I already addressed that. We have four different kind of synergy we can get it.
Based on that, we believe the LSC deal is pretty accretive for us.
Okay. Great.
Regardless from the financial point of view, by taking 15% of our stock back, and that is another positive to us.
Okay. Appreciate that, Dr. Lu. I want to press you guys a little bit on the OpEx. Based on your guidance for the third quarter, what you've done so far in the first half of the year, it looks like your non-GAAP OpEx might be up this year, despite what could be maybe a mid-single digit % revenue decline. Maybe if you can speak to what you're doing and what you could be doing to rein in that OpEx and what some of the sources might be to why it's turning up, specifically quarter-over-quarter in the third quarter.
Okay. Well, actually, if you look at the OpEx, operational expense, a lot of them is really affected by R&D, up and down R&D. One of the major reason is because Pericom product using TSMC or using GlobalFoundries for the tape-out. Each tape-out is very expensive. It's not like our regular discrete product. Our discrete product, the tape-out is very cheap, okay? The Pericom product using very advanced process, each tape-out is half million dollars or more. We do not want to slow down the R&D for Pericom, because if you look at Pericom, having continued to grow quite well, like Emily talking about, our second quarter actually is the highest or second highest revenue after we consolidate or after we merge Pericom company. You can see the growth is quite well, and it's really done by all the new product generated by the Pericom group.
Those new product, the cost for each tape-out is quite expensive. Okay, it affect us quarterly, sometimes up, sometimes down, and it's just because that R&D cost is the major issue. From the other SG&A portion, we do not really have any plan to increase. It's still the same thing. As what we do, is we only grow half of the revenue growth. Now, if the revenue going down like the last 2 quarters, we are not taking any action to lay off the people, to reduce the salary. Therefore, our SG&A as % may be up, but as a total cost, we try to keep it flat. Does that answer your question?
Yes. Thank you. I think I've taken up the time, I'll release the floor.
Okay.
Thank you. Our next question comes from Shawn Harrison from Loop Capital. Please go ahead.
Hi. Good afternoon, everybody, my congratulations on the solid results. Emily or Dr. Lu, I'd hope you'd be able to comment on the work from home related strength and kind of the IoT and connected device strength that you saw in the quarter, strong growth in the consumer electronics and computing side of it. What are you hearing from your customers in terms of the sustainability of that demand into the back half of this year?
Shawn, nice to talk to you. First of all, if we look at a consumer area. The IoT related, we're talking about the game consoles or the sport health tracker related stuff, we're definitely seeing upside. Q3 is usually a stronger quarter for the consumer market. We definitely have a confidence that we expect consumer will be a good quarter in Q3. Also working from home for the PC and computing area. We see strong growth in Q2, but we also expect that might slow down a little bit. We expect probably it's going to be more like a flat quarter for Q3, instead of continue to grow quarter-over-quarter strongly.
Very helpful. Brett, a question on gross margin. I would've thought maybe you would've seen a little stronger uplift here into the September quarter. I wonder if maybe some of the inventory you built in the June quarter here is affecting that, or are there other dynamics such as pricing or product mix or anything that's affecting kind of the sequential uplift of the gross margin into the September quarter?
One of the things that we are encouraged about is that from a pricing perspective, we're continuing to see the consistency of that, and we are seeing a big thing that's driving our improvement in second quarter was the improvement of our utilization, especially in the assembly test in second quarter after the recovery of the extended coronavirus impact in first quarter. We're seeing that, and we're seeing a gradual improvement into third quarter, and that's what we're anticipating. One of the things to keep in mind is that really mid-year last year, the revenue levels we were driving were still significantly higher, and so we're still not back at that peak level. Although we do anticipate that at some point, but just not in the near term.
Great. Thank you so much, and once again, my congratulations.
Thank you.
Thank you. Our next question comes from the line of Matthew Ramsay from Cowen. Please go ahead.
Yes, thank you very much. Good afternoon, everyone. Dr. Lu, I wonder if you might talk about the strategic rationale for ramping up inventory. We've heard from a lot of your peer companies about strength, particularly out of China and Asia, in terms of end demand, and obviously their strength from the work from home drivers and the consumer markets that you've mentioned. To some questions that were asked earlier, the sustainability of that demand in the work from home environment might be something that we can debate, but I imagine if you're taking steps to build inventory, you may see some strength in other markets in Asia that might lend you to do that. If you could just talk about the demand environment in Asia, I would really appreciate it. Thank you.
Okay. You had several questions, let me just answer one by one, and if I forget to answer something else, you can repeat it. Okay. From the working at home effect to the operation, fortunately, is most our operation is in China and Taiwan. Today, well, even in Europe, all the manufacturing do not really affected by working from home. It's only engineer or non-manufacturing type of people working from home. From that point of view, most our people is in Asia. Okay? Now, Europe, yes, they're affected by working from home, and U.S., yes. Fortunately, it's majority of our non-manufacturing worker still coming from Taiwan and China, and they are allowed to traveling and allowed it. Just they're limited by customer meetings. That do affect it, because a lot of customer still do not want them to see face-to-face.
