Q2 2026 Compal Electronics Inc Earnings Call
Speaker #1: I am Randy Abrams, head of Taiwan Research at UBS, and I'm joined here by Mr. Tony Bonadero, CEO; Mr. Jack Wang, CFO and spokesperson; and Ms. Tina Chang, senior director and head of IR.
Speaker #1: Just to note too, as the operator mentioned, 2:30 there will be a Taiwan drill that the cellular speed may come down, so for better connection you can join Wi-Fi at that time, from 2:30 on.
Speaker #1: But with that, I'll turn it over to Tina. She'll start with a financial review, followed by Tony for the business update, and guidance, and then we'll be happy to open up to questions.
Speaker #1: With that, over to Tina.
Speaker #2: Thank you, Randy. Thank you, everyone, for joining today's call. This is Tina from Compal IR. Before we move to the details, please help us turn to page 2 for the safe cover notice.
Speaker #2: Please take a moment to review the statement. Okay. Now let's move to page 5 on the quantum mix. Compal's second quarter revenue grew substantially to $238.3 billion, non-PC contribution continued to stay around at 35% level, up about 5% points year over year, and on path to the 40% goal.
Speaker #2: The non-PC growth was primarily driven by the ramp-up of our AI services. Next page. For the income statement. . Second quarter gross margin was 4.6%, impacted by the rising component costs, particularly in memory prices.
Speaker #2: While costs passed through, supporting ASP expansion, the expanded revenue basis also diluted the gross margin ratio. However, through our continued quantum mix optimization, and enhanced operational efficiency, the second quarter gross profit dollar increased by 4% quarter over quarter, as well as a 4% year over year.
Speaker #2: Operating profit added 2.8 billion, grew 8% quarter over quarter, and a 9% year over year, outpassed the gross profit growth, reflecting the benefits from our expanded operational leverage.
Speaker #2: Not on the non-operating line, we focused most amount of interested income in second quarter, however the major contribution came from about like 1.8 billion in the month-to-market valuation gains on the financial assets.
Speaker #2: All in all, the second quarter net profit was 3.1 billion, increasing 59% quarter over quarter and substantially year over year, and the EPS was 0.73.
Speaker #2: Next page. For the first house. P&L. For the first house, the overall trend was similar, with the continued growth of the service business, ongoing quantum mix optimization, and a greater realization of the benefits from our transformation.
Speaker #2: Compal's operating scale and the profitability both improved compared to the same period of last year. The net profit for the first house was 5.1 billion, grew 91% year over year, with the EPS of 1.18.
Speaker #2: Let's turn to next page on the balance sheet. For the balance sheet, end of the second quarter, our cash position was around $83 billion, we have invested in working capital investments, with cash conversion cycle days lifting slightly to $52 days.
Speaker #2: Given our business expansion, the liability ratio slightly up to 71%, but still maintained as a relatively healthy level. Lastly, for value per share in the second quarter, was 31.3 dollars, both improved the quarter over quarter as well as the year over year.
Speaker #2: So this concludes the financial review session. So now I would like to hand over to Tony for the business update. Tony, please.
Speaker #1: Yes. Thank you, Tina. We talked a lot about, in the past, about the transformation that Compal is going through, and so I thought I'd give you an update on the Compal AI transformation.
Speaker #1: As we call it, AI inside and out. So as you look at the pie chart, everything on the right side is external, PC, it's basically the businesses and customers that we serve.
Speaker #1: Everything on the left side is internal AI transformation we're doing. So A, AI devices, we're positioned very well to capture AI PC refresh supercycle while there's still some Windows 10 end of life.
Speaker #1: We see a lot of focus on future-proofing these replacement purchases with NPU silicon, NPU-capable silicon, and AI PC offerings. We see a premium AI PC mix lifting revenue and margin.
Speaker #1: First half unit margin improved if we strip away ASP effect and volume impact. B, on AI server, Q1 26 server revenue already equaled all of FY 25.
Speaker #1: With AI servers over half of our server mix. Additionally, we're dedicated to delivering an end-to-end solution and are now building backend service capabilities coupled with regional production advantages to stand out in a crowded market.
Speaker #1: So we are seeing starting to see the lift of the AI server business with these results today. C, are the five businesses, the five-plus-one we've been talking about, focus growth engines, dedicated portfolio, of early growth engines converting from bets to scale.
Speaker #1: 5G UE, IPC, grew about 106% year over year. MedTech CDMO, physical AI hospital robotics, with strategic alliance with NVIDIA. And currently four Taiwan-leading hospitals with US hospitals.
Speaker #1: Plan and ready to follow. And then D, on the left side, is our margin inflection from AI transformation. Unit margin improved year over year, non-PC mix was up plus 5% year over year, percentage points year over year.
Speaker #1: As the next transformation boosted efficiency, diversified revenue mix, and restructured the low margin portfolio. Computex 2026 was an exciting event for us. It was really one of our first large kind of coming out, showing what the brand is all about.
Speaker #1: And it got incredible reaction. We basically were able to show what Compal's future is, and if you will, Computex 2026 was the trailer of what Compal plans to achieve over the next 18 months or so, creativity, the future of PC.
Speaker #1: This is our bedrock, and we continue to bring innovative concepts like agentic PC solutions and others. Acceleration, AI infrastructure, this is server. And new use cases to demonstrate such as quantum AI applications and others.
