Delta Electronics, Inc. (2308) Q4 FY2025 Earnings Call Transcript & Summary

Hello, everyone. Welcome to the first earnings conference of this year. And before we officially start our -- I mean, today's conference, I would like to say Happy New Year to everyone. So now we will have our IR, Rodney, to report the financial numbers for the -- for Q4 and 2025. So as usual, we have announced our financial numbers yesterday, and we also uploaded our financial reports -- financial report yesterday. So if you need more details, you can actually find the financial report on our website.

So our Q4 revenue reached TWD 161.6 billion, marking a record high for a single quarter. This represents a 42% year-over-year growth and an 8% sequential increase, mainly driven by strong data center demand. So this sequential increase was actually above normal seasonality. But just because in terms of the contributions from the data center business has been increasing, I mean, for the last couple of quarters. So the normal seasonality has become a little bit different, I mean, from -- it was -- from it was before. So in terms of the GP margin, gross profit in Q4 was TWD 55.9 billion, up 59% year-over-year and 7% quarter-over-quarter, marking a new all-time high. GP margin in Q4 was 34.6% versus 30.8% a year ago and 34.9% in Q3. Year-over-year, R&D and SG&A expenses increased 17% and 24%, respectively, leading OpEx up 21%, with profit surging 147%. Sequentially, OpEx rose 7%, reflecting 2% and 11% increases in R&D and SG&A expenses, respectively, with profit growing 6%. As a percentage of sales, R&D expenses declined to 8.1% this quarter compared with 9.8% a year ago and 8.5% last quarter. SG&A expenses were 10.2% versus 11.6% a year ago and 9.9% in the previous quarter. So benefiting from improved economies of scale, OpEx ratio in Q4 dropped to 18.3% from 21.4% a year ago and 18.4% last quarter. Operating profit was up 147% year-over-year and 6% sequentially, bringing our Q4 operating margin to 16.3% compared with 9.4% a year ago and 16.5% in Q3. So in terms of the segmentation performance, Infrastructure delivered the strongest growth with revenues up 94% year-over-year and 12% quarter-over-quarter. Power Electronics also posted solid growth, while Automation recorded modest but improving momentum. In contrast, mobility remained under pressure with sales down 31% year-on-year and 15% quarter-over-quarter. From a profitability standpoint, Infrastructure delivered the strongest performance with profit up 287% year-over-year and 25% quarter-over-quarter. Power Electronics also posted solid growth, rising 93% year-over-year and 1% quarter-over-quarter. In contrast, mobility and Automation saw year-over-year profit declines of 27% and 83%, respectively. Quarter-over-quarter, mobility recorded a profit drop, while Automation swung to a profit. So now operating income was negative TWD 800 million in Q4 compared with negative TWD 900 million a year ago and positive TWD 2.2 billion in Q3. The negative income in Q4 was mainly due to the write-offs after a careful review of the assets at year-end. So in Q4, we had TWD 25.6 billion profit before tax. And then our Q4 EBITDA was TWD 32.7 billion, up 92% year-over-year and down 7% quarter-over-quarter. Q4 tax expense was about TWD 6 billion. The effective tax rate was 23.4% and net profit after tax was about TWD 17.3 billion. So the Q4 EPS was TWD 6.67. So now let's have a look at the full year cumulative results. So the revenue was TWD 554.9 billion in 2025, up 32% year-over-year. Gross margin was up 9 -- sorry, 39% year-over-year with a GP margin of 34.3% versus 32.4% a year ago. So on a year-over-year basis, R&D expenses, I mean, increased 17%. SG&A rose 21% and OpEx grew 19%. Operating profit increased 76% year-over-year. By segment, Infrastructure delivered the strongest performance with sales up 82% year-over-year and profit surging 413%. Power Electronics also posted solid growth with sales up 25% and profit up 37% year-over-year. Automation saw modest revenue growth, while profit declined 39%. Mobility remained under pressure, while -- with sales down 16% year-over-year and profit turned to a loss. So in 2025, we had about TWD 3.9 billion, I mean, nonoperating profit. In total, we had TWD 87.9 billion pretax income and EBITDA was TWD 117.9 billion. So tax expense was about TWD 19.9 billion, representing an effective tax rate of 22.7%. As a result, net profit after tax was TWD 60.1 billion and translating this number into EPS. EPS was TWD 23.14. And yesterday, I mean, we -- during the Board meeting, we actually proposed a cash dividend for this year, which was TWD 11.6 per share. So now we are open to the Q&A session.

