Delta Electronics, Inc. (2308.TW) Q3 FY2025 Earnings Call Transcript & Summary

So welcome to our Q3 analyst meeting. So today, we have so many attendance, so many visitors coming to join our 3Q 2025 Analyst Meeting. So as usual, we will have Rodney to report the financial numbers at the beginning, and then we will have the Q&A session.

So as usual, we are going to review the financial numbers of Q3. Q3 revenues reached TWD 150.3 billion, marking a record high quarterly result. This represents a 34% year-on-year growth and a 21% sequential increase. Driven by strong shipments from server powers and liquid cooling systems, Q3 revenue was above normal seasonality. Gross profit in Q3 was TWD 52.4 billion, up 34% year-over-year and 19% quarter-over-quarter, marking a new all-time high. GP margin for Q3 was 34.9%, slightly down from 35.5% in Q2 and flattish from a year ago. OpEx in Q3 increased by 21% year-over-year and 9% quarter-over-quarter. With SG&A expenses growing faster than R&D spending, benefited from improved economics of scale, OpEx ratio declined to 18.4% compared to 20.3% a year ago and 20.4% in Q2. R&D expenses as a percentage of revenue stood at 8.5% versus 9.6% a year ago and 9.5% in Q2. SG&A expenses as a percentage of revenues were 9.9% compared to 10.6% a year ago and 10.9% in Q2. Supported by operating leverage. OP margin in Q3 further improved to 16.5%, up from 15.1% in Q2 and 14.6% a year ago, reaching another record high. Operating profit increased by 51% year-over-year and 33% quarter-over-quarter. Segment-wise, driven by robust data center demand, infrastructure recorded both the strongest year-over-year and quarter-over-quarter revenue growth, followed by Power Electronics. In contrast, Mobility continued to face challenges amid market weakness, while Automation was also affected by broader macro headwinds. From an earnings perspective, all segments except Automation saw varying degrees of sequential improvement. On a year-over-year basis, Infrastructure delivered the strongest profit growth, followed by Power Electronics. On the other hand, Mobility swung to a loss and Automation also came under pressure from the slow economy. So in terms of the non-op, Q3 was TWD 2.2 billion versus TWD 900 million in Q2 and TWD 1.3 billion a year ago. In Q3, we had TWD 27 billion profit before tax, up 53% year-on-year and 38% quarter-over-quarter. Q3 EBITDA reached 33 -- sorry, TWD 35.4 billion, up 45% year-over-year and 32% quarter-over-quarter, setting another all-time high. So the Q3 tax expense was about TWD 6.1 billion. The effective tax rate in Q3 was 22.5%. Net profit after tax was about TWD 18.6 billion, up 51% year-on-year and 33% Q-on-Q. And Q3 EPS was TWD 7.16, achieving a new historical high. So now we have a look at accumulated numbers for the first 3 quarters of the year. So the revenue was TWD 393.3 billion in the first 3 quarters, up 28% from a year ago. Gross profit increased by 32% year-over-year with a GP margin of 34.1% compared to 33% in the same period last year. The operating expense in the first 3 quarters was up by 18 -- sorry, 19% year-on-year with SG&A up 20% and R&D up 17%. OpEx ratio dropped to 19.5% from 21% a year ago with the SG&A expense ratio contracting to 10.4% from 11.1% a year ago. And R&D expense ratio decreased to 9.1% from 9.9%. So OP increased by 56% year-on-year and OP margin in the first 3 quarters improved to 14.6% from 20 -- sorry, 12% a year ago. So for the first 3 quarters, the Infrastructure segment again showed the strongest growth, followed by Power Electronics and a modest 4% increase from Automation. And while the Mobility continued to struggle due to the sluggish demand. And then earnings-wise, both Power Electronics and Infrastructure showed substantial profit improvement while the profits of Automation and Mobility both shank from a year ago. So for the first 3 quarters, we had about TWD 4.7 billion up slightly higher than a year ago. In terms of the profit before cash, we had TWD 62.2 billion, pre-tax income, up 50% from a year ago. And our EBITDA was TWD 85.2 billion, up 40% from a year ago. The tax expense was around TWD 13.9 billion, representing a 22.4% effective rate and a net profit after tax in the first 3 quarters was TWD 42.8 billion versus TWD 28.1 billion a year ago. So the EPS in the first 3 quarters of the year was TWD 16.47 versus TWD 10.8 a year ago, representing a 53% year-on-year growth.

