Good afternoon, and welcome to Diodes Incorporated First 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 questions and answer session. If anyone needs assistance at any time during the conference call, please press star key followed by the zero on your touchtone phone. As a reminder, this conference call is being recorded today, Tuesday, May 7, 2019. 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 First 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 Mehr. 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 the 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 first 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.
Therefore, the company claims the protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission, including Forms 10-K and 10-Q. In addition, any projections as to the company's future performance represent management estimates as of today, May 7, 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. 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. Now 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. Diodes once again had an exceptional quarter of solid financial results, achieving record net income and earnings per share on both a GAAP and a non-GAAP basis. Revenue for the quarter grew 10% over the prior year period on continued market share gains and was down 3.9% sequentially, which was better than typical seasonality. Notable gross margin increased 90 basis points from the fourth quarter of 2018, exceeding the upper end of our guidance range and reaching the highest level since the fourth quarter of 2010. We expect a further increase in the second quarter. Contributing to this margin expansion was the achievement of the record revenue in Europe, combined with record revenue in the automotive and industrial end markets.
In the automotive market, revenue grew 7% sequentially and 23% year-over-year as we continue to benefit from past design win activity. Together, these two end markets represented 39% of total revenue, which place us well on track to achieving our long-term target of 40%. Additionally, our Pericom business is growing frequency control products, reaching record revenue level in the first quarter and contributed to our strong margin performance. More recently, on April 1, we announced the closing of the transition to acquire Texas Instruments wafer fab facility and operation located in Greenock, Scotland GFAB. The ownership transfer has gone very smooth with no interruption to production. We are in the process of aggressively installing Diodes' process to fully utilize the additional eight-inch capacity and capability of the fab, which will support our growth expansion initiatives and further cost reductions.
As part of a five-year wafer supply agreement, Diodes is also providing foundry service to TI, which is not material to Diodes overall revenue. As we look to the second quarter, we expect to extend our growth momentum and market share gains, while further increasing gross margin and lowering operating expense as a percentage of revenue. Together, these factors will contribute to driving higher profitability and cash flow for Diodes and our shareholders. One final comment. As announced on February 22, Rick White retired as CFO as of March 1, and Brett Whitmire, who has been with the company over eight years, has assumed the CFO role. I would like to take this time to thank Rick for his many years of service to Diodes and our financial organization, while also welcoming Brett into this new position.
Rick will remain with Diodes part-time and serve as corporate secretary as well as an advisor to the company. With that, let me now turn the call over to Brett to discuss our first quarter financial results and our second quarter of 2019 guidance in more detail.
Thanks, Dr. Lu, and good afternoon, everyone. I look forward to meeting and speaking to each of you in the coming quarters. 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 the first quarter 2019 was $302.3 million, a 3.9% decrease from the $314.4 million in the fourth quarter 2018, which is better than normal seasonality. Gross profit for the first quarter was $112.4 million or 37.2% of revenue, compared to $114.2 million or 36.3% of revenue in the fourth quarter 2018. The sequential increase in gross margin was primarily due to the record revenue from the automotive and industrial end markets, as well as from Pericom products.
GAAP operating expenses for the first quarter 2019 were $70.3 million or 23.3% of revenue, and $65.8 million or 21.8% 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 fourth quarter 2018 of $70.3 million or 22.4% of revenue, and $65.8 million or 20.9% of revenue on a non-GAAP basis. Total other expense amounted to approximately $89,000 for the quarter, including $2.1 million of interest expense and $64,000 of foreign currency loss, largely offset by $1.2 million of other income and $0.9 million of interest income. Income from taxes and non-controlling interest in the first quarter 2019 amounted to $42 million compared to $42.8 million in the fourth quarter 2018. Turning to income taxes, our effective income tax rate for the first quarter was approximately 24.5%.
GAAP net income for the first quarter 2019 was a record $31.7 million or $0.62 per diluted share, compared with $29.5 million or $0.58 per diluted share last quarter. Share count used to compute GAAP diluted EPS for first quarter 2019 was 51.5 million shares. First quarter 2019 non-GAAP adjusted net income was a record $35.4 million or $0.69 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 $33.2 million or $0.65 per diluted share in the fourth quarter 2018. EBITDA for the first quarter 2019 was $69.9 million or 23.1% of revenue, compared with $70.5 million or 22.4% of revenue in the fourth quarter 2018.
