Good afternoon, and welcome to Diodes Incorporated second quarter 2019 financial results conference call. At this time, 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, please press star key followed by zero on your touchtone telephone. As a reminder, this conference call is being recorded today, Monday, August 5th, 2019. I would 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 2019 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes investor relations firm. Joining us today are Diodes 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 Tu. 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 2019. 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.
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. 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 5th, 2019. 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 reconciliation 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. Now I'll turn the call over to Diodes President and Chief Executive Officer, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.
Thank you, Leanne. Welcome everyone. Thank you for joining us today. Diodes once again set new records across multifunctional metrics in the second quarter, including revenue, gross profit, EBITDA, and net income. Gross margin also further expanded by 260 basis points year-over-year, 70 basis points sequentially as a result of record revenue in the automotive and industrial end markets, as well as from our Pericom IC products. Additionally, we continued to successfully drive increased profitability on incremental revenue growth, with the first half 2019 revenue increasing 8% over the same period last year. Non-GAAP net income increasing more than 40% over the same period. Of note, our both market performance was achieved in the current global trade environment as a direct result of our test design wins and expanded customer content.
Over the past year, we have been strategically focused on demand creation and deploying a total solution sale approach that leverage our broadened product portfolio, contributing to our consistent share gain. I believe those proven strategies will continue to substantial future growth and outperformance of our served market, while also driving increasing profitability and cash flow. Additionally, our exceptional financial performance enabled us to aggressively reduce our long-term debts by $44 million during the quarter. We now have a $70 million net positive position of cash and short-term investments to our total debts, which provide us increased flexibility and the opportunity to consider strategic acquisitions. With that, let me now turn the call over to Brett to discuss our second quarter financial results and our third quarter 2019 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 would refer you to our press release for a more detailed review of our results as well as the year-over-year comparisons. Revenue for second quarter 2019 was a record $322 million, a 6.5% increase from $302.3 million in the first quarter 2019, due to continued strong performance in Europe and North America, as well as the automotive and industrial end markets. Gross profit for second quarter was a record $122 million, or 37.9% of revenue, compared to $112.4 million, or 37.2% of revenue in first quarter 2019. The 70 basis point sequential increase was primarily due to record high revenue contribution from the automotive and industrial markets, as well as Pericom products.
GAAP operating expenses for the second quarter 2019 were $73.5 million, or 22.8% of revenue, and $69 million, or 21.4% of revenue on a non-GAAP basis, which excludes $4.5 million of amortization of acquisition-related intangible asset expenses. This compares with GAAP operating expenses in the first quarter 2019 of $70.3 million, or 23.3% of revenue, and $65.8 million, or 21.8% of revenue on a non-GAAP basis. Total other expense amounted to approximately $639,000 for the quarter, including $2 million of interest expense and $496,000 for foreign currency losses, partially offset by $1.2 million of other income and $633,000 of interest income. Income before taxes and non-controlling interests in the second quarter 2019 amounted to $47.9 million, compared to $42 million in the first quarter 2019. Turning to income taxes, our effective income tax rate for the second quarter was approximately 23.3%.
GAAP net income for the second quarter 2019 was a record $36.3 million, or $0.70 per diluted share, compared to $31.7 million or $0.62 per diluted share last quarter. The share count used to compute GAAP diluted EPS for the second quarter 2019 was 51.6 million shares. Second quarter 2019 non-GAAP adjusted net income was a record $40 million or $0.77 per diluted share, which excluded net of tax $3.7 million of non-cash acquisition-related intangible asset amortization costs. This compares to non-GAAP adjusted net income of $35.4 million or $0.69 per diluted share in the first quarter 2019. EBITDA for the second quarter 2019 was a record $77.1 million or 23.9% of revenue, compared with $69.9 million or 23.1% of revenue in the first quarter 2019.
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 generated from operations was $40.6 million for the second quarter 2019. Free cash flow was $8.5 million, which included $32.1 million for capital expenditures, and net cash flow for the second quarter was negative $65.5 million, which includes the paydown of $44.1 million of long-term debt, as well as cash used to acquire Texas Instruments' Greenock Scotland fab in early April, and the final payment for a building for our Eos subsidiary. Turning to the balance sheet. At the end of second quarter, cash and cash equivalents plus short-term investments totaled approximately $242 million. Working capital was $481.2 million, and long-term debt, including the current portion, was $171.9 million.
