Lite-On Technology Corp
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Lite-On Technology Corp
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Dear investors and friends from the media, welcome to Lite-On Technologies 2024 Q2 Earnings Conference. In addition to explaining the results from H1, we also hope that everyone will better understand Lite-On's growth strategy after completing many operational adjustments and transformations in recent years. Our meeting will begin when everyone is seated. Today's agenda consists of 3 parts. First, I will explain the financial and business performance in Q2 2024 as well as today's BOD decisions. Next, President Anson will explain the company's operating outlook and growth strategy. And then the Q&A session is open for questions and further explanations. For those who are here for the first time, this page provides you with an introduction to the 3 major business segments. They are optoelectronics, including optoelectronics semiconductors, auto electronics and [indiscernible] smart systems from our subsidiary, LEOTEK. Cloud and AIoT mainly used in data centers, servers, 5G networking products, AI, IoT, et cetera. ITC, mainly used in laptops, workstations, desktop computers, game consoles, et cetera. Our results of Q2 2024. sales were TWD 33.3 billion, gross profit, TWD 7.4 billion and GP rate 22.2%. Operating profit, TWD 3.3 billion and OP rate 9.9%; OpEx, TWD 4.1 billion with a rate of 12.3%; OIOE, TWD 800 million; net profit to parent, TWD 3.1 billion; EPS, TWD 1.36. Overall, Q2 sales increased by 16% Q-o-Q and all the 3 major business segments continue to grow Q-o-Q. Among them, shipments from the core businesses continue to grow Y-o-Y, including cloud computing power supply, optoelectronic semiconductors and high-end IT products. However, due to the consumer market corrections and our strategic elimination of some consumer and OEM products in order to keep optimizing our product mix, sales decreased Y-o-Y. The gross profit benefited from the growth of high-value businesses and the synergy of introducing AI empowerment and digital management. GP increased by 26% Q-o-Q and GP rate increased by 1.9 percentage points Q-o-Q. OP increased by 47% Q-o-Q and OP rate increased by 2.1 percentage points Q-o-Q. In the lower left, due to proper management of OpEx, OpEx rate decreased by 0.3 percentage points Q-o-Q. Among them, R&D accounted for 5.5% of sales. R&D investment increased by nearly 10% Q-o-Q, especially in cloud computing, 5G, optoelectronics and new businesses. OIOE was TWD 800 million. Net profit to parent in Q2 was TWD 3.1 billion. EPS, TWD 1.36, up 30% Q-o-Q. As for the results of H1 2024, sales in H1 was TWD 62.1 billion. Gross profit was TWD 13.2 billion with a GP rate of 21.3%. Operating profit, TWD 5.5 billion, OP rate, 8.9%; OpEx, TWD 7.7 billion and OpEx rate, 12.4%; OIOE, TWD 1.7 billion. Net profit to parent, TWD 5.5 billion and EPS TWD 2.4. In H1 this year, due to the consumer market corrections and our strategic discontinuation of some consumer and OEM products, sales decreased by 13% Y-o-Y, but the high-value businesses continue to grow. GP rate increased by 0.2 percentage points Y-o-Y, which reflects the synergy of the continued optimization of operations and the high-quality growth of high-end businesses. OP rate decreased by 0.2 percentage points Y-o-Y, affected by the reduction in sales in the short term. OpEx decreased by 10% Y-o-Y. Among them, R&D accounted for 5.8% of total sales, focusing on improving the value of core products and investing in new businesses. OIOE was TWD 1.7 billion, which was stable Y-o-Y. Net profit to parent in H1 was TWD 5.5 billion and EPS TWD 2.4. Performance of the 3 major business segments. In Q2, the