Speaker #1: And future care and connectivity, our growth engines across MedTech, 5G connectivity, and audio. As we go into the revenue highlights, revenue again was 238.3 billion.
Speaker #1: 34% of that revenue was non-PC, basically flat. One percentage point down, quarter over quarter, basically flat. Year over year, we saw growth of 32% total.
Speaker #1: 52% in non-PC revenue growth. We're not just the PC company anymore. I said that at Computex, we're really not. We're starting to expand beyond that.
Speaker #1: Non-PC revenue share, again, up 5 percentage points year over year, and has been staying there, well on our path to 40%. And we're growing across both PC and non-PC, but obviously non-PC growth has been really significant for us.
Speaker #1: The notebook PC segment, notebook revenue was 156 billion. 20% growth quarter over quarter, 23% growth year over year. Notebook shipments were up 5% sequentially on seasonality.
Speaker #1: Well, minus 13% year over year due to component supply constraints and price increases. Q2 is a kind of prime seasonality for some Chromebook and there was a lot of Chromebook shortages with the lack of small core availability.
Speaker #1: A shift toward premium and AI PCs lifted average selling prices supporting a higher value product mix. And FY 26 PC shipments are expected to decline at a mid-teens rate broadly in line with the market.
Speaker #1: Surprisingly, we saw the first half was almost flat. 133 million last year, 132 this year, almost flat. We think the second half is a very different story.
Speaker #1: We think the second half is probably 15 to 17% down as we continue to see higher component costs weighing on consumer demand. So overall unit profitability is constant despite volume drop and underlying unit profitability is improving if we strip away the effect of buy-sell inflation and volume impact.
Speaker #1: The improvement is due more due to a more focused portfolio, higher margin product mix, and transformation efficiency. The non-PC segment, 82 billion dollar revenue, quarter over quarter growth of plus 15% year over year, of plus 52%.
Speaker #1: Fast majority of this growth was driven by our AI server business or our server business. Non-PC revenue, again, plus 52% year over year, led by servers with contribution from smart devices and intelligent systems.
Speaker #1: AI servers ramped to 70 to 80% of server revenue in Q2 26. New NeoCloud wins expanded the growth pipeline. And our FY 26 non-PC mix targets to approach 40%.
Speaker #1: And again, it's 34% we're all on our way. We think by the end of the year we will be there. We look at the server and AI infrastructure.
Speaker #1: Some of these everything on the left there, we've announced, and so we're gaining a lot of momentum with AI cloud wins. Across three different regions, Europe, Asia, and US.
Speaker #1: Focus on Compal's value proposition of delivering end-to-end solutions. Our global manufacturing expansion, our addition of a lifecycle management component to this, and bringing our efficiencies to supply chain and operations.
Speaker #1: So aside from entering more parts of the value chain, we are now building back-end service, coupled with regional production service advantages to stand out in a crowded market.
Speaker #1: Server and AI infrastructure. We have two new sites coming online, Taiwan and the United States, and expanded capacity across four countries. Ramping by the end of 2026 are all of these facilities.
Speaker #1: One, capability standard close to demand, resilient. Up to full rack scale L11 integration. So in Taiwan, we have a facility which will be an NPI facility, AI server and cooling manufacturing, full rack level integration, and an in-house R&D hub.
Speaker #1: In the US, we'll have onshore base for US customers. We'll have board assembly through full rack L6, L10, L11. And full stack US center, including R&D.
Speaker #1: China and Kunshan will still play an important part of this. There's China and Asia demand. Group NPI knowledge base as well. And in Vietnam, we continue to ramp up mostly PCEA production, PCBA scale hub.
Speaker #1: It's really one of our highest volume board sites that we have. Next, one of the biggest highlights of our Computex showing was in the physical AI Polymedex, which is a concept of physical AI for healthcare.
Speaker #1: Expanding across arrival, treatment, surgery preparation, tracking, and training. So this is obviously playing to a huge need that we have today. You've heard a lot about robotics and healthcare.
Speaker #1: Most of that is a humanoid robot walking into your hotel room and sticking a thermometer in your mouth. We think that's probably sometime before that actually happens.
Speaker #1: And so this we believe now this technology is available immediately, right? It's available technology that can roll out and scale today. And our whole goal around this is to develop an operating system and a deployment system for hospitals to make it easy to own control operate physical AI within their facilities.
Speaker #1: And lastly, transformation gains to sustain and fund external growth. The transformation has been pretty amazing. We've been doing it for about 18 months. We've been planning it and doing it for about two years, a little over two years.
Speaker #1: We've identified 70 plus use cases for digital we've implemented those across the company. There's core use cases already deployed in R&D, manufacturing, procurement, and supply chain that are actually providing significant savings, significant operating savings to us today.
Speaker #1: And also helping us fund the external world, the future growth, scaling growth from AI devices into server and intelligent systems. So foundation remains PC and smart devices.
Speaker #1: Scale remains server and infrastructure first and foremost. And then 5G connectivity and the businesses we're developing on frontier, medtech continue automotive, physical AI, and hybrid.
Speaker #1: Thank you.
Speaker #2: Okay. All right. Thank you, Tony, for the remarks. I'll kick off, but I'll turn it to the operator just if you want to give instructions and then maybe I'll start with a first question.
Speaker #2: But we can turn it over to Max just to give the instructions for the Q&A.
Speaker #3: Thank you, Randy. I'll attend this if you want to raise a question, please just raise them feature and then we'll allow you to unmute yourself.
Speaker #3: Thank you.
