Lite-On Technology Corporation (2301) Earnings Call Transcript & Summary

Dear investors and media friends. Welcome to Lite-On Technology's 2025 Q2 earnings conference. Besides the Q2 and H1 results, we hope that you will understand better Lite-On's strategies and deployments after many operational adjustments and transformations in recent years to face uncertainties in the macro environment. The meeting will begin when everyone is seated. The senior executives present today include President, Anson Chiu; and CFO, K.T. Lim. The agenda consists of 3 parts. I'll first explain the financial results and performance of Q2 2025. Next, President, Anson will explain the operating outlook and growth strategy. Then the Q&A session is open for questions and further explanations by Anson and K.T. For those here for the first time, this page provides an introduction to the 3 major business segments, which are Opto-Electronics including opto-electronics, semiconductors, opto-electronics. Next, Cloud and AIoT used in data centers, servers, 5G networking equipment, AI, IoT, et cetera. ITC, applied in laptops, workstations, desktop computers, game consoles, et cetera. Lite-On's Q2 revenue was TWD $40.4 billion, GP TWD $8.9 billion, with a rate of 22.1%; OP TWD $3.7 billion with a rate of 9.2%; OpEx, TWD $5.2 billion with a rate of 12.9%; OIOE, TWD $540 million; net profit after tax, TWD $3.16 billion; EPS, TWD $1.39. Overall in Q2, revenue went up 21% Y-o-Y. All the 3 segments achieved Y-o-Y and Q-o-Q growth driving the overall revenue back to the Y-o-Y growth track. Despite the sharp appreciation of the Taiwan dollar, GP went up 21% Y-o-Y, and 9% Q-o-Q. OP went up 14% Y-o-Y and 1% Q-o-Q, mainly benefiting from growth of high-value businesses, optimization of global operational efficiency and close collaboration with the supply chain. OpEx went up 27% Y-o-Y, mainly due to shipping related costs and increasing R&D investment in Q2. R&D accounted for 5.2% of revenue, up nearly 20% Y-o-Y, especially in cloud computing, 5G, opto-electronics and new businesses. OIOE, TWD $540 million due to the recognition of losses on financial investment evaluations. Net profit after tax, TWD $3.16 billion, EPS TWD $1.39 billion. Okay. In H1, our revenue was TWD 76.8 billion, GP TWD 17.2 billion with a rate of 22.3%, OP TWD 7.4 billion with a rate of 9.6%. OpEx, TWD 9.8 billion with a rate of 12.7%, OIOE TWD 1.5 billion. Net profit after tax, TWD 6.6 billion, EPS TWD 2.89. In Y-o-Y terms revenue went up by 24%, benefiting from growth of the 3 major segments and growing share of high-value businesses. GP went up 30% Y-o-Y and GPM 1 percentage point, OP went up 34% Y-o-Y and OPM, up 0.7 percentage points. This reflects the synergies of operational flexibility and resilience with high-quality growth in the high-end businesses. OpEx went up 26% Y-o-Y. In it, R&D accounted for 5.4% of total revenue, up nearly 20% Y-o-Y, focusing on enhancing the value of core products and investment in new business. OIOE, TWD 1.5 billion. Net profit after tax in H1, TWD 6.6 billion, EPS TWD 2.89, up 20% Y-o-Y. Okay. Now the 3 major segments in Q2, Opto-electronics and Cloud and AIoT together accounted for 60% of revenue, up 2% Y-o-Y. OP went up 14% Y-o-Y. All the 3 segments saw both Y-o-Y and Q-o-Q growth. Cloud and AIoT revenue reached TWD 16.7 billion, accounting for 41%, up 37% Y-o-Y, thanks to shipments growth of new generation, high-end cloud powered products, revenue went up by 50% Y-o-Y, OP TWD 1.9 billion, roughly, up 30% Y-o-Y. Now Opto-electronics revenue, TWD 7.6 billion, accounting for 19%, up 5% Y-o-Y. The visible light mini LED and invisible light core applications in opto-electronic semiconductors continued to improve with revenue up nearly 10% Y-o-Y, OP TWD 740 million, up 42% Y-o-Y. ITC revenue TWD 16.1 billion, accounting for 40%, up 16% Y-o-Y. Shipments of IT high-end power, low-orbit satellites, game console power and smart input devices grew Y-o-Y with revenue up nearly 20% Y-o-Y. OP TWD 1.4 billion, up 3% Y-o-Y. Now let's look at our balance sheet. In Y-o-Y terms, accounts receivable in Q2 went up by TWD 2.2 billion due to sales increase. Inventory went up TWD 600 million Y-o-Y. In current liabilities, short-term loans went up by TWD 5.5 billion Y-o-Y. Accounts payable went up by TWD 5.7 billion Y-o-Y. Current assets decreased by TWD 4.4 billion and current liabilities increased by TWD 9.5 billion. As a result of that quick ratio, 1.18x and current ratio 1.45x, which are relatively stable. Accounts receivable and inventory days decreased by 7 and 5 days, respectively. CCC cash cycle improved by 12 days Y-o-Y, reflecting improved working capital management. Net cash in Q2, cash expenditures, including treasury stock repurchases and cash dividends were about $8 billion. Net cash position in Q2 was TWD 52.6 billion. This will prepare an improved business performance in the future as well as investment and growth in core businesses. Okay. Since 2021, the company has strategically increased the share of high-value businesses while reducing noncore businesses. In recent years, our GPM has increased from 18.5% to 22.3% in H1 this year. OPM has increased from 7.9% to 9.6% in H1 this year. Revenue in H1 grew 24% Y-o-Y and OP grew 34% Y-o-Y, reflecting high-quality growth. Now operation optimization. We develop high-value businesses towards system integration, the share of Opto-electronics and Cloud and AIoT in total revenue has to 61% in H1 from 51% in 2021. Cloud and AIoT revenue reached TWD 32.3 billion in H1, up nearly 40% compared to the same period in 2021. The growing share of high-end businesses has led to overall profit margin growth. Very quickly, in Q2, revenue, TWD 40.4 billion, up 21% Y-o-Y and 11% Q-o-Q. All the 3 major segments achieved Y-o-Y and Q-on-Q growth. GP went up 21% Y-o-Y with a rate of 22.1%. OP went up 14% Y-o-Y with a rate of 9.2%, benefiting from the growing share of high-value businesses, global optimization of operational efficiency and close collaboration with the supply chain. R&D accounted for 5.2% of revenue in Q2, up nearly 20% Y-o-Y focusing on cloud, opto-electronics, 5G and new businesses. Net profit after tax, TWD 3.16 billion, EPS TWD 1.39 billion. In H1, revenue was TWD 76.8 billion, up 24% Y-o-Y. GP went up 30% Y-o-Y, GPM 22.3%, up 1 percentage point Y-o-Y. OP went up 34% Y-o-Y, OPM 9.6%, up 0.7 percentage points Y-o-Y. EPS, 2.89, up 20% Y-o-Y, thanks to smooth shipments of new generation AI server power, cloud computing products and power management systems, cloud and AIoT achieved Y-o-Y growth of more than 50%. The core -- the visible light mini-LED and invisible light core applications in opto-electronic semiconductor continue to improve with revenue up nearly 10% Y-o-Y. ITC, the proportion of high-end products has increased and shipments of low-orbit satellites, game console power and smart input devices grew with revenue up nearly 20% Y-o-Y. This morning, BOD approved a cash dividend of NTD 2 per share for Q2 2025. On June 9 this year, the repurchase of 24,219,000 treasury stocks was completed, accounting for 1.03% of the issued shares. These shares will be written up for capital reduction in order to protect shareholder interest and strengthen corporate governance. This concludes the financial highlights for H1 2025. Next, Anson will explain the company's operating outlook and growth strategy. Thanks.