segments of optoelectronics and Cloud and AIoT accounted for 58% of total sales, and our operating profit increased by 47% Q-o-Q. So we can see that the 3 major business segments continue to grow Q-o-Q, among which Cloud and AIoT sales was TWD 12.2 billion, accounting for 36% -- this sales increased by 21% Q-o-Q, mainly coming from AI servers and cloud computing power supply. In Q2, cloud power supply sales increased by more than 10% Y-o-Y. This drove operating profit, which was TWD 1.44 billion, up 116% Q-o-Q. The sales of the ITC segment was TWD 13.9 billion, accounting for 42%, up 15% Q-o-Q. Apart from the adjustments on the consumer market and our product mix optimization by eliminating weak products, shipments of IT high-end power supply and smart input devices have grown Y-o-Y. Operating profit, TWD 1.4 billion, up 25% Q-o-Q. The Optoelectronics segment sales were TWD 7.2 billion, accounting for 22%, up 10% Q-o-Q, in which optoelectronic semiconductors have made new progress in shipments for car and invisible light sensing applications. Operating profit, TWD 520 million, up 72% Q-o-Q. Now the simplified balance sheet. Current assets in Q2. Accounts receivable increased by TWD 3.2 billion Q-o-Q due to increased sales. Inventories decreased slightly Q-o-Q. In current liabilities, short-term loans increased by TWD 11.1 billion Q-o-Q and accounts payable decreased by TWD 1.2 billion Q-o-Q. In Q2, current assets increased by TWD 8 billion, exceeding the quarterly increase of current liabilities of TWD 3.5 billion. So quick ratio also increased to 1.35x in Q2. Net cash, TWD 62.5 billion. This will prepare and help improve operating momentum in the future as well as investment and growth in core businesses. EPS increased to TWD 38, up 9% Y-o-Y, indicating that our intrinsic value continues to increase. We can see here that since 2021, the company has strategically increased the proportion of high-value businesses while reducing noncore businesses. In the past 4 years, GP rate has increased from 18.5% to 21.3% in H1 this year, and the OP rate has increased from 7.9% to 8.9% in H1 this year. Operating model optimization. We are developing high-value businesses towards system integration, including the Optoelectronics and Cloud and AIoT segments. The proportion of these 2 segments in overall sales has increased to 58% in H1 2024 compared with 51% in 2021. The increase in the proportion of high-end businesses has led to an increase in overall profitability. An overview for Q2 and H1 2024, Q2 sales was TWD 33.3 billion, GP rate, 22.2% OP rate, 9.9%, up 1.9 and 2.1 percentage points, respectively, Q-o-Q. This is mainly due to the increased proportion of high-value businesses, elimination of weak products and the synergy of introducing AI empowerment and digital management. Among OpEx, R&D accounted for 5.5% of sales, up nearly 10% Q-o-Q, focusing on cloud, optoelectronics, 5G and new businesses. Net profit to parent, TWD 3.1 billion and EPS TWD 1.36, up 30% Q-o-Q. Sales in H1 was TWD 62.1 billion, GP rate, 21.3% OP rate, 8.9%; EPS, TWD 2.4. The BOD this morning just approved a cash dividend of TWD 2 per share in Q2 2024. Our core businesses in H1 this year, cloud benefited from the improved specs of AI server power and cloud computing products with cloud power supply sales growing by more than 10% Y-o-Y. The proportion of high-end products in ITC continues to grow, especially the annual growth in shipments of high-end power supply and smart input devices. The core applications of car and invisible light sensing and optoelectronic semiconductors continue to increase. This concludes the financial highlights for H1 2024. Next, President Anson will explain the company's operating outlook and growth strategy. Thanks.