In terms of inventory, at the end of second quarter, total inventory days decreased to 100 in the quarter compared to 102 last quarter. Total inventory dollars amounted to approximately $223 million, which reflects a $3.1 million increase in work in process, a $1.8 million increase in raw materials, and a $1.5 million increase in finished goods. After four consecutive quarters of finished good decreases, finished good inventory days was 26, down from 27 in the first quarter of 2019. Capital expenditures on a cash basis for the second quarter 2019 were $32.1 million, which includes an $18.1 million final payment for a building for our Eos subsidiary. Turning to our outlook.
Building on our strong first half revenue growth of 8% over first half 2018, during a time in which our served market was down more than 6%, further highlights our ability to deliver growth in a down market. For the third quarter, we expect revenue to be approximately $324 million, plus or minus 2%, which at the midpoint represents another quarter record and continued growth year-over-year, as well as further outperformance of our served markets. We expect GAAP gross margin to be 37.8%, plus or minus 1%. Non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition-related intangible assets, are expected to be approximately 21% of revenue, plus or minus 1%. We expect net interest expense to be approximately $2 million.
Our income tax rate is expected to be 23.3% ±3%, and shares used to calculate diluted EPS for the third quarter are anticipated to be approximately $52 million. Please note that purchase accounting adjustments of $3.8 million after tax for Pericom and previous acquisitions are not included in these non-GAAP estimates. With that said, I now turn the call over to Emily Yang.
Thank you, Brett, and good afternoon. As Dr. Lu and Brett highlighted, second quarter revenue grew 6.5% quarter-over-quarter and 5.9% year-over-year, as we continue to reach new records across our business and gain increasing market shares. Looking more closely at second quarter revenue, point of sales revenue was up, driven by the strong demand recovery in Asia. Distributor inventory in terms of weeks was flat in the second quarter and remains within our normal range of 11-14 weeks. Looking at the global sales in the second quarter, Asia represented 74% of revenue, Europe 14%, and North America 12%. In terms of our end markets, industrial was once again our largest representative end market at 29% of revenue, communications 23%, consumer 22%, computing 16%, and automotive 10% of revenue.
During the same period in 2018, industrial was 27%, communications was 23%, consumer was 25%, computing was 16%, and automotive was 9%. Let me review the end markets in greater detail. Start with automotive market. We achieve another quarter of record revenue as we continue to benefit from past design win activity and expanded customer content. As I have discussed in the past, Diodes has been focused on strategically deploying a total solution sales approach that leverage our broadened product portfolio, which has been a key contributor to our consistent share gain and growth in this market. From a product perspective, we have solid revenue growth in our switching diodes, Zener diodes, Hall sensor, MOSFETs, LDOs, and proprietary SBR product family.
These products are targeted at a variety of applications, including battery managed system, advanced driving assistance system, or ADAS, cross-domain controllers, airbag control, lighting, body control, infotainment display, and gear shift level indicators. During the quarter, we released a number of new automotive-grade products, including real-time clock, interface logic level shifters, and Hall sensors. We saw design-ins in brushless DC motor, water pump, power window, electric horns, and infotainment. Wireless chargers for portable equipment like mobile phones are becoming a popular feature of vehicles. Our low voltage gate driver, fully AEC-Q qualified, is designed into several automotive modules. We also continue to see adoption in the automotive LED lighting segments, especially in front side, rear side, and interior lighting, where we are winning designs for our LED drivers with a number of automotive customers.
With the rapid increase of electronics in today's highly connected cars, robust ESD protection is becoming increasingly more important. We are seeing excellent design win momentum in the connected driving applications for our protection products in applications such as ADAS, telematics, and infotainment. Similar to automotive market, we also continue to set new record revenue in industrial end market as well, growing 13.7% year-over-year. Together with automotive, these two end market represented 39% of total revenue. We are gaining increasing momentum in smart connected lighting and commercial spotlighting applications for our SBR MOS technology and LED drivers. Drones and laser scanner are also driving growth in the industrial end market for our Zener diodes, and also continue to secure more design-ins for DC fan applications for regular transistors, gate drivers, and bipolar transistors.
