ENNOSTAR Inc. ($3714)

Welcome to ENNOSTAR Inc.'s 2026 First Quarter Financial Results Call. [Operator Instructions] I'd like to hand it over to Ms. [Ying Hu] of ENNOSTAR. Ying, please go ahead.

Good afternoon, ladies and gentlemen. I'm [Ying Hu] from ENNOSTAR's Investor Relations. On behalf of the company, I would like to welcome you to participate in our 2026 first quarter financial results conference call. I have 4 executives joining me: Paul Peng, Chairman of ENNOSTAR Inc. Patrick Fan, Chairman of ENNOSTAR Corporation; Terry Tang, President of Device Business Operations; and Alan Wang, Chief Financial Officer of ENNOSTAR Inc. Today's agenda is as follows. First of all, our CFO will go over the 2026 first quarter financial results. Then our Chairman, Paul, will have an opening remark. After that, Terry and Patrick will cover the second quarter outlook. Then we will wrap up with Q&A. I would like to remind you that all forward-looking statements contain risks and uncertainties. Please spend some time to read the safe harbor notice on the slide. Now I would like to hand it over to our CFO for an overview of our Q1 results.

Ladies and gentlemen, good afternoon. I'm Alan, CFO of ENNOSTAR. Let me walk you through our 2026 first quarter operating results. Q1 is typically a slow season with fewer working days. However, we benefited from continued volume growth in professional lighting and backlight applications, plus strong demand from laptop facial recognition rather and industrial sensing products. Our consolidated revenue in Q1 was up by 0.7% Q-o-Q to to TWD 5.245 billion, while it was down by 6.9% Y-o-Y. OP margin in Q1 was still negative at negative 5.8%, but improved by 19.4 percentage points versus last quarter. So OP loss narrowed. This was mainly driven by higher revenue from horticulture lighting and sensing applications, better utilization and a meaningful reduction in our operating loss compared to the fourth quarter of 2025. Net profit margin was negative 2.8% loss per share, 0.2. Net loss attributable to the parent company was TWD 149 million. Next, on revenue by application. Let's first look at the bar representing the first quarter of 2026. Even with the Lunar New Year holiday and seasonality, which made automotive and display signage a bit softer, Growth in horticultural lighting, backlight and sensing applications helped lift our overall revenue. Moving on to the balance sheet. As of the end of the first quarter, the group had TWD 12.2 billion in cash. So liquidity remains rather strong. Inventory increased by TWD 700 million Q-o-Q to TWD 5 billion, mainly because we started building materials for higher Q2 demand and modestly raised utilization. Inventory turnover was 91 days. Lastly, on cash flow. Despite the operating loss in Q1, cash flow from operating activities remained positive. Investing and financing cash flows mainly reflected CapEx and borrowing activities. That's my overview for Q1. Now I'll hand it over to Paul for a recap of our Q1 performance and the Q2 outlook.

Good afternoon, ladies and gentlemen. I'm Paul. For Q1, as our CFO just noted, we continue to ramp the volume for professional lighting and backlight applications. Demand was also very solid for notebook facial recognition and industrial sensing. Despite the slower seasonality, our revenue in Q1 was roughly in line with Q4 2025. We have been implementing structural improvements across our business and our product mix continues to improve. We are prioritizing profitability and maintaining disciplined control over our OpEx. While the core business slightly in red, our OP margin has improved significantly year-over-year. As the share of higher-value products increases and gross margin improves, achieving overall profitability in 2026 remains our management team's top priority. We have a strong position with ample cash and no debt, so remain net cash. However, inventory increased slightly, and this will be a key focus for our ongoing management. We have a solid financial structure at the moment. In early April, we participated in Touch Taiwan and showcased new technologies and products. We have strong traffic from both industry visitors and those outside the industry. And the ENNOSTAR booth was one of the most active areas at the show. Across our 3 plus 1 areas, we showcased technologies that are already in mass production or will be soon launched. In particular, the CPO module we co-exhibited with the group together with AUO and T-Tech was shown at the Taiwan Pack Expo for the first time and drew strong interest. In addition to the short-range optical communications module enabled by micro LED mass transfer, our mid-range VCSEL and long-range CW DFB laser technologies are fully mature and already in mass production. Going forward, we will allocate more resources to optical communications, robotics and field applications as key focus areas for ENNOSTAR. For microLED display applications, we are beginning volume shipments this year, and we expect revenue to grow by multiples. Looking ahead at the second quarter, we are entering the peak season for components. We expect revenue to continue to increase versus Q1. We will continue to manage costs and OpEx, and we expect profitability to improve quarter-by-quarter. That said, shifts in the global environment may continue to push up energy and raw material costs. Demand visibility also remains limited, so we will continue to take a prudent approach. That concludes my remarks for today. Thank you.