Thank you, Julia. Dear investors and friends from the media on site online, good afternoon, and welcome. First of all, I would like to tell you that we have been implementing the strategy of lean focus in the past few years. By Q2 this year, it has successfully come to an end. The most important thing for us in the next step is to accelerate in the direction of growth. Lite-On's future growth will be based on the optimized operational structure in order to create momentum for the company's mid- to long-term revenue growth. On the one hand, we need to concentrate our R&D resources to enter new tracks. And on the other hand, we must continue to make strategic investments for M&A. I believe that this is also an issue that many investors here today are very concerned about. We have experienced many times in the past that due to the short life cycles of consumer electronics products, -- when they account for a relatively high proportion in our product mix, it is easy for them to cause fluctuations in our operations. So the purpose of proposing 433 at that time was to increase the proportions of products with high entry barriers in the mid- to long term. These products include green data centers, clean energy transportation, high-efficiency infrastructure and other fields. This means that the tracks that Lite-On chooses to enter are based on a long-term plan. In fact, it will take a longer time for these tracks to gradually develop into mature industries. So we may not see immediate and significant progress in revenue in the short term, but we firmly believe that this is a necessary process for transformation. Lite-On's future growth will be through investment in new businesses, while we will continue to increase gross profit rates and then invest that money into R&D to continue to expand our new businesses. We hope to turn the flywheel of this operating model. As the intensity and speed of its turning become faster and faster, the flywheel will naturally drive the company's profits to increase in such a virtuous cycle. Julia just explained that the BOD has just approved the payout of cash dividend of TWD 2. With the development of new businesses in the future, we are confident that we can provide the greatest value to shareholders. As for strategic investments, we will continue to look for companies to cooperate with that are highly complementary to Lite-On's products in future new tracks. COSEL is a great example of this. Under the strategic vision of IOE, as long as a company can bring greater synergy to Lite-On, whether it is in terms of the business scale, technology, products or intellectual property rights, it will be the target of our evaluation. As you may know, Lite-On's subsidiary, LEOTEK, recently announced the acquisition of the transportation division of Dialight, which is a major British LED industrial lighting company. Through this M&A, LEOTEK will gain the leading position as a global traffic signal service provider. From the lighting business, we develop towards traffic signal system management, traffic monitoring, EV charging stations and then towards the new track of AI smart management platform, providing sustainable value-added transportation services for the upgrading of urban infrastructure and operational efficiency. These are the best examples of Lite-On's strategic investments and M&A strategies to drive growth. Next, I will take some time to share with you our views on Q3 and the second half of the year. As presented previously, some of Lite-On's consumer products are gradually in EOL. And at the same time, we are strategically reducing the proportion of our OEM business. Despite this, our overall revenue in Q2 still increased by 15% Q-o-Q. Looking forward to Q3, we are still confident that the 3 major business segments and the overall performance will continue to maintain Q-o-Q growth. In particular, the cloud business that everyone is paying attention to has seen revenue growth of more than 20% in Q2. In addition to Q-o-Q growth in H2, we also expect double-digit Y-o-Y growth. We are actively negotiating the share of high-end products with data center clients and the development of new clients and new products is currently underway smoothly. We will integrate power supply, liquid cooling, mechanic engineering, software and system management to provide clients with a complete solution for AI server liquid cooling integration. As for power supply, the power show used by the B-Series AI servers will mainly be 33k watt and mass production is expected to begin in H2 this year. The sidecar of the new generation liquid cooling system, Liquid to Air has been certified by clients and is expected to begin shipping in H2 this year. Liquid to Liquid has now passed the preliminary review and is undergoing full testing. Our goal is to obtain the RVL qualification by August and ship prototypes in H2 this year. Racks will begin small volume deliveries in H2 this year. It is expected that liquid cooling solutions revenue should contribute nearly 10% to the cloud business next year. So this is about power supply. The optoelectronics semiconductor business continues to benefit from the recovery of the markets of wearables, security protection, industrial automation and new energy as well as the fact that AI PC is driving demand for mini LED, infrared LED, et cetera, and the Q-o-Q revenue growth trend is clear. Revenue is expected to grow by double digits in H2 this year. Right now, the Optoelectronic semiconductor segment is fully committed to developing new tracks such as sensors and sensing technologies for AI vision, car lighting, high-end photocouplers in industry and renewable energy, et cetera. These are the opportunities we see in optoelectronic semiconductors. Finally, let's talk about the ITC segment. Driven by AI PC, shipments of high-end power supplies and mini LED backlit keyboards have significantly improved. In consumer electronics, game console clients have also begun to pull materials in Q3. The low orbit satellite and industrial power supply products, which began shipping last year, are expected to see growth in the models for major clients in H2 this year. These are all important factors that will drive quarterly growth in the second half of this year. Therefore, we expect that driven by the growth of these high-value businesses, the overall revenue will grow quarter-by-quarter and the core businesses can return to the track of annual growth. At the same time, the profit and operating structure can also be optimized continuously. Thank you so much for your attention.