Speaker #2: Okay. Yeah, thank you. And I'll share with a first question I think just to start with an Outlook. Maybe an initial view coming off second quarter.
Speaker #2: We could start with the notebook business. How you saw kind of your order trend, if there was any pull in activity just ahead of rising memory price and a follow-up to the second half where you're expecting a kind of a weak market overall.
Speaker #2: How much it's limited by supply shortage of certain constraints versus demand impact? I'll start just with notebook and then we can broaden to other parts of the business.
Speaker #1: Okay. Yeah. So I think we're facing kind of a fundamental margin reset in the PC industry. Component costs are rising faster than the market will tolerate pricing rises.
Speaker #1: That's just a fact. And it's turning what used to be a volume and efficiency business into a battle to protect every basis point of goods margin.
Speaker #1: It's kind of what we're seeing. We think that the growth in the second half, most of the replacement cycle probably underway, probably has happened already.
Speaker #1: And we think that on the commercial side, those customers are thinking very carefully about where they're spending their CapEx and a lot of it's going to AI.
Speaker #1: Type resources. We do believe in the future and even today that AI PCs can represent one of the lowest costs of AI computing out there, right?
Speaker #1: So it's one way to look at it. But we believe that that market is down kind of mid-teens. Yeah. And we think corresponding consumer markets are similar.
Speaker #1: Yeah. As I mentioned earlier, just we continue to monitor those component costs continue to weigh on consumer demand, but we see it wearables tablets PCs, other things.
Speaker #1: Yeah, just constantly impacted. Overall, we think for Compile, the third quarter growth continues. Driven by AI servers, with server revenue expected to increase by high double digits quarter over quarter.
Speaker #1: PC units are expected to remain flat for us, basically. While continued ASP increases should provide additional support to revenue growth. Smart device revenue is expected to decline like just talked about, with basically watches and tablets and things like that all under pressure, right?
Speaker #1: Consumers all going, yeah, I'll wait till next year. It's just too expensive right now. That may not be a great strategy because next year might be worse than this year.
Speaker #1: It's kind of what we think. 2027 may actually have more margin or more memory pressure, more memory inflation and then in a lot of cases, you just can't get what you need.
Speaker #1: Right? And then we think 2028 returns back for 2026. And they're looking ahead in fourth quarter AI server momentum. Again, to remain healthy, PCs and other consumer products will continue to monitor that impact.
Speaker #2: Okay. That's great. And let's turn it to the operator. Just if you're showing any questions, otherwise we can ask a few follow-ups on the floor here.
Speaker #3: We don't have any raised hand yet.
Speaker #2: Okay. Actually, I'll ask a question just to the because you mentioned 2027 could be a continued headwind from all this memory. How's the when you're doing the initial bidding for 2027 projects and notebook, how's the competitive environment?
Speaker #2: You talked about fighting for every dollar. How does it look from an environment and what's your strategy? Is it in terms of trying to maintain market share, unit share, dollars, or focus on certain mix?
Speaker #2: Yeah. Kind of where how the industry looks and your strategy.
Speaker #1: Yeah. I think from it's not every dollar. It's every penny. I think as we look ahead to what we think is going to happen in the rest of this year and in 2027, there's a problem just with the memory inflation, right?
Speaker #1: And that's going to continue for us, I think, what our strategy is is to continue to compete for the higher margin type products to look for the AI PCs where we're very well positioned there already.
Speaker #1: Our mix is, I think, ahead of industry mix.
Speaker #4: Yeah. So around like a 60% of our shipments is AI PC-related at the top, right? So in terms of the revenue contribution, even higher because higher HP, right?
Speaker #4: So it's a dollar-wise, it's about like around 60% first half on AI PC side.
Speaker #2: With second line focus on AI, it comes to the competition side. There's two parts here. Traditional competitors, how they're approaching the market and like a year ago, it felt like there was a bit more coming from China.
Speaker #2: How do you see those two, your traditional competitors and the China competitors now?
Speaker #1: Yeah. There was a lot of noise the last year around the Chinese ODMs. Still, formidable competition. We took a step back and kind of analyzed what we do versus what they do.
Speaker #1: And some of the perceptions that maybe people had about why they're able to achieve such aggressive pricing wasn't necessarily true, right? It was, well, maybe they're subsidies, maybe there's other things that we don't know about.
Speaker #1: We believe that especially with the big three tier one PC OEMs, there's a very specific ABL stack that you have to deal with. When you look beyond that stack and you say, well, if I don't build it your way, but I build it my way and I price you, okay, here's your quote.
Speaker #1: On what you want, but I can do this. If you let me, right? If you allow me to go into bring more vendors to different vendors and variety into the ABL, well, we were cost competitive and have won deals.
Speaker #1: Based on that. So we believe we've kind of figured that out. We could not have started the transformation at a better time than we did.
Speaker #1: Because we have last year, 2025, across all of our manufacturing facilities in nine countries, the average productivity improvement UPPH improvement was 28%. That's unheard of in our industry, right?
Speaker #1: I mean, it's like a lot of great work went. And that provides a lot of operational efficiency. That allows us to be more lean in our RFQ and other responses to customers.
Speaker #2: Yeah. Okay. I'll ask one more that we'll go back to the line. Actually, to clarify the notebook, I think where you said double digit, you're flat, you're today, it sounds like for the industry.
Speaker #2: So is that double digit decline more just a second half over second half or second half falling off even more to get to down teams for the year?