So I have 2 questions. So for the first question, I would like to know, would you have any guidance on the OpEx increase of this year? And then also, do you have any guidance for the CapEx for this year as well?

So for the OpEx increase, this year, I think the OpEx will continue to increase. So first of all, because we continue to have a lot of innovations and R&D need to be invested because we have, I mean, many new -- sorry, we have many new products. So we continue to need to invest a lot into the R&D and innovations of our products. And secondly, because we -- okay. So for -- sorry, for the expenses, because we continue to -- we actually are expanding our service team in other regions because we are -- our solution business -- our solutions businesses have been increasing, I mean, within the company. So we need to have more sales force and more FAEs and so on and so forth to serve our clients in different regions. So that is also part of the reasons we actually expect an increase, I mean, of the OpEx this year. And speaking of the -- okay. Speaking of the CapEx, I think the CapEx this year is probably going to be slightly higher than the CapEx of 2025.

Okay. So the next question is related to the GP margin in Q4. So could you please give us more, I mean, colors on your GP margin in Q4?

So because the GP margin in Q4 was actually softer compared to the third quarter. So my answer to that question is, I think because our GP margin is very much subject to the overall mix -- product mix of the companies. So there are actually -- because we have, I mean, very diversified and many different product lines. So the GP margin is always going to be a little bit lumpy. But I think our GP margin currently, as I always said, I think it's actually quite healthy. I mean, it's at a quite healthy level, but we just can't really guarantee that we will always continue to, I mean, to achieve, I mean, the new record high of GP margin. So I think that is actually our expectation -- a healthy expectation for the GP margin.

So yesterday, according to the financial report, I actually noticed that you actually mentioned -- I mean you actually mentioned asset, the write-offs of some of your assets on your financial reports. So can I say -- is this kind of write-offs is actually one-off or we will continue to see this kind of write-offs going forward.

So I think that is actually kind of a regular practice at the year-end of every year, I can't really say that we will -- I mean, actually expect to see such I mean, write-offs every year. But we always take this cautious and conservative approach to review our assets at year-end. So that is basically like that.

So next question, what percentage of total revenue does liquid cooling represent currently? And what level could it reach in 2026?

So in 2025, I think liquid cooling-related revenue accounts for approximately 9% of our total revenue with the majority coming from system-level solutions. But we are not in a position to provide guidance for 2026. Particularly, in terms of mix, given the diversified nature of our business and multiple variables involved. That said, with the continued expansion of AI data centers, I think our AI-related businesses, including the liquid cooling business and our power-related businesses or the liquid cooling market is actually experiencing a strong growth momentum. And so we see significant opportunities ahead. So I think in terms of the AI investment, actually, the main demand driver for the AI deployment is actually still mainly coming from the major hyperscalers, especially in the U.S. So if you look at the numbers and the investment, I mean, the CapEx numbers they have announced. So for this year, supposedly, their investment -- the absolute number of their investments are actually not less than the previous year. So of course, the CapEx investment is one thing, but there are always some other bottlenecks or uncertainties. For example, the lack of labors and the lack of the materials. So we can be totally sure about the pace of the deployment of their investments. But still, given that -- given the commitment from those major CSPs, the commitment into the AI investment from those major CSPs, so we remain actually cautious optimistic about the demand for this year. So although there might be some uncertainties and/or maybe just some ups and downs in this long-term AI cycle, but for the long run, we do believe that it is just a very early stage of this -- the new era of AI. So we remain pretty optimistic for the long-term opportunity.

So the next question is related to the potential bottleneck in terms of the power outage in the U.S. So I know that -- actually, Delta has always been very ambitious in terms of your opportunities in the energy infrastructure business. So can you tell us more about your plans or your opportunities in this space?

So I think that is actually a universal issue in many different countries and for many different types of our customers. We do have this ambition to address this issue, but -- and actually, the architecture change in the -- the power architecture change in the data center is also somewhat related to this power efficiency issue. So we will continue to work on this and let's see then what we can achieve.

So in terms of the outlook for this year, can you please give us some updates or just more colors for this -- for main segments?