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 $69.9 million for the first quarter 2019. Free cash flow was $51.2 million, which included $18.6 million of capital expenditures. Net cash flow in the first quarter was a positive $60.5 million. Turning to the balance sheet. At the end of the first quarter, cash and cash equivalents plus short-term investments totaled approximately $307.9 million. Working capital was $524.8 million and long-term debt, including the current portion, was $215.8 million. We are now in a positive net position with cash exceeding long-term debt. At the end of the first quarter, inventory increased $1.2 million from the fourth quarter 2018 to approximately $216.6 million.
The increase in inventory reflects a $5.1 million increase in work in process, offset by a $3.7 million decrease in finished goods and a $200,000 decrease in raw materials. This is the fourth consecutive quarter of finished goods inventory decreases, reflecting our focus on reducing finished goods inventory. Finished goods inventory days were 27 in the quarter compared to 28 in the fourth quarter of 2018. Total inventory days were 102 in the quarter compared to 100 last quarter. Capital expenditures on a cash basis for the first quarter 2019 were $18.6 million, or 6.2% of revenue. We expect CapEx for the full year 2019 to remain within our target model of 5%-9% of revenue. Turning to the outlook. We expect revenue in the second quarter of 2019 to increase to approximately $322 million ±2%.
At the midpoint, this represents growth of over 6.5% sequentially and 5.9% increase over the prior year period and reflects continued growth from Diodes' organic business, as well as revenue contribution from GFAB. We expect GAAP gross margin to be 38% ±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 ±1%. We expect net interest expense to be approximately $2 million. Our income tax rate expected to be 24.5% ±3%, and the shares used to calculate diluted EPS for second quarter are anticipated to be approximately $52 million. Please note that purchase accounting adjustments of $3.7 million after tax for Pericom and previous acquisitions are not included in these non-GAAP estimates. With that said, I will now turn the call over to Emily Yang.
Thank you, Brett, and good afternoon. As Keh-Shew Lu and Brett highlighted, first quarter revenue grew 10% year-over-year as we continue to gain increasing market share. Looking more closely at first quarter revenue, POS revenue was down slightly, mostly driven by the Chinese New Year and weaker demand in Asia. We started to see a recovery for Diodes business in March. Europe had record high results. The North America remained strong. Distributor inventory in terms of weeks increased sequentially in the first quarter, but is within our normal range of 11-14 weeks. We expect distributor inventories to remain within our normal range of 11-14 weeks in the near term. Looking at global sales in the first quarter, Asia represented 70% of the revenue, Europe 13%, and North America 13%.
In terms of our end market, industrial was once again our largest representative end market at 29% of revenue, consumer 23%, communication also 23%, computing 15%, and automotive 10% of revenue. Let me review the end markets in greater detail. As Keh-Shew Lu mentioned, our automotive end market had a record quarter, growing 7% sequentially and 23% year-over-year and reaching a record 10% of total revenue. This continued growth is a result of our past design win activity and momentum across an expanding customer base in all application areas, particularly in our three focus areas of connected driving, which consists of ADAS, telematics, and infotainment system, comfort, style, and safety, including lighting and brushless DC motor control, and powertrain covering conventional hybrid and electric vehicles. From a product perspective, both our analog and discrete product family continue to be strong for us in the automotive market.
PCI Express has become the interface of choice for the backbone transmission of engine control units, ADAS, navigation, telematic, and infotainment systems. Diodes is well positioned to address this need with a variety of product design to support PCI Express protocol. In fact, Diodes is the only supplier to offer PCI Express 4.0 clock generators and clock buffers with AEC-Q Grade 2, 105 degrees Celsius ambient temperature support. We are also seeing a lot of activities from automotive customers for our DC-DC converters, timers, and USB switches for USB Type-C, infotainment, and charging applications. Our sensor business also continues to grow in applications like power windows, doors, seat belts, pumps, and shift gates.
We also continue to gain traction with MOSFET design-ins across a number of auto applications, as well as strong revenue growth in battery management system applications for automotive grade diodes and rectifiers. As a result of our automotive expansion initiatives over the past five, six years, we have increased our potential semiconductor content per vehicle to $85 per vehicle, an increase from a prior estimate of $70, which will continue to drive further revenue upside towards our long-term targets. We also saw strong growth in industrial end markets, with revenue increasing almost 12% sequentially and 39% year-over-year to reach a record 29% of total revenue. Our momentum continued with new design win activities across applications such as metering, DC fans, power tool, and power supply, as well as home appliances, including ELAR applications.