Speaker #1: Yeah. Market-wise, second half '26 over second half '25, we think it's about 15% down.
Speaker #2: Okay. And your expectation is to be, I actually might have mentioned it, but is it to be tracking line broadly or to mix up and like an outperform the market?
Speaker #2: It sounds like you're stable into third quarter.
Speaker #1: Yeah. Pretty stable.
Speaker #2: Okay. So it's more to you have resilience, I think, with being able to take back some share.
Speaker #1: That's right.
Speaker #2: Okay. Good. Yeah. Let's go back to the line. To see if there's some questions.
Speaker #3: Thanks, Randy. We don't have any raise hand yet.
Speaker #2: Okay. Oh, you can also I'll have my note if you want to send if you don't want to ask send it to my email randy.abrams@ubs.com and then I can take some from the floor.
Speaker #2: So I'll look out for them here. Okay. Yeah. To go ahead.
Speaker #3: Yep. Sorry. When you have one question, we allow it. Okay. So yeah, the question is from Irene please.
Speaker #2: Okay. Go ahead, Irene.
Speaker #5: Hello. Can you hear me?
Speaker #1: Yes.
Speaker #6: Yes.
Speaker #5: Hi. Hi, Tony, Tina, and also Jack. So maybe two questions from me. First is on I see that you showed some NeoCloud customers in your presentation slides.
Speaker #5: So just wondering what is within your AI server business, what is their contribution today? And what's the expected mix heading to 2027 from the NeoCloud customers?
Speaker #5: That's the first question. And the second question is on your CAPEX. So perhaps if appreciate if you could share your CAPEX guidance for 2026 with us.
Speaker #5: And maybe also some preliminary colors on the CAPEX in 2027. Yeah.
Speaker #4: So Tony, you're starting with the server side. So server, maybe I give you some numbers. Maybe Tony later can have a more details. So server, actually accountable even for first quarter is around 5%, right?
Speaker #4: So we elaborate that before, right? And second quarter server is roughly high single digit for a total revenue. And as you can see on the slide, so we're saying amount our server revenue is roughly 70%.
Speaker #4: Now it's all driven by the AI server, right? So if you recall, compared we ever said that we target about 10% the server contribution for 2026, right?
Speaker #4: So we are on track of our path to our goal for this year on the server side. So this is some data for you.
Speaker #4: So Tony, maybe you can elaborate.
Speaker #1: Yeah. I think the NeoCloud, some of them we publicly announced some of them they passed asked for that kind of press material to go out.
Speaker #1: The NeoCloud, I would say, provided a lot of the growth that we saw in Q2. We expect that to continue for the balance of 2026 while we ramp up enterprise customers.
Speaker #1: And we move into more diversified business when our facilities in Texas and here in Taiwan are ready. And so I think next year we'll see a pretty healthy mix of NeoCloud, of tier one, cloud service provider, hyperscalers, and of at least one large enterprise.
Speaker #1: Business. So we'll see a hopefully a very well diversified customer portfolio in our server business.
Speaker #4: Great. All right.
Speaker #1: There's the 2:30.
Speaker #2: Okay. There's our 2:30. Okay. Yeah. If everyone's still online. Okay. Should we do the CAPEX question?
Speaker #4: Okay. Sure.
Speaker #2: Yeah. Irene went to the CAPEX question now.
Speaker #4: Okay. Right. And for the CAPEX, I think we ever give a guidance for this year. The CAPEX is $18 billion. $18 billion, right? The guidance for this year.
Speaker #4: So we are roughly tracking in line because if you look at the financial report details for the first half, we spent around $9 billion.
Speaker #4: So we spent roughly half of that, right? So we are on track for today, $18 billion for two years. And some additional color here is that among the $9 billion in the first half, we are spending around 6 to 7 billion which is the server-related, right?
Speaker #4: So as Tony mentioned that right now we have the expansion in Taiwan and Daxi, right? And they're not for the SMT line, as well as in US, Texas, right?
Speaker #4: So from the SMT to the L10, L11. So overall, our spending on the 6 to 7 billion is for the server, right? So this is the color on the CAPEX side.
Speaker #4: And as for the question, is there any color for 2027 CAPEX? We haven't yet had the numbers, but overall, as you can see that if the server continue to be the very high gross potential for compounds of peak gross pillar, right, for the next few years, and we continue need to have the capacity support.
Speaker #4: So we think this year and the next year definitely will be continue will be the expansion year capacity year for compound. Yeah.
Speaker #2: Okay. Is that 6 to 7 out of the 9 billion or out of the total full year CAPEX for server?
Speaker #4: 7 to 6 to 7 is just for the first half, right? But second half we continue spending for Taiwan, for Vietnam, and for US, right?
Speaker #2: Okay. I mean, do you have a follow-up question? Okay. Okay. Max, are you showing other questions at this point?
Speaker #5: Yes.
Speaker #2: Yeah. Oh, go ahead, Irene.
Speaker #5: Oh, sorry. Yep. So maybe also a housekeeping question for me. I see that OPEX ratio was down in second quarter. You mentioned it's primarily from the operating leverage.
Speaker #5: So I'm wondering how should we model for the OPEX heading to second half or even to 2027?
Speaker #4: Right. This is Tina. So let me give you some color on the OPEX. OPEX actually is 8.1, 8.2 billion, right? So absolute dollar in second quarter, right?