With the rapid adoption of high-speed interface across multiple end applications in the IoT market space, ESD protection is getting more important for data links as well. We are seeing multiple design wins for our data line platform, which offer best-in-class ESD clamping voltage performance while minimizing capacitance loading on the data line. Also, during the quarter, we added new products in smaller package for DC-to-DC converter that are suitable for home applications, power tools, and other industrial applications. Our newly released wide VIN LDOs are gaining strong momentum in this market, especially for e-meters and detector applications, as well as DC-to-DC buck converters in solar inverter applications and high voltage Hall sensor in power tools. Turning to consumer market, Diodes protection product continue to gain traction in all type of panel applications.
Our new miniature super high surge performance protector product has been designed into earphones, wearables, portable devices, TVs, and smart speakers. We also saw significant revenue growth for BJT product driven by TV and monitor design wins. We also secure increasing design wins for our standard recovery rectifier, low voltage Hall sensors and TVS products in large panel TV, cloud-based cameras, robotic vacuum, and lawnmower. While switching diode has solid growth in white goods home appliances, our Zener diode were also designed into smart thermostat as well as powered sound system. Diodes also continue to gain strong momentum in quick charger and direct charger application with our USB Power Delivery solutions, which help reduce the charging time of batteries.
We also continue to gain increasing traction in virtual reality applications, where our newly released and first in the market integrated high-speed mux for USB 3.1 and USB 2.0 are seeing new design wins. In the communication market, the traction from 3G to 4G and then 4G to 5G has become the major trend to meet the requirement of significant speed upgrades and large amount of bandwidth. Our products are well aligned to this trend with our clock buffer solutions currently being designed into 5G base station. This product are used as critical sampling clock for the baseband unit and remote radio units. Diodes' diverse clock portfolio and superb jitter performance are the key technical factor for this applications.
In addition, we see tractions in 5G applications for discrete, power management, and connectivity products, including USB redrivers and switches, and are also gaining traction in other communication applications such as new Voice over IP phone, telecom power product, as well as data network and gateways. Also in the communication market, mobile phone and portfolio applications continue to grow growth for our protection and power switch product. Our gate drivers have been successfully designed into latest wireless charging transmitter module, while our SBR and Schottky product continue to gain increasing penetration in IoT, mobile, and smartphone market by offering product with a thinner profile and compact dimensions. Design wins are also being achieved with high variety bit rate product for applications such as POE, server power, and data centers.
Lastly, in the computer market, revenue increased 13.5% sequentially as a result of increasing traction for our Pericom product family. Power density and efficiency are fueling the development of the hardware evolution, and Diodes is actively engaged in this market with MLD MOSFETs in DC-to-DC power conversion and ultra-low RRM PMOS for low switch for battery management in computing application. During the quarter, we saw strong revenue growth for our standard recovery rectifier and synchronous rectifier functional array products in server power and SAN applications. Along with this trend, we also saw growth for our power switch and wide VIN LDO in notebooks and the high current LDOs in server applications. Additionally, our protection product, along with timing, signal integrity, USB Type-C switches, redrivers, charging and power management product are seeing significant activity in notebooks, tablets, and PC applications.
Further, our focus and momentum in the cloud computing segment continues as our new product for timing, signal integrity, and switching are being designed into server and data center applications. In summary, our achievement of record results in the second quarter underscore Diodes' solid positioning across our global customer base, as well as the benefits from our past design win activities and new product initiatives. Additionally, we continue to gain increasing contact at customers with our expanded product portfolio, including our Pericom product family. Our consistent performance continues to set Diodes apart, especially during the current market environment. We look forward to providing our continuous progress next quarter. With that, we now open the floor to questions. Operator?
Thank you. Ladies and gentlemen, if you have a question at this time, just press star then the number one key of your touch-tone telephone. If your question has been answered or you wish to be removed from the queue, press the pound key. Again, to get in the queue, just press star then one. One moment. Our first question is from Tristan Gerra with Baird.
Hi, good afternoon. Could you talk about your progress on eight-inch capacity ramp and is that helping gross margin?
You were talking about the, in the KFAB site?
Correct. Correct. Yeah, the actually fab two in Shanghai
That's our S5. Our S5 8-inch is going to be rented out. In the second quarter, we are fully rented out. It is adding a gross profit for us and due to the cost, it's cheaper and due to the equipment and the capability, it's new, our area, and we are able to load it while in the past, we have a capacity constraint on the MOSFET. It help on the gross margin improvement.