Thank you, Paul. Next, we will go over our business outlook for Q2 2026. Terry will cover advanced display, sensing, special lighting and display, and Patrick will cover automotive and backlight applications. With that, I'll turn it over to Terry.

Ladies and gentlemen, good afternoon. I'm Terry. For Q2 2026 in sensing, -- we anticipate growth supported by strong demand for notebook facial recognition, along with the recovery in demand for consumer wearables. For wearable products, customers are preparing for new product launches in Q3, and we expect them to pull orders forward and increase shipments in Q2. As a result, we expect Q2 revenue to increase meaningfully with double-digit growth. In addition, for high-end applications, including VCSELs, short wavelength infrared products and industrial automation and smart wearable applications are also gradually entering end market adoption and have begun contributing to our revenue. If supply chain constraints ease, these segments have the potential to deliver even stronger growth. For specializing in Q2, demand remains strong for higher power white lighting and industrial lighting. Horticulture lighting demand is also stronger than in prior years, driven by improved efficiency. We are entering the peak delivery season and UVC products are beginning to contribute revenue. Overall, we anticipate double-digit growth Q-o-Q. For signage, we expect demand to increase in Q2 for both outdoor and indoor RGB displays. We expect shipments to be higher than last quarter with double-digit growth. Fuller visibility in this segment remains strong, and we expect customer demand to continue through year-end. For micro LED, -- after beginning the production ramp in Q1, yields are improving and capacity is coming online progressively. We expect Q2 revenue to grow by multiples versus last quarter. Our capacity expansion for the second half of the year is nearing completion. We expect second half capacity to be more than double that of the first half. As Lumina's efficiency continues to improve, microLED maintains its advantages in transparent displays and AR glasses. We also aim to further develop applications in automotive and smart watches to enhance competitiveness and expand adoption. That concludes our Q2 outlook for sensing, special lighting and display. Thank you.

Terry, thank you. Next, Patrick will go over automotive and backlight outlook.

Good afternoon, ladies and gentlemen, and Patrick. I'll start with our Q2 outlook for TV backlight. Q1 was impacted by Lunar New Year. Even with that, international sporting events supported demand. Major brands also accelerated inventory build in the first half, considering potential increases in memory and large-sized panel pricing. In addition, Chinese brands have been strong demand -- have been seeing strong demand in overseas markets. As a result, our Q1 revenue increased by 11% Y-o-Y. For Q2, we expect this momentum to continue with the potential for double-digit growth. In this segment, we also expect the revenue contribution from modules to continue to increase. For IT backlight, memory shortages has had an impact and overall Q1 growth was below our expectations. Thanks to increased contribution from a single project, however, ENNOSTAR Corporation's revenue rose by 5% Q-o-Q in Q1. For Q2, we see the potential for double-digit growth on the packaging module side. So TV backlight business is expected to post single-digit growth. Meanwhile, we are monitoring customer shift from wire bond LEDs to flip chip solutions as they respond to higher gold prices. Which requires adjustments to our capacity allocation. Moreover, due to the CPU and memory shortages and customers are frequently switching production modules, we need to respond quickly to capture business opportunities while also avoiding additional inventory. This is an area where we will continue to strengthen management in IT backlight. Now for automotive, as Q1 was impacted by Lunar New Year holidays and a softer overall automotive market, our revenue declined by 3% However, both chips and back-end packaging modules saw Q-o-Q growth. Looking ahead to the second quarter, we anticipate high single-digit growth, mainly because our automated COB backlight module production line in Mainland China will begin volume shipments in May. Module revenue is expected to increase and continue into the third quarter, making the contribution from backlight modules more meaningful to us. Moreover, I'm very pleased to share with you that ENNOSTAR Has established a fully automated automotive IT module line in Taiwan. The production line passed the Tier 1 qualification last week. And just today, it also passed qualification conducted by a third-party certification firm commissioned by an automaker. Based on the auditor's assessment, we are one of the few companies in recent years to successfully pass an automaker's qualification on the first attempt. Following these qualifications, we will continue mass production in line with the automakers' time line, and we expect revenue contribution to begin next year. ENNOSTAR Corporation has more than 50% share in automotive tail lamps and turn signals, and we also continue to strengthen our overall automotive presence. We are expecting market share in backlight modules and automotive lighting modules to increase given the relatively low base. Our module strategy is to integrate a large number of LEDs into a single lamp, including designs such as COB and POB. Demand is also increasing for intelligent signal display lamps for automakers in mainland China, and a single lamp can include tens of thousands of LEDs. Our objective is to increase the revenue contribution per vehicle even as the overall automotive market softens. That concludes our Q2 outlook for the automotive business. As Paul just mentioned, following Touch Taiwan, we have received strong interest from investors and the media regarding our optical communications development. So I will briefly address a few topics here. Regarding microLED, our -- our company places a very sharp focus on CPO, where mid-layer integration is relatively complex because it involves working with multiple system components. Therefore, in addition to improving microLED response speed, we are also addressing cross-supply chain interface issues. This is one of ENNOSTAR's strength, specifically our expertise in enabling high-volume mass transfer of microLED onto a consistent structure. Across the entire supply chain, there are different stages, and each stage has technical items that need to be addressed. For VCSEL connectivity, we plan to enter the market with existing products in collaboration with partners. ENNOSTAR is an optical communication supplier while current products may not yet meet the highest specifications, we see a meaningful opportunity to enter the market and build the business. We will also start with the VCSEL Terry just mentioned, first for optical sensing and then extend into optical communications. At the same time, we plan to improve transmission speeds to 100G and even 200G. We will stay focused on end market requirements, not only technical specifications as optical communications will be crucial for future data centers. At the same time, we are pursuing multiple approaches and working with partners strategically. We expect to provide test samples to major optical communications companies in the second half for validation. For CW-DFB lasers, in addition to reaching the 100 milliwatt specification, we are establishing mass production equipment that can be qualified by customers. The work on key equipment began at the end of last year. This year, we aim to shorten the implementation time line so that samples produced on the line can be validated by our customers. As product time lines shorten, we also need to accelerate the production line to support faster delivery. At the same time, we see gap across the entire supply chain. Beyond upstream epi chips, there are gaps in front-end and back-end fabrication as well as in downstream packaging. We are discussing with partners across each segment how to address these gaps more quickly and accelerate revenue contribution. Recently, one of the most frequently discussed issues in the industry has been the shortage of Indium phosphide substrates with many players noting that securing sufficient supply is not guaranteed. Over the past years, ENNOSTAR Corporation has already consumed a substantial volume of Indium phosphide substrates for sensing applications. Building on our long-standing relationships with suppliers, once our optical communication projects obtain clear qualification results, we expect to engage closely with Indium phosphide suppliers. We are confident in our ability to secure the additional volumes required. After Touch Taiwan, we have also seen more collaboration opportunities from both inside and outside the industry. As many companies have approached us for discussions, we will select partners carefully and deepen cooperation with those most likely to succeed. Thank you.