Speaker #4: So actually sequentially it's gross, right? Sequentially it's gross. The ratio-wise, definitely it's a decrease. It's because we joined operating leverage, right? So we have expansion on the top line of the revenue side, right?
Speaker #4: So the company actually we give a guidance for the OPEX is on the absolute dollar, right? So we ever say that the company would continue to will be managed well on overall the spending to have a more efficiently to use our overall resources.
Speaker #4: So we are targeting about roughly the single digit growth, right, year by year on the OPEX, the dollar-wise. So this is continue to be our target and our goal for this year.
Speaker #4: And if you look at the if you look at the first half, the number, the year-by-year gross is around 3% year-by-year gross on OPEX.
Speaker #4: So it's just roughly in line with your overall company part.
Speaker #2: Okay. Great. Yes. Thank you. Okay. Max. Irene's finished. Max is there another question on the map?
Speaker #3: We don't have any questions yet.
Speaker #2: Okay. A few follow-ups on the server. Actually, one start with the traditional server business. There's been a lot of this strength from the agentic AI.
Speaker #2: Do you see that it looks like a lot of the investment is AI server, but is there potentially you see in terms of more volume to go after in the traditional server market?
Speaker #1: Yeah. I think so. I'm not seeing that translate into demand just yet, but yes. The agentic stuff is very interesting. We were talking before the call that the article I just read said that the world's built less than 1% of the compute power that we need especially when you're talking agents and a software programmer goes from an agent to managing 50 to 100, always on and live active agents.
Speaker #1: So the silicon, yeah, just isn't there. Yeah. So we see all kinds of interesting opportunities for entrancing for agent, for agentic compute, if you will.
Speaker #1: And other data center infrastructure.
Speaker #2: Okay. And turning to the AI business, talk about the transition. Is most of the business still L6 and when you start to bring up the Taiwan and the Texas site, how does that transition over to L10 and expand?
Speaker #2: It sounds like it's a customer base and also a mix-up where you can get more content per server.
Speaker #1: Yeah. So the L6 business, the L10, L11 business is overcoming our L6 business is what you see the significant revenue growth. Tina, any other comment on that?
Speaker #4: But actually, if you look at the first half, the number we have, the major contribution on the AI server actually is already L10. It's already L10.
Speaker #1: It's about 8%.
Speaker #4: Yeah. It's about 70. About 70%. And the rest of that is the general purposes. So that will be the L6. That was the L6.
Speaker #1: Most of that revenue is from B300 and most of that being L10 manufactured here in Taipei. When the other facilities get ready, of course, we'll have much more capacity and we'll be able to do more regional customer services.
Speaker #2: Okay. How are you thinking on product transition? We're getting a little bit later in the B Blackwell family, starting to get into Rubin. How do you see just the continued B300 just continue to go into your end early next year?
Speaker #2: Is there any transition pause? And then when do you see us kind of moving up to the Rubin generation?
Speaker #1: Rubin CPU, yeah. I think there's these product generations move so quickly. By the time you get a platform and get it debugged and get it producing tokens, you're already onto the next generation.
Speaker #1: Yeah. We don't see that slowing down. And we don't see much tail either, much overlap between those products. So we think B300 runs strong.
Speaker #1: The demand is very strong through this year and as the Vera CPU comes in, we'll start to see that take over, that transition will happen I think pretty quickly.
Speaker #2: Okay. So then as you transition, it looks like from market all this high-component cost, the ASPs, the pricing of these systems should be much higher.
Speaker #2: How's the thought in terms of margin percent? It's kind of strategy keep when you're negotiating dollar margin. I think notebook, one of the ODMs for market was a dollar margin, but try to move toward a percent margin.
Speaker #2: But should we think of it as dollar so components inflate? It's a good dollar profit, but it's a lower gross margin. There's a way to think if it's a huge ramp-up in the price of the systems.
Speaker #2: Blackwell or Rubin. We're just in general with these AI servers.
Speaker #1: Yeah. Not percentage-based.
Speaker #2: Yeah.
Speaker #1: Yeah. Not percentage-based. So like we're seeing with notebooks, you're seeing the margin compression actually happen. It doesn't be ASP increasing. It would be great if it were percentage-based.
Speaker #2: Yeah. I understand. Yeah. Why don't we talk about a little optimistic on that? And then in terms of components, I mean, it sounds like it's really demand pressure in PC, but is there how much is supply, whether it's CPU supply or memory supply, actually limiting shipments?
Speaker #2: And is it an issue for some of the server ramps getting components? Or is there enough prioritization to those that there's less issue with ramping up the servers?
Speaker #1: Yeah. Depending on what customer we're talking to or dealing with, the buy-sell components may be different. So they manage a lot of that, really.
Speaker #1: Some of that relationship. But it's everything. If you don't do the supply chain dance very carefully, with PCB and even just wiring and connectors and everything, if you don't have that plan, have enough DSI, have enough POs to secure supply, you're going to be short of something.
Speaker #1: For sure. So we've seen for the most part, like in Q2, for example, we had a dip in May only because we couldn't get the parts.
Speaker #1: But then we had a very strong June because we got the parts. And so I think that dance continues forever, it seems.
Speaker #2: Okay. And it sounds like you guided I should go back to server high double-digit growth. The outlook. So when you think high double, are we thinking is there a way to think it's because I've heard different things for high double.
Speaker #2: It can be 30 to 50, but it could actually be closer to triple digits. The type of acceleration and how do you see that?
