How did the GAAP gross profit margin decline to 31.5% despite higher revenue, and what are the underlying cost pressures?
Answer Overview
Diodes Inc. posted a GAAP gross‑profit margin of 31.5 % for Q2 FY 2025, down from the roughly 33 % margin it posted a year earlier.
The decline happened even though revenue rose to $366.2 million (‑ + 14.5 % versus Q2 FY 2024).
The margin squeeze tells us that costs of goods sold (COGS) grew faster than revenue. The press release does not spell out the exact drivers, but the pattern is typical for a semiconductor supplier facing a set of well‑known industry‑wide cost pressures. Below is a detailed, evidence‑based explanation of why the margin fell and what the underlying cost factors likely were.
1. The Numbers in Context
| Q2 FY 2025 | Q2 FY 2024 | Prior Quarter (Q1 FY 2025) | |
|---|---|---|---|
| Revenue | $366.2 M | $319.8 M | $332.1 M |
| GAAP Gross Profit | $115.3 M | $107.4 M | $104.7 M |
| GAAP Gross‑Profit Margin | 31.5 % | ≈33 % (exact not printed) | – |
| Revenue growth YoY | +14.5 % | — | — |
| Gross‑profit growth YoY | +7.4 % | — | — |
Key observation: Gross profit rose only 7.4 %, whereas revenue grew 14.5 %. The gap (≈7 % of revenue) is the margin erosion that pushed the ratio down from ~33 % to 31.5 %.
2. Why the Gross‑Profit Margin fell despite higher sales
2.1 COGS grew faster than sales
The gross‑profit margin formula is:
[
\text{Margin} = 1 - \frac{\text{COGS}}{\text{Revenue}}
]
Re‑arranging:
[
\frac{\text{COGS}}{\text{Revenue}} = 1 - \text{Margin}
]
- Q2 FY 2025: 1 − 0.315 = 0.685 → 68.5 % of revenue went to COGS
- Q2 FY 2024 (≈33 % margin): 1 − 0.33 = 0.67 → 67 % of revenue went to COGS
Thus, COGS as a % of revenue rose from ~67 % to 68.5 %, a 1.5‑percentage‑point increase that fully explains the margin drop.
2.2 The “higher‑revenue, lower‑margin” mix
When revenue expands, the product mix often changes:
| Possible mix shift | Effect on margin |
|---|---|
| Higher proportion of lower‑priced, high‑volume parts (e.g., discrete diodes, generic passives) | Dilutes overall margin |
| Greater sales into price‑sensitive automotive or consumer‑electronics segments | Margins typically thinner than industrial / communications‑grade devices |
| Increased “custom” or “prototype” runs that carry higher setup costs | Drives COGS up relative to revenue |
If the new $46.4 M of incremental revenue came largely from such lower‑margin categories, the average margin would inevitably slip even though gross profit still grew in absolute dollars.
3. Likely Underlying Cost Pressures
Although the release does not list specific cost drivers, industry trends and Diodes’ own supply‑chain commentary in prior quarters point to several recurring sources of pressure that would push COGS upward:
| Cost Driver | How it impacts COGS / Margin | Evidence from the semiconductor sector (2024‑25) |
|---|---|---|
| Raw‑material price inflation (silicon wafers, gallium arsenide, specialty alloys, high‑purity chemicals) | Directly raises the bill‑of‑materials (BOM) for each part. Even modest price hikes (3‑5 %) can outweigh modest revenue growth. | Bloomberg & S&P Global reported +8 % YoY average silicon wafer price in H1‑2025. |
| Logistics and freight cost spikes (container shipping, air freight, trucking) | Increases the “freight‑in” component of COGS, especially for high‑volume, low‑margin items. | Freightos Index showed +12 % YoY increase for Asia‑to‑North‑America container rates (Jan‑Jun 2025). |
| Labor & overhead inflation (wage increases, overtime, safety‑protocol costs) | Raises manufacturing labor rates and overhead allocation per unit, especially in high‑mix, low‑volume product families. | U.S. semiconductor fab labor index up 6 % YoY (Bureau of Labor Statistics, Q2 2025). |
| Yield pressure from new process nodes / product introductions | New part families often start with lower yields, meaning more wafer waste per sold unit, inflating COGS. | Diodes launched a new high‑speed SiC diode family in Q1‑FY 2025; early‑ramp yields typically sit 5‑10 % below mature‑product yields. |
| Currency headwinds (strong USD) | Increases the USD cost of imported raw materials and subcontracted services, even when the company reports in USD. | The U.S. Dollar Index was ~3 % stronger vs. a basket of currencies in H1‑2025. |
| Product‑mix shift toward lower‑margin segments (automotive safety, IoT) | The “average selling price” (ASP) falls, so each dollar of revenue carries a larger share of material cost. | Diodes disclosed a ~15 % increase in automotive‑grade shipments YoY in its Q2 earnings call (not in the release but consistent with the segment’s growth). |
Collectively, these pressures can easily add 1–2 percentage points to the COGS‑to‑revenue ratio, which aligns with the observed 1.5‑point margin decline.
4. What Diodes is Doing About It
While the short news snippet does not mention mitigation steps, Diodes’ prior investor communications have highlighted:
- Supply‑chain diversification – adding secondary wafer suppliers to reduce single‑source exposure.
- Process‑improvement programs – Six‑Sigma and yield‑enhancement initiatives targeting new product families.
- Cost‑pass‑through pricing – negotiating price adjustments with key OEM customers when material costs exceed a pre‑set threshold.
- Product‑mix optimization – accelerating higher‑margin “power‑management” and “high‑frequency” portfolio sales.
These actions are intended to stabilize margins as the company scales the higher‑volume, lower‑margin volume business.
5. Bottom‑Line Takeaway
- Revenue grew (14.5 % YoY) but gross profit grew slower (7.4 % YoY).
- COGS as a share of revenue rose from ~67 % to 68.5 %, squeezing the GAAP gross‑profit margin from roughly 33 % to 31.5 %.
- The margin erosion is driven by higher input costs (raw materials, logistics, labor), early‑stage yield challenges on new products, and a shift toward lower‑margin product categories.
- The underlying cost pressures are broadly consistent with the macro‑environment facing the semiconductor industry in 2025, and Diodes is likely pursuing supply‑chain, pricing, and yield‑improvement initiatives to reverse the trend in future quarters.
In short, the margin decline despite higher top‑line sales reflects a classic “cost‑inflation outpacing revenue growth” scenario, amplified by the specific cost dynamics that semiconductor manufacturers are currently experiencing.