So first of all, a big congrats on your very strong performance for the third quarter. So my first question is related to your -- capacity planning for your liquid cooling and other data center-related businesses? And then can you also please walk us through the company -- the latest progress in the solid-state transformers. And then also the 800 HVDC. How should we think of the sales -- the contributions in 2027? So can you give us a rough idea?

So in terms of the current capacity -- the capacity is actually pretty tight. It's actually pretty tight. So we are actually building many new factories. So by the end of this year, that we may complete some of these factories. And then we may have 3 new factories in Thailand are likely to be, I mean, complete in terms of the construction by the end of this year. And then in the meanwhile, we also have the discussions with our customers. So for example, for those non-American market orders, customers -- or most customers, they actually agree to -- agree that their products to be made in China. So that is also a pretty helpful and beneficial in terms of our capacity flexibility. But anyway, in terms of the capacity, we continue to expand the capacity because we are seeing pretty strong demand from our customers. So in terms of the 800 HVDC, I think it's still going to take some time before it become more meaningful to our revenues. And then in terms of the dollar amount of the CapEx for this year for the -- actually, for the first 3 quarters, it was around TWD 29.7 billion. And for the whole year, I think it's going to be somewhere around TWD 40 billion. And for the next year, I think, in terms of the dollar amount, should be quite similar to this year. But in terms of the compensation of the CapEx, I think for next year, it's going to be more related to the automation -- the factory automation and equipment procurement and setting.

So the next question is related to the gross margin. Could you please give us more color regarding why the GP margin, I mean, in Q3 was lower than Q2?

I think the main reason -- I mean, it's still -- was still related to the inventory reversal and inventory write-down. So the difference between that. So between Q2 and Q3, I think the difference was around like 0.6 percentage point. But generally speaking, the GP margin is still mostly related to the product mix. Despite that, I mean -- despite the fact that we actually saw a pretty strong growth, I mean increase in our revenues in Q3. But mostly, I mean the revenue was driven by the data center related business. And then for that part of the business, in terms of the GP margin inherently is naturally not higher than the component business. So it's still mostly -- I mean, the GP margin is still mostly related to the product mix.

So my next question is also related to the margins. So first, I mean, first of all, related to the GP margin. As you said, the GP margin was mostly related to the product mix. Given that the AI or AI-related or data center-related businesses actually are becoming more and more meaningful within the portfolio. But still, I mean, we saw a higher GP margin in Q2 compared to Q3. So can you give us more colors? Can you give us more colors regarding the margins? And secondly, how should we think of the OpEx rate going forward?

So first of all, I think I already covered the question before. So because the component -- I mean the strong or the rapid growth in our revenues was mainly driven by infrastructure in Q3. But the solution or the Infrastructure System business in terms of the margins is not necessarily higher or is not going to be higher than the component business -- the margin of component business. So I think that is actually the main reason. And then speaking of the OpEx ratio. So if we are able to continue to accelerate our revenue growth that is likely or it's possible that we will continue to enjoy some operating leverage. And you see the OpEx ratio continue to decline a little bit.

So the first question is related to the tariffs. So in terms of the tariffs, basically, as we are in the ODM business. So theoretically, the tariffs are all on the customer side. But in reality, how we pay for the tariffs, how we really pay the tariffs -- sorry, how the tariffs are really be paid?

It can be negotiable. So for example, sometimes for some orders or customers, the customers they may pay the tariffs directly by themselves. But sometimes, we may pay the tariffs before -- we may pay the tariffs first. And then our customers will pay us back like maybe 1 or 2 months later. And in terms of the tariffs, I think 95% of our revenues or 95% -- more than 95% of our businesses on this FOB basis, which means that it's our customers to pay the tariffs. So that's my answer related to the tariff question.

So for your second question related to the capacity, when I said we actually had a pretty tight capacity. But still, we have some alternative ways to actually to run up our capacity, for example. Actually, most of the equipment in our factories made in-house by Delta. And then also for most of the manufacturing process are assembling projects -- process. So we actually have some flexibility to switch lines or to actually ramp up the capacity in relatively faster pace. Actually, in reality, for example, that actually always takes -- at least a few years to construct a new plant. So for example, the plant we have today, which was built or started -- which was built like 2 years ago. And then by then, 2 years ago, the capacity was planned for maybe different business. But over time, the business landscape and demand landscape can change. So that's why we always need to have such a flexibility to -- we always need to have this flexibility to switch the production lines maybe from one product line to another. So as I said, I mean, in order to fulfill the customers demand. So we actually have the discussions with our customers. So for those, non-American market orders, they actually agreed their products to be made in China because in China, we still have pretty much capacity. And then in India because of the tariffs. So if we are not -- maybe not able to see the further decline in terms of the tariffs in India. So we may not be able to shift our production there. And then in Taiwan, basically, in Taiwan, I think there is some, I mean, natural ceiling in terms of the capacity because of the electricity in terms of the labor and in terms of the lands. And then also in America, in the U.S., we are building some new factories. And then we may also run some more factories in the U.S. to build up new capacity.

