DIOD — Q2 2026 Financial Report Analysis

Diodes Incorporated's second quarter of 2026 was a clean volume-driven recovery: revenue rose 21.7% to $445.5 million, gross margin widened 1.6 points to 33.1%, and operating income more than tripled to $33.3 million. The 10-Q puts the sales gain down to "strong demand in the computing market, especially for artificial intelligence related server applications as well as data center and edge computing," with units shipped up 24.8% while average selling prices fell 2.5%. GAAP net income was almost unchanged at $46.6 million ($1.00 per diluted share vs $0.99), but that flat line hides the real story: last year's quarter was propped up by $43 million of one-time and mark-to-market gains, this year's far less so.

At a glance

• Operating margin 7.5%, up from 2.6%. Operating margin is the share of revenue left after running the business, before interest and tax. Revenue grew 21.7% while operating expenses grew only 7.9%, so most of the extra gross profit fell through to operating income.
• Non-GAAP EPS $0.70 vs $0.32. The company's adjusted earnings per share, which strips out investment gains and acquisition costs, more than doubled, a far better read of the business than flat GAAP EPS.
• Q3 guidance: ~$510 million revenue (+30% year on year), 35.0% gross margin. Management expects the recovery to accelerate, not plateau, next quarter.

Results vs a year ago

Sequentially, revenue rose 10% from $405.5 million in Q1 2026 and gross margin rose from 31.8%. Over the first half, revenue was $851.0 million (+21.9%) and GAAP net income $61.6 million ($1.33 per share, vs $0.90).

What drove the quarter

Volume, not price. Diodes sells mostly low-cost discrete chips and analog/power parts in very large quantities. The filing says weighted-average selling price fell 2.5% "primarily due to lower market pricing," while volume rose 24.8%. In other words, customers are buying far more parts, but the company is not yet getting price increases, so all of the growth comes from filling its factories.

AI servers pushed computing to the biggest end market. Computing rose to 28% of product revenue from 26%, and automotive to 21% from 19%; industrial held at 23%. Consumer slipped to 17% and communications to 11% (from 18% and 14%). Because total revenue grew 21.7%, communications' smaller share still implies roughly flat dollar sales, while computing and automotive grew faster than the company overall.

Growth everywhere, led by Asia. By shipment destination, Asia sales rose 22.7% to $350.9 million (79% of the total), Europe 21.1% to $55.1 million, and the Americas 13.7% to $39.5 million.

Cost discipline did the margin work. Gross profit rose 28.0%, faster than sales, which management attributes to cost initiatives taken during the downturn and better factory utilization (a semiconductor plant's fixed costs are spread over more units when it runs fuller). Below that, research and development spending was flat at $40.7 million, falling to 9.1% of sales from 11.1%. Selling, general and administrative costs rose $10.3 million, mostly $8.6 million more salaries and wages and $1.7 million more freight and duty, but still fell as a share of sales to 15.7% from 16.2%.

What the headline numbers hide

• Flat GAAP profit masks a much better operating quarter. Both years carried large non-operating gains. Q2 2026 included a $20.0 million unrealized (mark-to-market) gain on investments; Q2 2025 included a $29.6 million investment gain plus a $13.7 million gain on selling a subsidiary. Strip those out and the company's own adjusted net income went from $15.0 million to $32.5 million. The adjustments are narrow and consistent across both years: acquisition intangible amortization ($3.2 million after tax this quarter), board/officer retirement costs ($1.2 million) and acquisition costs ($0.2 million), plus the investment gain. Note that share-based pay is not excluded, and it rose to $8.9 million after tax from $4.6 million.
• A lower tax rate and minority-partner losses also helped. Tax expense fell to $6.8 million from $9.1 million (an effective rate of about 11.8% vs 17.0%), which the filing attributes to "the geographical mix of pre-tax income and loss across tax jurisdictions." Partners in Diodes' joint ventures absorbed a $2.1 million loss this quarter versus taking $1.9 million of profit a year ago, adding about $4 million to what common shareholders kept. Offsetting that, interest income fell $1.5 million and equity-method investments lost $2.4 million.
• Buybacks did not move EPS. Diluted share count was 46.4 million in both quarters; the $10.0 million of repurchases this quarter only offset share issuance.
• Cash conversion is strong. Operating cash flow was $132.8 million in the first half against $61.6 million of net income (about 2.2x), helped by non-cash depreciation, share-based pay and a $34.3 million rise in payables. Free cash flow (operating cash flow minus capital spending) was $34.8 million in Q2 after $33.6 million of capex. First-half capex of $65.5 million was 7.7% of sales, up from 5.2%, inside the 5%-9% target range.
• Inventory is rising but slower than sales. Inventory grew to $504.6 million from $471.5 million at year-end (+7.0%, a $33.4 million cash outflow over six months) while sales grew about 22%. On the call, management said inventory days fell to about 152 from 157 in Q1, finished-goods days to about 51 from 55, and distributor channel inventory fell again in dollars and weeks, below its normal range. That is the opposite of a pre-downturn inventory build. Receivables were flat at $310.3 million despite 10% sequential sales growth.
• Guidance was beaten. Q2 revenue came in above the midpoint of the company's own prior guidance, per the earnings call.

Takeaway: Ignore the flat $1.00 GAAP EPS. On a like-for-like basis Diodes doubled its earnings, and it did so on volume alone with selling prices still falling 2.5%. If pricing turns positive while utilization keeps climbing, margin upside from here is larger than the past year's 1.6-point gain.

Outlook

For Q3 2026 management guided revenue of about $510 million, plus or minus 3% (up 30% year on year and 14% sequentially at the midpoint), GAAP gross margin of 35.0% plus or minus 1 point, and non-GAAP EPS of $1.05 plus or minus $0.10, which it describes as a 2.8x year-on-year improvement. It reiterated a three-year target of $2 billion in annual revenue and over $4.00 of non-GAAP EPS.

The other moving piece is M&A. On July 10, 2026 Diodes agreed to buy ElevATE Semiconductor, a San Diego chip designer for the automated test equipment (ATE) industry, for a $250.0 million base price in cash plus up to $50.0 million of earnouts tied to revenue and gross margin targets. With about $442 million of cash and short-term investments and about $40 million of debt at quarter-end, Diodes can pay from its balance sheet, but the deal would use more than half of that cash and still needs regulatory approvals.

Our read: the guidance implies another step up in both sales and margin, and the low channel inventory means demand is not being pulled forward into distributors' warehouses. The risks to watch in the Q3 report, due in early November, are whether average selling prices stop falling, whether gross margin actually reaches ~35% (each point is worth about $5 million of quarterly gross profit at this revenue level), and how much the AI-server-driven computing segment, the most cyclical of Diodes' end markets, keeps carrying the growth.