Great. Given the macro, which you've obviously outpaced very nicely with share gains, how should we look at your gross margin trajectory medium term? Do you feel that you can sustain gross margin at current level? Any commentary that you could provide, medium term?
Well, the economic situation is actually slowed down. We all know that. The Diodes continue increase the market share. We continue gaining the growth, gaining the revenue. If you compare even at the midpoint of our third quarter, you look at the nine months of this year versus nine months of last year, we actually going to grow 5.4%. On top of 2018 versus 2017, we grew 15%. Year-over-year, last year, 15%, this year, nine months versus nine months, we're going to grow 5.4%. Even the market is soft, which everybody know, the TAM actually going down, but our demand is still there. Our capacity is still utilized quite well, and that's why our GP, we still continue somewhere around 37.5%-37.8%, in that range. We continue improve.
I still feel good about our gross margin. I believe we still can continue in that kind of range. We do a seasonality or typically price erosion, but we don't need to particularly erode our price too much to gain the capacity or to utilize the capacity.
Okay, that's great. Just a last very quick one. Any color you can provide on your front-end utilization rates?
Our utilization? What is that? The front-end and back-end?
Oh, yeah. The utilization rate for our back ends is running in mid-90s%. It's running good. That's what we see. We're able to modulate some of the things we outsource. The internal utilization has been pretty good.
Yeah, you know the way we set our model, 80% for wafer fab and 95% for AP considered as full because you cannot really fill all the capability or all the packaging. We typically use 95% as a full. That means majority of our capacity is full, but maybe here or there has some unused capacity due to special packages. Based on that, our wafer fab and our AP is still quite full. That's why we are able to maintain our gross margin, and we've seen since our revenues did not go down, our loading situation going to be the same. We don't see an issue from that point of view.
Great. Thank you very much.
Thank you. Our next question comes from Shawn Harrison with Longbow Research.
Hi, and good afternoon, and my congratulations everybody.
Thank you. Hi, Shawn.
If we look into the September quarter or even the back half of the year, either Dr. Lu or Emily, what end markets are you seeing continued strength, either on a sequential or a year-over-year basis versus further contraction or incremental weakness?
Well, that's separate into two things. One is the general market. Okay. We believe general market this year is weaker compared with last year. That's why everybody start guidance on a year-over-year growth is either negative or flat. That is the general market. Okay. If you look at the Diodes, we fighting very hard during the slowdown market and able to continue keep us on the growth path. I know it's getting harder, but we still committed to continue growth year-over-year. Okay? Automotive, actually, we see the slowdown in automotive, and virtually Diodes can grow our automotive revenue by increase the content. Industrial, I think the first half for us is very good. We have been setting the record for the industrial, and we do see some slowdown in U.S. and Europe. Okay?
That's where our major one is, but we don't have very strong industrial in Asia. Automotive, we do have very strong in Asia, and we still continue increase our revenue in Asia or in China in particular. Overall, the market do slow down Diodes. We're hoping we can continue our year-over-year growth, especially our first half. We already grow 7% or 8%.
Eight.
Huh?
8%.
8%. Okay. Even including the third quarter, the nine months of year-over-year, we are going to grow 5.4%. We still continue push our revenue growth.
Okay, great. As a follow-up, Emily, or Dr. Lu, the point of sale versus point of acquisition number for distribution, was there a big variance this quarter? Did you see any notable destocking at distribution?
No. As I reported, right, our channel inventory is within our normal range, 11 to 14 weeks. If I compare quarter-to-quarter, it's pretty flat. We manage it very closely for the channel inventory. That's really what we've been doing.
Okay.
The point of sale. Yeah. For the point of sale, we do actually see good recovery from Asia, as I reported in my script. I think that's really encouraged to see. Definitely, that's a good momentum that we want to continue.
Great. Then last for me, wanted to just get some, I guess, an answer on the rise in our company sales. I know there's been some questions about that, how that's changed over the past 12 months. I don't know if that's a factor of moving fabs around, other issues at work, but if you could just speak to kind of the rise of intercompany sales that we've seen over the past 12 months.