With our newly introduced low-power PCI Express 2.0 package switch, we continue to expand our market position in industrial PC with expanding design activities. Our product's low power performance gives Diodes a leading position in the small link count and port expansion application. We are also seeing USB Type-C adoption into medical equipment with our HDMI over Type-C crossbar switch design-in for transporting video image to the monitor over our USB Type-C interface. In the consumer market, we continue to see growth for our SBR and Schottky products for new applications like smart sneakers, handheld portable devices, wire and wireless chargers, gaming, white goods, OLED TVs, as well as USB ESD and data line protection. Additionally, we have seen significant design win activities for DC-DC products driven by IPTV, over-the-top TV, and set-top box applications, as well as bipolar transistor design-ins for TV and monitor applications.
We're also seeing strong demand for our Hall sensors in applications like wireless earbuds and IoT, and our audio products are gaining traction in monitor and gaming applications. Also, in the first quarter, we saw increasing content growth in TV and panel applications across a broad range of products, including switching diodes, zener diodes, and transient voltage suppressors. We're also beginning to see revenue growth in augmented reality applications on low-profile, small form factor switching diodes products. In the communications end market, we're seeing new design wins in 5G applications like base station, CPE, small cell, and data center for many of our products, including PCI Express 2.0 packet switches, I2C SPI, port expanders, level shifters, MOSFETs, and timing.
We are also seeing an increasing need for our sensors in smartphone applications, with the demand for our high-speed, low-loss MIPI switches continue to grow in mobile applications as display resolution and number of camera module increase. Power density, in particular, is a key concern for smartphone manufacturers, and Diodes has been actively engaged in this market with its comprehensive small footprint DFN and CSP MOSFET portfolios, as well as our AC-DC products in charging adapter applications. The mobile device and smartphone market continues to be a key growth area for our protection products, especially in support of the latest trend to replace the 3.5 millimeter audio jack with a USB Type-C connector. Lastly, in computing, power density and efficiency are driving our hardware evolution, and Diodes is at the forefront with our comprehensive portfolio of MOSFET power blocks and SGT MOSFETs in the DC-DC power conversion.
Additionally, our diodes and rectifier products continue to expand in notebook and desktop power applications, as well as wireless charging and printer applications with broad range of products, including fast and ultra-fast recovery rectifiers, high voltage switching diodes, and TVS zener diodes. With the increasing adoption of USB Type-C in the notebooks and PCs, we have been seeing strong revenue growth for our complete USB Type-C solutions, including switches, ReDrivers, timing, charging, and protection products. In summary, our first quarter once again demonstrated a solid operating leverage in our business model, resulting in record profitability despite the sequential lower revenue. Our strong position with customers as well as our past design win activities has enabled us to consistently gain market share and outperform the market.
Additionally, our increasing content in both the automotive and industrial markets, combined with expanded opportunity for our Pericom products, position us to drive continued revenue and profitability growth in the coming quarters. 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 and the number 1 key of your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound or hash key. Again, to ask the question, just press star and one. Our first question is from Shawn Harrison with Longbow. Your line is open.
Hi, good afternoon. This is Gousia Choudhry on behalf of Shawn. Congrats on a solid quarter and guidance. First off, can you give the POS versus POP number? I think you said POS was down slightly, but if you have more details, please.
Yeah. This is Emily. Our POS is down slightly compared quarter-to-quarter. POP also down slightly quarter-to-quarter. That's based on our guidance. That's how we look at the inventory level as well, right? It's still within our range, as defined as normal between 11-14 weeks.
Can you reconcile your view on the auto and industrial strength that you're seeing given the weakness that was cited by some of your peers? Also your view on Pericom within these markets. Are you still bullish for 2019? Any further detail would be helpful. Thank you.
Right. If we look at the automotive market overall, the consensus is actually from the demand point of view is down. Where Diodes is actually gaining is really based on the past demand creation effort and also the content expansion. Even the overall market is down, we're still seeing very good growth, 7% quarter-over-quarter growth, 23% year-over-year growth. That's specifically related to the automotive. Related to the Pericom, we're also seeing significant growth contributed to our Q1 revenue, and we expect the growth will continue into 2019 and the rest. This is really based on the demand creation pipeline and also the information that we receive from the content expansion point of view.
Thank you.
Thank you. Ladies and gentlemen, as a reminder, to ask a question, just press star and one to get in the queue. Our next question is from Tristan Gerra with Baird. Your line is open.