So I think as we -- as our Chairman just mentioned, this year, I think the main growth driver will continue to be the AI data centers. So we actually expect to see a pretty healthy or solid growth momentum for our Power Electronics and our Infrastructure business. And even though -- and I'm speaking of the Mobility business, even though I think the market has been actually experiencing a pretty struggling and pretty challenging period. But still, in the long run, we still believe this -- the EV, it's actually one of the key to address the carbon emission issues. So we will continue to stay in this market. But just in terms of the clientele, I think we -- actually, as everybody knows that in terms of the customers, we actually had or have -- still have like much more customers. There are the European OEMs or the American OEMs. But as everybody knows that the Chinese OEMs they actually have been really, really dominant in the global market. So we will continue to try to approach the Chinese OEMs. And hopefully, our exposure to the Chinese OEM customers can continue to increase going forward. And then speaking of the Automation business, as we just reported last year, we actually had a very modest growth for Automation segment. But still, we can really say that -- I can really say that we have already seen very clear signs of recovery in the China market. So the only thing I can say is the market is probably, has already been bottoming out a little bit, but still not a very strong signs of recovery yet. So hopefully, of course, we do hope to see the growth for this year can accelerate. But that is something actually out of our control.

So the first question is actually related to the capacity. So in terms of the capacity issue, I think we still have actually pretty tight capacity in order to fulfill the customers' demand. So last year, actually at the year-end of last year, we had 3 new factories in Thailand, Three of our new factories in Thailand have been going online at the year-end of last year. And then we continue to have some new capacity plans for other regions.

So not just -- I mean, not just Thailand. Actually, this year, we even visited Mexico. But still, we are still in the process of evaluating whether the environment, the overall environment in Mexico is suitable for us to further expand our capacity in the America regions.

So the next question is related to what is the time line and shipment scale for power racks? Could this become the next growth driver?

So actually assuming no major disruptions, we expect to see initial shipments of power racks this year. However, the actual contribution will depend on customer demand and broader supply chain coordination. So visibility remains limited. Conceptually, power racks integrate additional components such as relays, breakers, cabling, PDU, ADS, BBU, PCS and even liquid cooling systems, which meaningfully expand the addressable revenue opportunity for us.

So I want to circle back a little bit to the -- to your opportunities in the energy infrastructure market. So I know that you have this hydrogen energy business, which aims to address this power insufficiency issue. So do you have any other like plans? Or do you have any other new product lines, which might actually help with this power insufficiency issue in the background of increasing power usage due to the AI deployment.

So I think we just actually briefly mentioned that the new architecture in the data center, which is actually refers to this 800-volt DC is actually part of the solutions to solve this energy issue. Because in terms of this new power architecture, actually, the AI data centers all have been -- they are all using a lot of energy and electricity. So something that we can actually do to help with the situation or issue is we help our customers to try to save as much as energy as possible by saving or reducing the energy loss during this energy conversion process. So that is actually one way that we help with this energy or electricity insufficiency issue. And the other one is actually the one you just mentioned, which is related to our hydrogen energy business. So as we previously explained in our earnings conference. This hydrogen energy actually compared to the traditional power -- discrete power generation solutions, actually, in terms of the power conversion efficiency is maybe higher, much higher than the traditional solution. So it can up to maybe 65% conversion efficiency for this hydrogen energy. But in terms of the contribution or the shipment, I think we are actually expecting to have some very initial shipment at the end of this year. But if we want to see like more -- slightly maybe more meaningful contribution from this hydrogen energy business, we may need to wait until maybe next year or even maybe for the longer run.

So you just mentioned that you already have some clients, they are testing your products. They're testing your fuel cell products currently. So what kind of customers they are. Are they like the CSPs or other types of customers?

For the hydrogen energy fuel cells, actually, the clients currently, they are the utility companies instead of the CSPs. So I think there is still for the CSP clients, penetrating into the CSP clients. I think still, it's still going to take some time to penetrate into the CSP clients.

So the next question is, can you please give us some maybe breakdown or split in terms of your power products for maybe GPU servers or maybe like ASIC servers.