Thank you, Anson. Now we open the floor for questions and answers, and we will provide more explanations.
Anson and Julia. This is Doris from BofA. Here's my first question. In H1, we see that the revenue was still declining Y-o-Y. So I don't know, now with the outlook for H2, what do you think about the full year in terms of revenue? Will there still be a Y-o-Y decline? And your margin actually went up. So could you share with us your thoughts on the full year's profitability? Will it maintain a Y-o-Y growth?
Okay. As I just told you, our lean focused strategy has come to an end in Q2 this year. So in H1, we see that our revenue declined Y-o-Y indeed. That's a fact. As a result because of H1, the full year is going to be affected. So because of that, this year, it will be more difficult to achieve growth for the full year. We also told you that this is also affected by, for example, the consumer market as well as by game consoles and the life of some of our products. I think in H1, they were mostly reflected. So I believe that there will be a better chance in H2 to return to positive growth compared to H1. Now with the development of new products and new tracks we remain relatively optimistic about future growth projections.
Here's my second question. Now in terms of AI, there are a few, you have a few products and businesses related to AI. So from the company's perspective, no could you share with us your targets for this year or next year, what's the AI-related revenue contribution as opposed to the company's total revenue?
And in terms of AI servers, you said -- you mentioned the percentage of power. So could you update us on the numbers because now you have liquid cooling contributions being more and more visible. So maybe you should enhance or update those numbers for us?
Well, I think everyone pays a lot of attention to AI, and we are seeing AI's future growth trend, which is a good opportunity, which we will not miss. Our AI power -- well, first-generation AI product, right now, it's mainly 3k watt, and in H2, it will be 5.5k watts. If we look at AI power only, then including our PSU and power shelf, we believe that this year, there will be a chance to grow from 7% to 8% from last year. I'm talking about power business. So from last year to 12% to 15% this year. So that's about house. That doesn't include H2 this year because liquid to liquid systems and chassis businesses in H2, they are going to start to have volume. I think the contribution this year is probably not big. But next year, we are going to see more. So the liquid cooling integrated solution will drive PSU and liquid to liquid products and also racks and chassis. So these are the 4 major products of ours. Next year, they will start to have higher revenue.
We hope that in the future, these products will account for roughly about 10% of the company's total revenue next year. That's our current expectation.
Anson and Julia, good afternoon. May I clarify something from the previous question. Anson, did you say that next year liquid cooling plus chassis combined will account for 2025, 10% of the total revenue in 2025?
Well, basically, the 5 major products that I mentioned, PSU is the largest, of course, and there's also liquid cooling, racks and chassis and what else? So basically, well, there are 2 parts under liquid cooling. So liquid to liquid and liquid to air. So these are the 5 major items.
Okay. May I -- another clarification. You said that AI power would account for 12% to 15% of total power source in terms of cloud.
Right. Because there are 3 parts, right? Cloud is one. So in cloud power supply, AI this year, they achieved 10% to 12% -- sorry, 12% to 15% this year.
Okay. So that's for this year. But does total power include consumer?
No just cloud. Consumer power is something else because we have 3 major business segments, right? Consumer power is put under IT&C segment. All the cloud products are put under Cloud & AIoT segment.
Got it understood. Another thing in H2, you mentioned that the core businesses would achieve -- turn positive Y-o-Y. So you mean that the total revenue in one single quarter would do -- we'll be able to do that?