Speaker #2: There'll be a higher and higher base. It feels like you start to get to 10% by if your year-end target was 10, it could pull in.
Speaker #2: But does it look like it kind of continues in the year-end or there's some data on supply side?
Speaker #1: It depends. It'll just depend on how people are a lot of it is truly material-based, right? And again, it's customer you're dealing with. Can they get the parts?
Speaker #1: That they're bringing to you from a buy-sell perspective. And do we get enough early warning on the demand that we can go secure the parts to where we're responsible for?
Speaker #2: Yeah. And do you have and I'll take it back to the line in a second. Maybe just one thought. Do you have it strategy midterm to go after it?
Speaker #2: It would take a different amount of working capital to do the bigger racks, like this NVL 72. That's one side. And I'm curious too if you see opportunity.
Speaker #2: I think at Computex you showed MI, like AMD boards. There are also moving up to rack scale. So do you see on both camps kind of that opportunity to go after bigger rack scale?
Speaker #1: Yeah. We believe the larger rack manufacturing will start in the Q1 timeframe of 2027.
Speaker #2: Okay. Yeah. Okay. Good. Actually, I'll go back to the go back to Max if questions on the line.
Speaker #3: Yeah. We have next question from Anthony. Anthony, please.
Speaker #4: Thank you. Thank you for taking my question. And I have a quick question regarding the server business. Especially on the margin side, how do you see this server profitability given that you already are really on track on the 10% of total sales scale this year?
Speaker #4: And how do you see this server margin trend going forward given the, say, dynamics between switching server and AI server and also the mix between L10 plus say product versus L6 board level?
Speaker #4: And how do you see this margin trajectory and could you share some color for us?
Speaker #5: There's right. So maybe I give us a number first and Tony can follow on the more color, right? So right now, if we look at the server margin, right, so if you compare to three quarters ago we were doing the L6, right?
Speaker #5: So L6 is more multiple level. So the margin definitely is a bit higher higher, right? So when we move into the L10 system, right, so we have a higher ASP.
Speaker #5: But if you look at the Q1, Q2, well, currently we have in the first half for servers, servers still enjoying very healthy gross margins.
Speaker #5: So server gross margin at the first half is still higher than our corporate average, right? So and afterwards, but of course, we're going to have a different customer to come in, different project to come in.
Speaker #5: So that will be definitely depends on the different projects and the customers on the margin profile. So Tony, if you want to.
Speaker #1: No, I think that's right. I think the margin profile of the customer will vary I think NeoCloud's and what we're shipping today, B300 and other things, can have more profit than others.
Speaker #1: If you look at the large rack systems that we were just talking about, given that the silicon, the GPU silicon providers take home such a huge portion of the BOM, right, it's it is what it is, right?
Speaker #1: It is what it is. So we believe that our strategy is to make sure that we execute well in the factory, that we have high yield rates, that we make sure we're not spending money or letting margin leak, if you will, where we don't need to.
Speaker #1: But also, making sure our offering includes lifecycle management and all the backend stuff that we believe has some significant profitability to it as well.
Speaker #2: Okay. Okay. Okay. Anthony, do you have a follow-up question?
Speaker #3: Yes, I do have. Thank you. So follow-up on this server margin. So when you talk about the healthy margin and higher-end corporate average, does that refer to both gross margin level and OP level?
Speaker #3: And quick follow-up will be if we look at just 70% of AI server in the first half, does that also apply to your comment on the higher-end corporate margin?
Speaker #5: Yes. Anthony, you're right. Yes.
Speaker #3: Got it. Got it. Thank you. Back to Q now. Thank you.
Speaker #5: Thank you.
Speaker #1: Thank you.
Speaker #2: Okay. Actually, a couple of follow-ups on the server margin. There's been some talk about industry consignment models, where certain things like memory you can whether have it off the balance sheet or not.
Speaker #2: I'm not showing up. I shouldn't say off the balance sheet, but not showing up in your buy and sell. Is there any negotiation going on or any potential some of these cost shift to consignment, or it still looks like a lot in the AI server?
Speaker #2: What you're doing, but mostly going to stay buy and sell model?
Speaker #1: I would say most people are comfortable with what they know. So the buy and sell seems to be the most thing. However, I will also say that we're in an age of very creative finance tools and other things.
Speaker #1: So people have an awesome discussions about how you can do that. And so we've had a lot of those discussions, but right now and it will vary customer by customer, of course.
Speaker #1: But right now, we don't have a consignment model. We don't have an operational customer in the consignment.
Speaker #2: Yeah. Okay. And to blend the margin where it's above corporate, is it a thought you go for a little bit of a transition period as you bring up the US and Taiwan site?
Speaker #2: So maybe it goes toward corporate and then the mid-long-term relative to notebook business, a creative to margin. Is there kind of a thought maybe it's a flow where it could come down a bit or come toward corporate or below corporate and then matures?
Speaker #5: But really, I think for the margin thing, I think what's important for a compound is that it still looks at the actual dollar-wise, right?
Speaker #5: So the margin ratio could be different, depends on the customers, the business model as well as you're asking about buy and sell consignment, right?
Speaker #5: So there's a lot of different arrangements. And even on the L6, L10, L11. But what's all important is that which is UPS accredited to the company, right?
Speaker #5: So the reason why we highlight that right now, even though if you look at second quarter, we have some margin ratio dilution, right? So because we have the different color mix, right?