So for the third question, which is related to this year and last year's driver for the company. I think if you haven't to notice recent news in the U.S., actually, a data center, very recently just signed a deal with an operator. And this operator is actually a data center infrastructure construction or -- sorry, a building company, which is -- which actually provides or offers data center infrastructure. And then the deal size was around USD 40 billion. So of course, I mean, the company -- the operator is a private equity. So we couldn't really see its revenues. But still, it means that if data centers are willing to pay such a high multiple to buy a data center infrastructure company, which means that data centers, the data center companies they are still very highly committed to the AI CapEx investment. So given that all those reasons, we do believe that for at least for this fourth quarter or for net -- for the whole next years I think the momentum should be fine.

And for the fourth quarter and first quarter, I think we are quite optimistic. But still the environment changes always change so fast. So we still need to be cautious and be prepared.

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So for next question, which is related to whether we are going to have new capacity in Thailand for your liquid cooling solution products? I think, as I said, actually for the non-U.S. orders or non-U.S. products or solutions, it's not just -- they can actually be produced in China because in terms of the components, especially those mechanical parts, the ecosystem as a supply chain is most comprehensive -- it's most comprehensive in China. So that can also kind of ease the capacity tightness a little bit.

So my next question is related to your DC/DC converter business because earlier, you mentioned that this year, the revenues is likely to drop maybe by 25% because of the platform -- because of the site changes. So how should we think of this business going forward?

Have you seen any -- the big customers, they decided to use the DC/DC modules again for their new generation products. For this year, the new generation products, they are still not using the DC/DC modules. But still, I think for -- not just big customers. Actually, for other customers, we have been seeing increasing penetration, increasing our adoption rates from other customers for our DC/DC converters.

So my last question is related to your ESS, energy storage system; and your BPU business. So I think for the large scale, energy storage system, in terms of the application, it's not just for the data centers. But indeed, the -- we have been seeing increasing demand for this energy storage systems. And then in terms of the energy storage systems, there are actually some critical components and critical functions within the energy storage system, including the BMS system and battery management. So because we actually don't make the battery cells, so we will -- we need to carefully select the competitive suppliers. Speaking of -- for the energy storage, as I said, they are used in many different -- a wide range of different applications. But in terms of SST because I think is still relatively or planting new technology and idea to the customers. So it still takes time to see the penetration rate to run up.

Okay. So for your first question, which is related to the revenue contribution in terms of our server powers and our cooling solutions. So in Q3, our server powers was around like -- sorry, 23% of our total revenues, while the cooling solutions was around 11% of our total revenues.

And the second question is related to -- our customers, they may actually think of to look for some second source for their solutions. But the question is actually, I think they are actually pretty few companies in the market, just like Delta being able to provide total solutions for customers. So how do your customers or how are your customers able to find a second source because given that there are maybe just pretty limited candidates or pretty limited suppliers in the market, being able to provide total solutions?

I think we -- of course, we do always want to provide the total solutions or provide as much as we can to the customers. But still, we already account a big portion of our customers in terms of their orders. If you were the customers, you would definitely think of, okay, I should find a second source. So it's actually pretty nature. And they also want to actually increase the competition among the suppliers. So I think it's definitely -- it's something that is definitely going to happen.

Okay. So my next question is, could you walk us through the motivation and background behind your acquisition of the Japanese company, which you announced yesterday?

Actually, our acquisition of this company is driven by our goal to integrate critical technologies in semiconductor power systems to expand both the depth and the breadth of our offerings in this space. And this Japanese company brings leading RF power expertise with a strong product portfolio and design capabilities. On the other hand, Delta has strength in global operations, large-scale manufacturing and efficient supply chain management so together, we believe the 2 companies are expected to create strong synergies across both technology and market fronts. So technically, the companies, this company's RF power and Delta's DC power are highly complementary. Commercially, our combined customer base helps expand product reach and R&D momentum. And the fundamental reason we acquired this company because we believe the RF power is becoming increasingly important in advanced semiconductor process. So that's the reason why we believe that it's actually a good deal for us to make.