All right. Thank you, Julia. And also thank you to everybody here for coming to Lite-On second quarter investor conference. When I came in, my colleagues told me that today turnout is very high, and it definitely seems that way from up here. So thank you all for coming. Well, as we all know, starting in the second quarter of this year, the Taiwan dollar has appreciated very rapidly against the U.S. dollar. Currency appreciation affects Taiwan's businesses, both in terms of revenue and in terms of profit. So I don't know about other companies, but looking at Lite-On, if we were able to exclude exchange rate factors, then actually, our second quarter revenue could -- would have been higher by 4%, and our gross profit rate would have improved by 0.2 percentage points, and our operating profit rate would have increased by 0.5 percentage points. Of course, currency exchange rates are a factor that's beyond our control. What we can do is to continue to innovate on our technology, continue to optimize our costs, improve our operating efficiency and do a financial hedging to respond to these changes. But the most important thing is to strengthen our customers' identification with our values and strengthen their trust in us. Also in the second quarter, the U.S. announced a pause in the new tariffs. So the tariffs did not cause a major impact on our operations in this quarter. However, regardless of how high the tariffs end up being, we will continue to pursue our strategy of globalization. We will expand our production capacity in Taiwan, in Vietnam and North America. This will improve our global operational performance and scale, and allow us to build a flexible and resilient supply chain management system. We anticipate that our planned capacity expansions will be completed on schedule in the third quarter allowing us to meet local market and customer needs. This strategy is not a response to short-term changes in the environment. Rather, they are part of our long-term planning and preparation. This also includes the introduction of digital simulation, automation and building more production flexibility across our different manufacturing sites. All of this strengthens our operations in the face of a changing environment. So we talked about tariffs and exchange rates. These are external factors that are beyond our control. So what we can do is to continue to strengthen our own competitiveness. We will continue to invest in our high-growth, high value-added core businesses. So currently, we're seeing continued strong demand in cloud computing, including in our BBU and 33-kilowatt power shelf products and also including our 72-kilowatt power shelf. So the growing demand for these products are very clear in the second quarter and will continue into the third quarter. In the future, we will launch new products such as the side power rack and the liquid to air cooling system. These products have now entered the customer certification phase, and we are confident that they will contribute to our shipments in the second half of this year. This may add COMPUTEX in Taiwan and this June at the Data Cloud Global Congress in France, Lite-On showcased many of our innovative technologies under the theme of Lite-On Power AI. This includes our 800-volt HVDC power supply, our silicon carbide and gallium nitride, high-performance power supply racks and our modular liquid cooling system. These allow us to provide integrated power supply and liquid cooling solutions, allowing our customers to build low-energy consumption AI data centers. We forecast that for this year, the AI contribution to our revenues. Well, last quarter, we said that it would be between 15% to 20%. And now we see that it would likely be towards the higher end of this range. And with the growth in volume of AI chips, it will see steady growth in the future. Looking forward to the third quarter, although uncertainties such as the exchange rate and tariffs will continue and international geopolitical complexities will grow, all of this will cause some uncertainty in ICT and consumer markets. However, Lite-On's core businesses will still see quarter-over-quarter and year-after-year growth. We are very confident in this because our high-specification AI power management system, including power supply, energy storage and integrated racks will see continued growth momentum in the second half of the year. In addition, photocouplers are regaining momentum in the new energy and industrial control markets. Many LEDs are also seeing new applications in the second quarter. Also, our high-end gaming consoles and gaming power supply markets are very stable. And in low orbit satellite power supplies, we are seeing good performance. Lite-On has become the main supplier in this field. So looking forward to the rest of 2025, we will continue to pursue technological innovation, our globalization -- globalized manufacturing strategy and sustainable operations. This will improve our corporate resilience and competitiveness while we become a reliable and trustworthy partner for our customers. And all of this will contribute to our next phase of growth. That is my overview of the second and third quarters. Thank you again for coming to today's conference, and I wish you all a good rest of the day.