Thank you, Patrick. We will now begin the Q&A session. We will now start to take questions. The first question comes from Warren Fu from SinoPac.

My question is you mentioned your optical communications road map is fairly comprehensive. Based on your current plans, which products are most likely to reach mass production and start shipping in the near term? And what is the expected timing? Moreover, I recall seeing a news report suggesting that some major international companies have approached you regarding collaboration opportunities related to indium phosphide epi. Could you share more color on this topic?

This is Patrick. I will take this question. Thank you. First, across the 3 strategic areas, as mentioned, microLED is more complex at the system level. So the time line may not be near term, even though we are well prepared. In terms of near-term contribution for ENNOSTAR Corporation, -- the VCSELs we mentioned earlier are currently the most likely revenue contributor. We plan to start with products that are not the highest specification through collaboration with our partners. There are unmet needs in this segment. While it is not the top end segment, it provides an opportunity for us to enter optical communications and build our experience. For indium phosphide, we have signed an NDA with the customer, and we are continuing our technical development. We expect to have samples ready in the second half for evaluation by a major international customer. We are not aiming to rush sampling. Instead, we want the first submission to meet approval requirements.

May I have a follow-up? What is the expected mass production time line for your CW lasers?

For CW, we expect the mass production equipment to be installed by the end of this year. We will have a sample for testing available first, and the production line is anticipated to be ready this year. Since RA requires 5,000 hours, so the earliest, most optimistic timing would be the second half of next year. And customer samples will be produced from the mass production line.

The next question also comes from Warren Su of SinoPac.

As a follow-up, you mentioned VCSELs appear to be progressing the fastest. For the end market, is the key use case rack-to-rack interconnect. Could you elaborate on the end applications?

For VCSELs, as noted earlier, we are not starting with the highest spec ones. We plan to enter first with applications featuring 25G or 56G. At this stage, we may not target the mid-range segment and instead, we'll focus on aligning with system vendors target applications. In addition, as mentioned on the DFB and epi side, we are exploring entry points across different segments of the entire supply chain. As I mentioned earlier, our current model is end-to-end with the full process from epi to chip managed internally. If we secure opportunities to participate in intermediate stages of the value chain, there is a possibility that revenue contributions could materialize earlier.

Thank you for the questions. There are no further questions at this time. I will now turn it back to Ying Hu.

Thank you. Ladies and gentlemen, thank you all for your participation. Today's earnings call has concluded. If you have any further questions, please contact our IR team. Thank you, and we look forward to speaking with you next time. Thank you all for joining ENNOSTAR's First Quarter 2026 Online Investor Conference Call. This meeting is now concluded. You may disconnect. Thank you.