Speaker #5: So the customer mix. But if you look at the actual dollar-wise, it actually compares turning back to the growth, right? So this is what the company focused on, right?
Speaker #5: So I think that is helpful. Yeah, our focus.
Speaker #2: Yeah. Let's see if we have a question from the line.
Speaker #3: Okay. We don't have any questions.
Speaker #2: Okay. I'll just ask a couple of final ones, then we'll go back to the line one more time just to see if any questions.
Speaker #2: Actually, since you brought up the financing, not just the creative financing, but the when you start to go toward rack scale business, just how you see in terms of different working capital requirements, if you think kind of debt or additional financing or you feel like there's pretty good headroom to grow the business with the resource you have.
Speaker #1: Yes.
Speaker #2: Yeah.
Speaker #1: I think we've looked at the cash we need to run that business and as you don't need it all on day one, right? It ramps over time.
Speaker #1: But we are we have facilities to take care of that.
Speaker #2: Okay. Makes sense. And then a question on other growth pillars, like a lot on server, but just between auto, medical, 5G, smart device. Seems like the consumer side probably headwinds because of the kind of inflation, but other sides are kind of more growth areas.
Speaker #1: Yeah. We're really interested in these polymedics thing that we did, the physical AI. We've been talking about robotics, and we've been talking about medtech and healthcare for a long time, something our chairman is very passionate about, the healthcare space.
Speaker #1: And we started this project about a year ago, and I've embedded many members of our innovation team have spent months in hospital wards with clinicians understanding their pain points and their problems and then turning them into use cases and solutions for this physical AI.
Speaker #1: So we're really excited about that. We think it's something that, again, can be deployed now. Technology is available today. We're not waiting for it.
Speaker #1: And we're kind of leaning into that business. So we like that one a lot. Automotive, we have we've kind of pivoted away from not very attractive at all EMS business.
Speaker #1: And looked at developing point solutions directly for OEMs. We have an infrared solution for cars to meet a requirement in 2029 about pedestrian detection and avoidance that we think is a winner.
Speaker #1: And we're getting that same feedback from a lot of automotive companies. So like the segment, don't like where we were playing. So kind of moved higher up into the higher margin businesses where we're finding value and real solutions, real point solutions for global automotive ODMs.
Speaker #1: We'll continue to invest in the consumer stuff. It's just not a great year to have a consumer debut.
Speaker #2: That's the one that we need to cover. But not a great year to do components. I'll ask one final and then we'll see on the line.
Speaker #2: Initial take looking toward year-end fourth quarter, I know not necessarily have guidance time, but it's a big step up on server if you kind of see the we're still in that phase where each quarter it should be stepping up.
Speaker #2: And then it sounds like we should expect outside of server, nothing exciting into year-end for the notebook and the consumer business. But server, I just should we get another step up where it actually could bring up the whole company outlook looking beyond the third quarter.
Speaker #1: Yeah. Yeah. And for Q, we see the AI server momentum to remain healthy.
Speaker #2: Yeah.
Speaker #1: And it should start building. One of the toughest obstacles for us to overcome was we love you guys on the devices side, on the consumer side, commercial PC side, etc.
Speaker #1: But you haven't done this now we're doing it. And we're doing it at scale. And we're about to start doing a whole lot more.
Speaker #1: And so I think that gives a lot of confidence and so we expect that to continue in Q4.
Speaker #2: Yeah. So I'd ask one more, but is there any very competitive bidding environment for servers? It feels like it's strong environment. Everyone's trying to get these data centers up.
Speaker #2: Notebooks feel they're somewhat always competitive. But how does it feel like competitive intensity as you're cutting into the market? Everyone's kind of fighting for share or everyone's grabbing a lot of opportunity?
Speaker #1: Yeah. I think it's very easy, right? I think some of the cloud providers have very aggressive deployment plans and need capacity, right? They need capacity.
Speaker #1: It's not like you can really go shop these things around and then say, "Oh, this guy's $10 cheaper. I'll let them build it because there's so much enablement that needs to happen for an ODM to serve a cloud service provider." First of all, they have to come in, look at your factory, make sure you're capable, etc., do all that type stuff.
Speaker #1: Then they have a whole set of requirements that you have to adhere to. Then you have to handshake. You have to have an IT connection.
Speaker #1: You have to have all that's not insignificant.
Speaker #2: Yeah.
Speaker #1: And so once you're in, competition among the established ODMs can be tough, sure. And so they'll all stay within a certain margin range. To get in is very hard.
Speaker #1: And we found ourselves at a very fortunate time in the industry where people are looking for more capacity and therefore more trusted partners. And they like the not only the facilities we're bringing online, but the quality of the facilities, the quality of what we're putting inside those buildings, the investment in automation, that we're making.
Speaker #1: And the team that we've built, the humans that are running this, we've built a really, really good team from all over the industry that does have that experience.
Speaker #1: And so it continues.
Speaker #2: Okay. That's good. Actually, Max, I'll see if any final questions from the line.
Speaker #3: Yeah. So we have a question from Anthony. Anthony, please.
Speaker #4: Thank you. Thank you for taking my final question. I have a couple of follow-ups. So it's still about server side. Just want to double-click on your server customer.
Speaker #4: If I heard it right, you mentioned you have you may have one new tier, one new cloud, and also a large US enterprise customer is it into next year or that will start to contribute in second half this year?
Speaker #4: And is that an L10 plus kind of product or like a VR200 kind of product?