The biggest change in the intercompany sales is operating in more of a global supply company way in terms of how we move our product and interact with our internal and external manufacturers. You also see some optimization occurring with our customers regarding how they want to take product, where they want to receive that product, and how we'll serve them. That's the biggest changes that you see in that.
Great. Thanks, Brett.
Thank you. Ladies and gentlemen, as a reminder, if you have a question or comment, just press star and one to get in the queue. Our next question is from Gary Mobley with Wells Fargo Securities.
Hi, everyone. Can you hear me okay?
Hi. Yeah. Hi, Gary.
Let me extend my congratulations again on a solid first half of the year.
Thank you.
I realize that there's not a whole lot of tariff headwind to your product that you're specifically selling, but you do sell heavily into the Taiwanese ODM supply chain. Much of that product is consumer-oriented, and we have various tariff implementation dates, the most recent of which is coming up here the first day of September. Have you been seeing any pull forward of demand from your Taiwanese ODM customers as they're trying to get ahead of these tariff implementation dates?
Okay. Number 1, this threatening to tariffs of this $300 billion is only talking for certain for a while now. We do have customer want to move their assembly, or their CM outside of China. They talk on and off here and there. We do see that. Some of them actually already taking the action, move to Southeast Asia or Taiwan. Some of the CM do actually take actions. For our product, we ship to the CM, so if they move, we just ship according to where they want us to ship. We don't really see that much effect till today. The new announcement just announced several days ago, I don't have any reaction to the market or any market reaction right away yet. Okay. I've been talking for a while.
Any particular reaction after the new announcement? I just came back from Taiwan last night. Unfortunately, this was done quite before the weekend, so I don't really see any reaction.
Okay. You guys have obviously taken a lot of market share in the first half of the year, probably the most notable share gain period that you've had in the company's history. I was wondering if you could talk about the types of competitors that you're taking share from. Is it the old world Japanese IDMs? Is it some of the former U.S. competitors that have been acquired by other U.S. companies that have left some market share for you to gain? I know your products are great products, and you probably won the design wins on your own technical merits of the products. Is it just an easy environment to take share, given that other people perhaps have de-emphasized products that you're promoting?
Well, Gary, I think I already talking about this for several times. Number 1, I really don't like to point out our competitor, the names, because it's not really polite to tell them we get the shares out of them, okay. I don't want to name the company's name, but basically, our growth coming from content increase, solution sales. Okay. Content increase, you know that automotive, compared with 5 years ago, the electronics content on automotive do increase significantly. Therefore, since our design, our growth in automotive area is not the vehicle growth, it is really due to the content growth. The vehicle might grow some, even like recently, it actually go down. Our content increase overcome that significantly. If you look at our automotive growth, CAGR, the last 5 years is 35%.
Even this year is going to slow down, we're still looking at 20-something%, the automotive revenue increase. Agreed, the market slowdown, we gain it. Now, I don't want to say we take the share from company A or B. I don't want to say that. I want to say due to the content increase, we take advantage of that, and we grow our revenues. Industrial, the same thing. We are solution sales through all the acquisitions in the past, including Pericom, including VCD, even including the GTAT. Our acquisitions give us very complete product portfolio. Emily is able to convert our component sales into solution sales. Now we bring the whole solution to our customer and to the same application, different customer, to show them what is our product portfolio to get into that solution.
When we sell, we are no longer component sales. We are now a solution sales. That's the second one. The third one is really due to the past several major acquisition in the semiconductor fields. We automatically provide a second source opportunity to our customer. By the industry consolidation, we, Diodes, is virtually have the good quality, good product, and good solution. We will automatically to be the second source of our customer. Number four, with all those acquisition, we now can have a lot of synergy and cross-sales to each other's product line. If you add in those four things, content increase, solution sale, acquisition, major industry consolidation, and our M&A, it give us the opportunity and the chance to grow better than our competitor. It's not only one thing or take away from one customer.
This is the way we can continue growth and gain the market share in the past. We will continue in the futures too.
Okay. Well, thanks for the detail, Dr. Lu.
Thank you. This concludes our Q&A session for today. I would like to turn the call back to Dr. Lu for his final remarks.
Thank you for your participation on today's call. Operator, you may now disconnect.
Thank you everyone for joining our call today. You may now disconnect. Have a wonderful day.