Right. In Q-o-Q terms, starting from Q3, in our core businesses, we believe that we can turn positive into the positive territory instead of decline.
Starting from Q3?
Right.
By core businesses, you mean those apart from new businesses basically?
We have 3 major business segments Optoelectronics to electronics, cloud and IoT and ITC. These are our existing core businesses.
Okay. Got it. understood. Okay. In terms of liquid cooling capacity, what is your capacity arrangement now?
For liquid cooling, this year and next year, it will be in [indiscernible] initially for production. Of course, in Vietnam, as you know, we have a new base. And in 2 years, that base will start production, meaning after 2025 or '26. By then, liquid cooling products will be transferred to Vietnam for production. So in the first 2 years, it will be in Kaohsiung.
Do you have capacity planning now?
Yes, it's been planned is in Kaohsiung.
Could you share with us the capacity roughly?
I think it's difficult to give you some numbers for explanation because there are different sizes and different clients as well. I think in terms of capacity, ultimately, it will be reflected in revenue, which is what people care about, right? As I just told you, in terms of liquid cooling, in H2 this year, then some small volume shipment this year. Ultimately, I think the revenue growth will be more visible in 2025.
I think there was a question over there.
Hello. I want to know your CDUs are completely self-manufactured or do you cooperate with others? There are [indiscernible] motors, right? So compared to other key dissipation companies, you enjoy more R&D advantages if they are still manufactured? And what is your estimated market share based on client requests?
Well, [indiscernible] is a new product of ours. We are still talking with clients about this product. The fact that clients are willing to adopt our product is because, as I said, first of all, our MCU is now digitally controlled. And the advantage is that it's related to power, which is what we are good at.
Traditionally, we used PLM, but now the temperature can be controlled more accurately. Second, we are talking about system integration solutions with clients. In the past, when things were not done well, there would be liquid leakage. So we understand clients' pain points. The integration has to be done well. We need to have that in order to reassure clients.
And third, we have manufacturing from around the world that can provide clients with a more stable supply chain and solutions. I think this is why we are able to attract clients to cooperate with us. In the past, LITE-ON did not have air cooling or liquid cooling solutions. But 2 years ago, we thought that this would be a great opportunity. So we started to invest very early on. All the design right now is owned by LITE-ON, and for some PDUs, we cooperate with others, of course. We don't need to 100% do everything when there are good suppliers to choose from, we choose to work with them, of course. Why are they willing to work with us? Because we can provide them with a bigger outlet. This is why we can attract them to work with us and cocreate this ecosystem with us.
As for the market share, now there are many different segments. So it depends on which segment you look at. In terms of PDU, we are talking about a rack solution. It's only at the initial phase. It's not meaningful to talk about market share now. When there's volume in the future, I think it will make more sense to talk about it.
Second question, your investment in co-sell. Now it's 19.99%. So do you plan to get more technologies or clients from them? And do you plan to increase your investment in the future?
Our purpose, we clearly told them that, ultimately, we want to have a certain level of control. That's our consensus. And before getting that, the first step is to know if there's synergy created from our cooperation? Can we really benefit our business, design, supply chain and manufacturing? Can there be synergy created? Now we have 19.99%, we are already starting to integrate resources from both sides, and talk about how we can start from business and product design and how we can use our massive advantage and low power to help co-sel expand it's market.
It's not that we are working only for ourselves. We also hope to bring something to COSEL. They are up to all a TWD 7 billion company listed in Japan, right? I believe that they are encountering their bottleneck. If [indiscernible] help, they can continue to grow. It will be great. This market size is TWD 140 billion. And right now, they only account for TWD 7 billion. So even though they are a top 1 in Japan, there's still a lot of room for their development. Our idea is that through them we can make the pie bigger. Through them -- through cooperating with them, we can also -- as I said, we can grow our revenue and profit as a result. That's our strategic thinking. Thank you.