Thank you, Anson for your clear explanation. Now is the Q&A session, and we will provide more explanations.

Hello, the management team. This is Terry from KGI. Here's my first question, the Q2 numbers. The GPM and OPM went down Q-o-Q. So is it because of the product mix or tariffs or some other factors? This is my first question. Thank you.

The GPM growth, well, as I have mentioned, the whole time we have been improving our operational quality. So this is the direction that we have embraced. So our GP growth is due to as Julia mentioned, in Q2, cloud computing data center growth was more than 50%. And because of this, our GP and our OP grew as a result, of course, there are negative factors, as I said, if we exclude foreign exchange rate impact, then our results, our performance should be better than this.

Managers, this is Sherry from [indiscernible] Investment. Well, you talked about new capacity in Q3, BBU in Taiwan and in the U.S. So how many lines are there, respectively? And what about the new capacity in Vietnam, when will that be ready?

Well, Taiwan and North America focused on BBU and PSU for now. There will be 3 lines added in Taiwan and in Plano, Texas. There will be 4 lines added for BBU. And in Q3, they will be ready. As for Vietnam, we continue to relocate our capacity from Mainland China to Vietnam, especially in terms of ITC and consumer products such as game consoles. So this is about Vietnam. So the new capacity there will be ITC and consumer product space.

A follow-up question. Last year, you mentioned that the OPM went down because of high-end power going to Vietnam for production. So I want to ask you, server-related products in -- shipped from Taiwan, from Vietnam and from Mainland China. What are the percentages?

Well, mainly Taiwan and Mainland China accounting for roughly 80%, whereas in Vietnam, we only moved some enterprise PSU there. So it's less than 10% from Vietnam. In terms of BBU, Taiwan and North America account for 50%, respective.