Fortunately, most our people have been working with the customer for long times. They communicate by pick up the phone, by knowing our product, we really don't see that much of effect by the working from homes. Okay? The second question is, what's the other one?
Yeah, maybe let me address the market segments in Asia.
Okay.
I think that's really your second question, right? In Asia, definitely we've seen really good, strong recovery momentum and especially, we talked a little bit about consumer and PC market already. In the communication market, for example, the smartphone, and the 5G is definitely going to drive some of the momentum in Q3. We expect the segment will be seeing good growth. For the automotive market, we're also seeing strong momentum recovering in Asia, especially in China. We also believe industrial, we're seeing some of the signs for improvement as well. That's pretty much in Asia, right? I think for North America and in Europe, that we have the mandate of shelter in place and also a lot of factory shutdown.
We're also seeing some, especially in the automotive area, some of the factories slowly recover, even if not to the full capacity, but we're definitely seeing improvement in that area as well.
Got it. Thank you both for the time. That was really helpful. I guess as a follow-up question on my side, Brett, I did want to go back to gross margin. If you guys are ramping up inventory here in the nearer term, might that utilization increase come through in some increase to gross margin in the fourth quarter and into next year? Just how do we think about the pace of that expansion that we should model over the next few quarters? Thank you.
Well, I think in terms of what we've been saying on that would be, we expected a steady increase as we go from second to third quarter, and that's what we're projecting on that. I think the verdict is still out in terms of transition of third to fourth and into next year on the top line, and generally, the gross margin will track that pretty closely because we've gotten, like I said, we're still seeing good strength in the pricing for our products, and really it's a reflection of the overall utilization in the factories. I think that's how I would look at it in terms of how the margins will track against the revenue stream.
In addition, it's the product mix. If you look at our automotive and industrial, when we get to the peak last year, we are running almost 35% of our revenue is industrial and automotive. This quarter or second quarter, it went down because automotive, industrial go down. We believe now, start from third quarter, automotive, industrial gradually pick it up, and like Emily just mentioned to you, if they are gradually picking up, then that portion of the gross margin will be increased. Our overall margin should be continue increase. Two factor, one is the product mix, one is the loading factor. If we assume, because we don't know yet, assume in 4Q seasonality, you might slow down due to seasonality, but that's just history. Not necessarily what we're going to see this year.
If even that, we're hoping the product mix portion, automotive and industrial, will continue, then we're hoping we can continue improve the gross margin.
Very clear. Thank you both.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. I show our next question comes from the line of Tristan Gerra from Baird. Please go ahead.
Hi. Good afternoon.
Hi, Tristan. Yeah.
Yeah. Can you hear me?
Yeah.
Yes.
Yeah. Hi. Given your commentary that distributor inventories are expected to be within a normal range in Q3, should we assume that the point of sale that you see at your distributors is going to be pretty much in line with the revenue guidance that you provided sequentially, or is that number going to be a little bit different?
Well, Tristan, this is Emily. We definitely see a really good momentum for the second quarter on the POS, especially from Asia, right? I talk about 15% quarter-over-quarter growth, more than 15%, right? We do expect Q3, we should continue the growth momentum and part of the POS estimate and it's into part of our guidance, and that's the reason we actually guided more than 5% for Q3.
Okay. Is the ramp in automotive for Pericom product pretty recent? Because I know the design cycles are pretty long. Is that going to be a positive mix catalyst for next year as well? Just trying to look at the duration of that ramp and which is more recent than data center and the impact on mix. Also, is that incremental content, those Pericom products in automotive, or is that really share gain versus other suppliers, and if that's the case, what role for Pericom to actually get the design wins?
Right. Let me address that question. The design win momentum has been really strong, and you are absolutely right, design cycle is quite long in the automotive. This is really driven by some of the past effort, like I said, throughout a few years. Most of the stuff is actually a new generation of the design. Some of the content also are new additional content. That we are excited. I think I talk about it, talking about the next generation ADAS or telematics topology change, and that's really driven some of the new Pericom content and additional Diodes content into the pipeline.
Yeah, if you look at our overall automotive business, even the market slowed down 30%, 40%. If you look at our 1Q to 2Q revenue, automotive revenue, we are only down about 6%. Okay? You can see this is what the benefit we have is from long-term design win opportunities.
Right. Really on the content expansion, right?
Yeah.
Yeah. That's really incremental in terms of content expansion as opposed to market share shift.
Right. We always focus on the new applications, right, and the new functions and features. That's really the new strategy carry through Diodes for the last few years, focus on the total solution and the value add to the customers.
Great. Thank you very much.
Thank you.
Thank you.
Thank you. I show no further questions in the queue. At this time, I'd like to turn the call back to Dr. Keh-Shew Lu, President and CEO, for closing remarks.
Thank you for your participation on today's call. We're looking forward to providing an update on our business next quarters. Operator, you may now disconnect.
Thank you, doctor. Ladies and gentlemen, thank you for attending today's conference. This concludes the program. You may all disconnect.