So I think -- sorry, Chairman didn't really answer that. What is the estimated sales contribution from the AI-related business next year? So I think it's really hard to say because we actually shared the numbers. I mean we share the percentage sales percentage of the server powers and cooling solutions Q3. So we do hope to see the further increase from the data center-related business. But still, I think there are so many swing factors. So it's really difficult to forecast the percentage.

Okay. So my first question is still related to your CapEx planning -- sorry, capacity planning. So because you actually mentioned in your previous earnings call, you said no matter how high the tariffs are going to be -- are going to be in Thailand, in terms of the overall manufacturing costs, making products in the U.S. is going to be much, much higher than making the products in Thailand in terms of the manufacturing costs. So does that mean that you have actually different thoughts in terms of the U.S. manufacturing?

So I think, as I previously elaborated. I think it's not just about the manufacturing cost in the U.S. is indeed pretty expensive. But also, there are some other factors making the U.S. -- made in U.S. is even more challenging. So for example, the labors are actually one of the key bottlenecks when you think of make the products in the U.S. So there are actually many different factors you need to think of when you consider the capacity planning for your products.

But still, we do continue to expand our capacity in the U.S., but it's not going to run up -- run up very quickly. So I think it's probably going to take maybe 2 years before we see the bigger or meaningful -- more meaningful capacity in the U.S.

So before that, I think we may just brand the factories in the U.S. in order to fulfill the needs of our customers. But still, I don't think the capacity -- the U.S. capacity is going to account for a really big part as a percentage of overall capacity.

So my first question is related to your hydrogen energy. So can you please give us some updates on the hydrogen energy batteries, including your technology deployment, capacity, build-out and the [ TAM ]? And when will you begin to contribute to Delta's revenues and profit?

So Delta's hydrogen energy technologies licensed from the U.K.'s series power and used solid all-size stacks. For example, hydrogen fuel cells can generate electricity, water and heat from oxygen and hydrogen with maybe around 60% efficiency. And with the heat recovery, the overall efficiency can reach up to 85%, which is notably higher than the centralized gas turbine generators at maybe around 40% to 50%. So because of the energy efficiency in terms of -- is much higher than -- it's much higher than the traditional gas turbine generators. So that is the reason why we acquired this company in the first place. However, as this is a new business, it requires significant resources and time. And within the next 1, 2 years, we do -- we do not expand hydrogen to make a meaningful contribution to Delta's financials.

So the second question is related to your M&A strategy. So I think we actually keep looking for the good targets in the market, either for the new technology or for the market assets. But still, when it comes to the deal, whether or not we are able to close a deal, it's actually subject to many different factors. So for example, I think timing is actually one of the issues or one of the factors because for example, even though we may believe that a company is a really good target to acquire. But if the multiple, the valuation is too high for us. And we are not able to have good return from these investments. So I don't think that we will go on or we will make this deal. And then sometimes, if the target with really good, for example, technologies, but with very poor financials. So we may also think twice or maybe very likely to decide not to acquire because we don't really want to spend so many years to turn a company around. So there are actually many reasons or manufacturers to consider when it comes to the M&A strategy. But overall, we do keep -- always give an eye in the market, and we do view this M&A as one of our main tools or growth engines to accelerate our growth.

So because everybody is really concerned about the AI. I want to ask the questions. I want to ask a question, which is related to your non-AI business. So can you give us some updates on your Mobility and your Automation business?

I think the Mobility business and Automation business, these 2 businesses have been very challenged this year. With evolving U.S. tariff policies, many manufacturers are in wait-and-see mode on capacity investment. So IA demand remains very weak. However, with lower base growth has recently turned positive, and we hope for further improvement by year-end. Our Automation division's losses primarily -- were primarily related from the building automation, lacking scale, especially under soft commercial demand in Europe and the U.S., which has widened the losses. And the EV components market also remains depressed. Outside China, nearly all major OEMs are seeing clear declines in EV sales this year, and many have paused or even stopped new pure EV platform development. So I think having said that, we still remain positive on the long-term EV trend, especially with solid-state battery technology. Once there is a meaningful breakthrough, it could transform the industry. So we will continue to strengthen our technology and operational base. So what we have been always doing is there are always up cycles and down cycles for different businesses. But for example, in terms of the Automation Business, it's actually a very long-term business. So we do hope to be prepared before the market recover. So that is the whole idea.

So if you don't have any other questions, thank you for joining us today. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]