Speaker #1: Yeah. To be conservative, I would say that we will prepare for it in the second half of '26, and we will ramp it in very early Q1.
Speaker #1: '27, and we will see the business expand from kind of what we're doing today with B300 and other things into getting into full rack solutions.
Speaker #1: So but we'll see that volume the OEM volume really in 2027.
Speaker #2: Okay.
Speaker #4: Got it. Yeah. So that leads to, I think, some news in your DAXI factory announcement opening. I mentioned chairman mentioned some 30 to 40 percent ARM new contribution next year.
Speaker #4: Does it should we confirm it as a guidance or that is not your official comments?
Speaker #1: No. I mean, that's the guidance, right? So we believe that 2027, that we'll see 30 to 40 percent of compounds around, but you've generated from the server business and a vast majority of that generated from AI server.
Speaker #4: Got it. And in that case, the PC mix should dip below 50% next year, right? Because you still have other business in the non-PC business.
Speaker #1: Yeah. Certainly, if that's the case if we hit those numbers, that's true because we have other smart device businesses, phone business, other businesses that rotate.
Speaker #1: So our PC our percentage of revenue of PCs will dip below 50%, yes.
Speaker #4: Got it. Got it.
Speaker #1: But like that business. We still like that business. We're still investing in them because we want to grow that business, but we want it to continue to become a smaller portion of revenue only because the others are obviously growing.
Speaker #5: More balanced than before.
Speaker #1: Yeah. Yeah.
Speaker #4: Understood. Makes sense. And my final question will be to support this very strong AI server revenue growth next year. And in terms of your balance sheet now, I think it's almost going to, say, a little bit into net debt area soon.
Speaker #4: How do you see this your capital plan will, say, announce any comparable bonds and how do you look at your capital structure? Will you leverage more on that or, say, equity increase?
Speaker #5: Yeah. So I think, Tony, I give an answer first, right? So overall, as Anthony, I think you're right. So if you look at the cash flow-wise, definitely we're spending, right?
Speaker #5: So the spending on the cash flow definitely supports business growth. But in terms of the so as we said, like a bank facility, we still apply have a capacity there.
Speaker #5: So if you look at the reliability ratio, 71% compared to right now the industry the average growth. So we are still relatively the healthy level.
Speaker #5: So bank facility-wise, so we still have some good support over there. But of course, we were going to prepare, right? So for the future, if the business continue to have a very high growth potential.
Speaker #5: So we are also at the same time to look at the different the funding vehicles, right? So we are not excluding the possibility, right?
Speaker #5: So for the other vehicles like everyone talking about the ECB or the other equity financing, but we are okay the attention on that. But we'll be really, really depends on how is the further progress of the business.
Speaker #5: Yeah.
Speaker #2: Okay. All right. Good. And actually, I'll just squeeze one final and then I'll turn it to Tony for closing remarks. I'm actually curious because you brought up these 30 to 40 percent revenue.
Speaker #2: Operating Tony, you talked OPEX is kind of growing single digit this year. Next year, do you get leverage or to support that kind of growth we should maybe accelerate the OPEX growth?
Speaker #2: It's kind of early, but do you need to start growing more double-digit OPEX just to handle that kind of big server expansion?
Speaker #5: Yeah. Tony, I think rather than to give a specific the numbers guidance, I think the rationale behind that, of course, for the growing business, we give the actual resources, right?
Speaker #5: So we're funding OPEX on that, right? But the other part, we also doing the reallocation of the resources. How to funding our OPEX more effectively, efficiency.
Speaker #5: So we are doing that kind of a balancing. So that's reason why you see the result, right? So the company we can still manage all the OPEX growth on still the reasonable level.
Speaker #2: Okay. Great. Okay. With that, I'll turn it over to Tony to give some closing remarks. Thank you.
Speaker #1: Yeah. Again, perfect timing. Hey, guys. Thanks for joining the call. You hopefully see the effects of our transformation and what that's done for compound.
Speaker #1: So far, again, we've been at it for about two years. Took about six to seven months to do the diagnostics and to get the mobilization ready.
Speaker #1: And then we've been at it for about 18 months doing the transformation. Now we're really starting to see it pay off. We've made the best.
Speaker #1: We've made the investments. We have the facilities coming online in the second half. Tired the teams. And the right people to manage them. And so across acceleration, future care, connectivity, creativity, everything we showed at Computex kind of what I termed our trailer and what I say is we're not just a PC company anymore.
Speaker #1: It's true. We are now executing. We're not just talking about those businesses. We are making bets, executing on those bets, writing checks, building buildings, hiring people, and we are very encouraged by what we think is ahead of schedule results for the server business, which we again continue to see through the remainder of 2026.
Speaker #1: And then we think 2027 could be a really, really bang-up year for us. So the transformation continues. Schedule right now is through 2027. We aim to be the most digital-enabled ODM on the planet.
Speaker #1: We have seen firsthand the impacts of Gen AI. And now in the last quarter or so, Agentic AI, as we start rolling that out in certain areas, and how that's driving operational efficiencies.
Speaker #1: And so we're excited. We're excited about what the future brings. So thank you very much.
Speaker #2: Okay. All right. Want to thank everyone for joining. Look out for the replay link. And yeah, at this time, I think everyone can disconnect.
Speaker #2: Thanks, everyone, for joining. Thank you to Tony, Tina, and yeah, we'll join you again next quarter. Yes, thank you.
Speaker #1: Thanks, everyone.