Hi, Dr. Lu. During the earnings call, I think it was in October of last year, Rick was highlighting the potential for Diodes to reach 38% gross margin by the second half of this year. It sounded like your outlook for gross margin early this year was more muted to about 36%. Today, your Q2 gross margin guidance is 38%, that's even ahead of last year's expectation. At the time, one could contend that the end demand environment was stronger than what you're seeing today. I know you mentioned Europe and automotive, but could you go more into details about the catalyst for gross margin? What makes it better than you thought earlier this year? Maybe quantify how big Pericom is as a % of revenue and how sustainable you think this gross margin outlook is into the second half.
Okay. Tristan, if you know, I can emphasize, if we grow the automotive and industrial revenue, automatically the gross margin will be improved better than expectations. You can see the result. Automotive, while the market went down, our sequential still go up 7%, and year-over-year is at 28%. You can see the effort due to the past design win, plus the content increase, as I've been mentioning to you several times. Based on those, it enable us to reach 10% now, 10% of our revenue, and we continue improved automotive performance. That is the one key thing to improve the gross margin better than expected. Another one is the industrial. Now, this quarter, industrial is 29% of our total revenue, is an indication of the silicon growth in the industrial area for Diodes.
While the market kind of slowed down, I think you see through other people's earnings conference call, industrial is actually slowed down a little bit. For Diodes, we continue gaining the market share. If you look at my long-term strategy, I've been talking about, I want to improve the industrial and automotive to 40% of our revenue. We already reached to 39%, and we will continue our long-term role of getting higher and higher automotive industrial applications. This will enable us to continue improve our gross margin. One more thing. Due to our Pericom acquisition, our Pericom product without the frequency control or those kind of the IC product has been contributed a significant growth to our margin. If you remember, our Pericom product typically has a 50% GP or higher.
If that sector grows much faster, it again enables us to exceed our gross margin guidance. If you look at the Pericom products concentrate on the data center, cloud computing and servers and automotive applications. All those are a good and big growth effort for us and contributes the better than average growth in Diodes' business. I'm still very confident we'll continue to be able to benefit from these three key areas, which are high GP and change our product mix toward the high GP product. Even if we get some pressure from the low-end commodity type of product, the price pressure is there. Due to our effort on the other market segment I mentioned, our GP is still able to continue to improve.
That's very useful. Thank you. As a quick follow-up, the market share gains, we can certainly see that and understand it in automotive because your ramp started or your exposure in automotive is a little bit smaller than some of your peers. In industrial, you do have a very meaningful % exposure. What would you say at a high level is driving the share gain? Is that packaging? Is it pricing? Any particular factor that you could emphasize?
Right. This is Emily. Let me address the question. I think it's really about content expansion. Even the market may not be growing from the total demand point of view, we've seen significant content expansion within the industrial area. The leverage between the Diodes and also the Pericom product line that we've seen a significant push in this area for us.
Yeah. Packaging is one of the help, but right now, we are not just dependent on the packaging. The real thing is we start to focus on solution provider. Through all different acquisition, our product line now is very completed, and it enable us to provide to our customer a total solution. With Emily's drive, we now focus on provide our customer the total solution. This is different from the past.
Great. Thank you very much.
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. We have a follow-up from Shawn Harrison with Longbow Research. Your line is open.
Hi again. Can you talk a little bit about the TI fab acquisition? What is associated with that within your guidance? Any details you might be able to provide on the expected accretion or impact to margin or OpEx would be helpful. Also having to do with the acquisition, how does the fab affect your CapEx profile? Thank you.
Okay. The Texas Instruments acquisition, one of the element is we will provide Texas Instruments with some wafer supply agreement. It's not material. It's not big compared with our Diodes revenue. Okay. Second, we keep the emphasis is accretive. Even the margin is not as high as our average, but it's accretive to our business. Like I mentioned, we aggressive now to qualify our own process because we want to use it to support our future growth. Okay. We are kind of very tight on our wafer supply, and we have a lot of wafer need to outside and controlled by other foundry people. What we want to do is increase, again, our own supply. It will helping us in the future for the growth.
The other question is on CapEx. This is within our CapEx model?
Yes. The equipment is already there. We maybe miss here, there for some of the equipment needed for our process. Okay. Most of the equipment is already there. With the GFAB and this, therefore, it's still within our CapEx model of 5%-9% of our revenue. It won't increase our CapEx requirement.
Okay. Thank you.
Thank you. I'm not showing any further questions in the queue. I would like to turn the call back to Dr. Keh-Shew Lu for his final remarks.
Thank you for your participation on today's call. Operator, you may now disconnect.
Thank you everyone for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day.