Okay. My last question, liquid cooling. Next year, what will be its contribution to your revenue? Now you have liquid to air shipments already. So what will be its contribution to revenue?

Well, next year, we hope to achieve 5% in our total revenue. It seems that in Q4, we will have a chance to ship some CDU. Our current plan is that these products next year can help us -- can help us achieve 5% of the company's total revenue.

Hello, President and CFO. I have many questions. I will ask them one by one. Otherwise, I won't remember. First of all, in Q2, the cost number was higher. Julia mentioned R&D and also she mentioned shipment related costs. So can you elaborate? And what's the absolute amount from that part?

Let me first answer the first part of your question. Our CapEx in Q2 went up quite a lot. And part of it comes from the fact that we prepay tariffs for our clients because in terms of BBU, we need to ship the U.S. directly to our clients and the tariff is 10%. So we prepay this tariff for clients and in their monthly settlement that money comes back to us. Of course, that affects our GP and OpEx because when we prepay it's in our CapEx. It's outbound cost that when we receive the money, it becomes our lower material cost. So -- but the impact is not that big. This is the first thing. Second, our R&D compared to the same period last year, if you look at the absolute amount, this year, the absolute amount is still much, much larger. So in high value-added segments such as liquid cooling or some future-looking MV300 or GB300, for example, from NVIDIA. We invest a lot of R&D expenditure to -- for development. So because of R&D and tariffs, our CapEx in Q2 went up significantly. That's the main reason.

So the prepayment in Q2, is there an absolute amount were roughly TWD 400 million. Well, so high. So can I call, can I do the math? So, 10% is a tariff percentage in general, but unit prices are different for different products. So it's not possible to calculate that, but the total amount is roughly TWD 400 million?

Yes, correct.

Okay. So tariffs may change in the future, but regardless, the prepayment in the future will continue, right? Because if you continue to ship BBU from Taiwan to the U.S. and every month that becomes the revenue and GPM?

That's the current situation, but we hope that clients will ultimately deal with that by themselves. We are talking about this with them so that the numbers become clearer.

Okay. So again, I would like to ask since it's TWD 400 million under a 10% tariff. So does this mean that you're selling about TWD 4 billion?

No, that's not the case. Well, I can't tell you how exactly to calculate this. Okay. But -- so the prepaid tariff is TWD 400 million tariffs.

Next question is you mentioned that 72-kilowatt power shelf in the future. So is that 12 kilowatts per PSU?

Yes, for the RB3 yes, the single PSU is 12 kilowatts.

Okay. So for Lite-On, when will the 12-kilowatt product be ready?

It's already ready I believe by the fourth quarter, the shipments will begin.

Okay? So in the fourth quarter, there will be 72-kilowatt power shelves being shipped? We also mentioned that the AI revenue contribution for 2025 will be 15% to 20%, likely towards the high end. So can I ask about the contribution for the first half or the second quarter? The second quarter or the first half?

Well, for the first half, it would be 15% or 16%, if I remember correctly, because BBUs didn't start mass shipment until the second quarter. So the second half, the contribution would be significantly higher than the first.

Okay. So for the first half, it's 15% to 16%. And the BBU started shipping in mass in the second quarter. So in -- within the 15% to 16% in the first quarter, can we get a further breakdown, for example, BBU and PSU?

Well, looking at the second quarter, the BBU and PSU should be about 1:1, I believe. But I don't think I can give you a more detailed calculation than this. Let me add to this. Well, in our Cloud Computing segment, we have 3 categories of products. First, we have power products, including the PSU and the BBU. In terms of absolute amounts, PSU is still greater than BBU. We believe that in terms of revenue, we have PSU and BBU, and we also have [rack]. So that's the 3 major categories of products in cloud computing, PSU, BBU and [ racks ]. So within the 15% to 16% contribution of AI, about 80% of this is still PSU. BBU accounts for about 10% to 15%. That is the case right now.

Okay. One last question. You mentioned CDUs and liquid cooling in the fourth quarter. Can I ask about the specs?

It will be 120 kilowatts.

And it's liquid to air?

Yes. Liquid to air 120 kilowatts.

Well, actually, a lot of my questions have already been asked. But I would still like to ask a little bit about the exchange rates. You said that -- like the previous asker said, the GPM and OPM is lower in the second quarter, and you said that there were many reasons behind this, for example, tariff prepayment and R&D expenses? Are there any more?