Actually, we don't really have the -- we don't really provide the details for this kind of split. And actually, we provide a lot of different products, including our AC products, AC powers and DC converters for different type of data center clients. So it's actually not that simple to really separate different type of our products for different type of the platforms or for different customers. Speaking of our DC/DC converter business, we actually do not comment on specific customer programs. However, given the expected meaningful increase in the market demand, we actually remain cautiously optimistic about our overall DC/DC business this year. Generally speaking, the whole industry or the whole architecture is still in the stage of -- is still evolving. So just like many Silicon Valley guys are talking about, maybe we can actually put our -- we actually set up or set up the data centers in the space. So I think there might be some advantages of, if you try to put the data centers or set up the data centers in the space. But there is still some other problems that you have to solve. For example, in terms of the cooling, how do you plan to cool down the equipment. If you put those equipment or data center equipment in the space. So there are many different conceptional ideas are being raised in this stage, especially, during the innovation of technology. So the only thing I can say is we actually must continue to innovate in line with market trends and customer needs in order to sustain our competitiveness.

So my next question is actually, can you please give us maybe some rough breakdown or split between your AI servers and your traditional servers.

No, we think that actually it's not easy to separate AI server revenues -- AI server power revenues and traditional server power revenues.

So can you give us maybe some guidance for the Q1 seasonality because traditionally, we all know about the first quarter, historically should be the lowest season for the whole year. But just because, I mean, the product mix, the business mix has been changed over the years -- over the quarters. So can you please maybe just give us some ideas or some clues about the first quarter seasonality. And the second question is related to the high-voltage DC. As I recall that you actually not just have -- you don't just have the 800-volt DC, you also have the plus/minus, 400 volt DC. So can you please tell us the adoption rate by the CSP clients for these 2 different types of high-voltage DC power.

So I think as we -- as Chairman said, different customers actually have different preference for these 2 types of HVDC power. So -- but we do provide both solutions. So it's not a problem for us. And then speaking of the seasonality because as everybody knows that in the first quarter because there are actually fewer working days in the first quarter because of the Chinese New Year holidays. So theoretically, the second quarter is very likely going to be better than the first quarter given that reason. And then speaking of the 800 DC and plus/minus 400 volt DC, because in terms of the deployment, in terms of the pace of deployment because they are all based on the needs of our customers, so it's actually hard for us to forecast the pace of their pulling our merchandise. But still, I think, generally speaking, in terms of the sales contributions from this high-voltage DC, I think next year should actually be the main year in terms of we start to see some more meaningful contribution from the power rack business instead of this year.

So my next question is still related to the capacity issue, we just discussed at the beginning of the conference. So because you mentioned that you actually are considering to maybe expand your capacity in Thailand or maybe the U.S. or maybe even Mexico. So if you have any new capacity or new factories in those regions, are they only related to your power products? Or maybe you have plans for both power and liquid or the cooling products as well for those new factories in different regions.

So I think we always plan our capacity. We always plan our capacity based on our long-term plans instead of any short-term needs because it always takes like a few years at the very least, maybe 2 to 3 years to complete the whole construction of new factory. So we can only have some rough estimate. Let's say that we may need -- like we may need more new capacity and then we want those capacity to serve maybe the clients in different regions. So I think -- but there are always some dynamics and always some flexibility in terms of the capacity planning, especially for different type of products. So we can actually decide which factory for which product later. So we need to just think of think about which region we might want to increase our capacity at this stage. So now we -- I think we can still have like 1 last question before we call it a day.

So the final question, I think, is actually related to whether Delta has any plan on the AI robots.

So I think currently, at this stage, I think we have actually still more industrial robots, which we really have the mass production for these kind of products. But speaking of the AI robot or service robot, we actually just established a robot research center. I think it was last year. So this is actually for the long-term innovation and the long-term plan for this area. So I think in order to achieve for those so-called service robots to be more reliable and to be more realistic for the actual use, I think it's going to take maybe a few years before that. So I think there are actually some areas or some areas or some problems have to be tackled before we see that really happen. So including the sensor or the sensing technology, including the communication capability and also including the communication between the edge and cloud. And then also, you need to consider the safety issues if you want to really deploy the service robot in the live environment. So it's not like the factories environment. It's actually much more simple. It's much more simple. So I do believe it's actually going to take some time to achieve that. So I think, as I said, I think, what we have been seeing now, they are still mainly more for demonstration purpose instead of they can be actually used in the real environment. So that is my perspective. So okay, thank you for joining our earnings conference today. So I will see you on the next quarter. So thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]