Yes. This affects both. Of course, for GPM, it was affected by the exchange rate. As I said, the exchange rate impact was about 0.2 percentage points. As per OP, this was affected by the prepayments of the tariffs. If we look at our overall operations in the second quarter, the impact of exchange rates on revenues is due to the currency conversion. So because the revenue goes -- NTD goes down, that affects our margins, of course, because the overhead is the same. So if the revenue goes down in NTD terms, then, of course, the percentage of the overhead compared to the revenue will go up. So there are many reasons, but so you can't attribute it to a single reason.

Okay. I have another question, which is that does the tariff prepayment only apply to BBU?

Yes, basically, because it does apply to other products, but the share is very low. For example, we do export some LEDs directly to the U.S. and that would be affected by the tariff prepayments as well. We have many products that are shipped to our ODMs and then our ODMs ship the final products to the U.S. So for those products, the tariffs don't have to do with us. But for the BBUs, we ship them directly to our customers in the U.S. So the tariff impact will be greater for the BBU. For the other products, the impact of tariffs is low. To give you an example, when we work with PC system manufacturers, we provide them with keyboards, adapters, mouses, et cetera. So we ship those to the computer system manufacturers and then the computer system manufacturers exports them to the U.S., and they are in charge of the tariffs. So the tariff impact for those products is lesser for us.

So can we have an estimate for the third quarter in terms of revenue? Because you said that Y-o-Y and Q-o-Q revenue growth is confident for the third quarter. So is that high single digits or low single digits, et cetera?

Well, looking at revenues, we are forecasting a currency exchange rate impact of about 10%. What do you mean by 10%. I mean that compared to the same quarter last year, the currency would have -- the NTD would have appreciated by about 10%. So what does that mean? That means that our revenue in USD terms will need to grow by at least 10% in order to overcome this currency appreciation rate. So there will be an impact of about 10% on our revenues.

So what about the margins? Will the margins be flat or increase compared to the second quarter?

Well, that would depend on our actual operations. But generally, the second half of the year is a peak season for us. So I did mention that due to tariffs, some of our ICT customers may have pulled ahead their demand to the first hat. That is a factor. But we do anticipate that the third quarter will be at least as good as the second quarter. So we are optimistic about the third quarter. And due to AI, we are quite optimistic that our performance for the second half would be better than the first half.

President, I have a follow-up question. You mentioned that in Q2, the AI percentage was 15% to 16%, in the entire year is about 20%. And in H2, ITC is going to be worse. So what about the percentage of AI power or Cloud & AIoT segment?

Well, it should be more than 20% simply put. If we look at this, well, as I said, 80% comes from PSU. So AI percentage is about 80%, while 80% comes from PSU or enterprise is in the second half of this year, the entire company's percentage is going to go up, then here, there needs to be an increase of 10% to 20%. This is roughly the logic behind this.

Mr. President, sorry, one question. You said that in Q2, the BBU shipment was massive, is it related to the Q2 GPM going down? You said that the GPM in Q2 was relatively lower. Well, you said that BBU GP is lower than average. And right now, Taiwan to U.S. tariff is 10%. We don't know about the future tariff percentage yet. So I think you have new capacity in both Taiwan and the U.S. So production in Taiwan, plus 10% or 20% tariff versus production in the U.S., which is better?

Well, if we just look at BBU products, indeed, the GP is lower, then the margin is lower than PSU. So in the entire portfolio, when BBU share goes up, the margin -- gross margin goes down. And second, now the tariff in Taiwan is 10%. When we -- even if we produce in the U.S., we still need to pay this 10% tariff because we need to ship materials to the United States, right? So when we ship final products to the U.S., we need to pay 10% tariffs. But even if we just ship materials to the U.S. for production there, we still need to pay 10% tariffs. So regardless, so produced production cost in the U.S. will always be higher than that in Taiwan. This fact will never change.

But -- if that's the case, why do we still want to do that?

Well, because locally, we can get closer to client needs. Of course, the costs are different. Clients understand this, and they are still willing to buy from us.

Hello, President, CFO and Julia. This is Sharon from Morgan Stanley. I have 2 questions for you. First of all, if we look at the numbers by segment. In Q2, the ITC operating margin was much lower than that in Q1. What does that imply? Is it related to the tariff prepayment, is it unrelated or totally related? Yes. So maybe you can explain to us why in Q2, the operating margin was lower than that in Q1. So can I understand in the ITC segment, the operating margin was lower in Q2. Why is that? This is my first question.