I have many questions. First of all, I just want to check. You said that cloud power H1 revenue Y-o-Y was more than 10%, correct?
Yes.
And you also said that in Q2, the Q-o-Q is 20%?
Well, in Q2, it's roughly 20%. And in Q3, we hope that in the future, we can maintain this level of growth.
Got it. So for the full year, Y-o-Y, could you share with us? Because in H1, it's higher than 10%.
Well, in terms of cloud, it should be also double digit growth.
Okay. I also want to check, you talked about AI servers 7% to 8%, and this year, 12% to 15%. So does it mean that the absolute revenue is in double last year?
Well, in terms of AI, it should be more than double.
Got it. You talked about liquid cooling, and there are many things that you have to do. You said that liquid cooling sidecar has been certified and the shipment will begin in H2. So in order to get certified, what are the clients? Are they CSD clients or what?
Well, we are already on their vendor list, so everyone can see it. It's okay for us to tell you. It's NVIDIA's product certification.
So it's like template reference design. So for -- if end clients want to adopt it, do they need to...
Well, no need because we go through ODMs like Quanta and we win, and also [indiscernible] and Super Micron and whoever gets the order. And when they adopt a solution, then we deliver to these ODMs accordingly.
Got it. So in this NVIDIA's reference design, how many suppliers are there?
Three, we are the only Taiwanese company.
Okay. You talked about liquid to liquid, which will be certified in August. It's being tested. Is it also NVIDIA?
Yes.
And you talked about liquid cooling with many things that can be done. If it's at the system level, from LITE-ON's strategy perspective, you plan for your capacity. But in terms of business, when you make the whole system, then you don't need to make all the components by yourselfs 100%, right?
Yes, we only control the core design and some capabilities, for example, chassis capabilities and power cell capabilities, and liquid cooling is mainly about design and the MCU is made by ourselves. Of course, for some components, we cooperate with others.
And you gave a list of PSU, liquid cooling, chassis and back accounting for 10% of the revenue next year if people do a very quick math, for example, 10% revenue growth, then we get the numbers, we get the share next year for next year.
And you said that PSU would still be the highest share.
So let me correct myself. It's not -- let me give you a rag as an example. If we look at rack PSU accounts for 20%. Chassis is the largest 65%. You mean production output contribution. If we look at rack and all the products inside, PSU's cost is 20% and the most expensive is still the chassis, 65%.
But there is still this question of market share, right? So if we look at the 10% share in the revenue next year, so what is the distribution between these items roughly?
It's the whole thing. It's a combination because we hope to provide a system solution for clients. Of course, sometimes they need individual PSU or power cells, but we aim to provide the whole thing, including PSU, liquid cooling, chassis and rack, everything combined together. We hope to do that with this integration. Because, as I said, the real client pain point is integration. This is why integration is valuable. But if they need individual components, we can also do that. So it's hard to estimate, but we hope to provide comprehensive solutions.
Got it. So when you calculate the 10% contribution, if we look at cloud power supply AI server, it will probably grow next year because it doubles this year. Is it part of the 10%?
Yes, of course.
Okay. My last question. For individual racks, could you provide the corresponding wattages and prices because there are many different specs, right?
Well, it's a bit more sensitive. I can only tell you that we aim at system integration because of market pain points. And second, in our long-term strategy, we hope to move towards systems and solutions. In the past, we were considered as being component or module oriented, and we did OEM or ODM businesses. in our transformation, our new businesses will move towards this direction. And the ASP naturally will be very different from nowadays, okay? So I believe that when these businesses go up, then it will be easier in a short time for you to see significant growth of revenue. Thank you.
Hello. Sorry, one more question for me. You mentioned that in ITC, some game consoles are having [indiscernible]. So first of all, is it because the market doesn't have to demand anymore, or there is still demand, but LITE-ON hopes to eliminate some low GP products in favor of higher products?
Well, it's mainly because of the market. The market doesn't have the demand anymore. And I think that we are so strategically reducing, for example, some car lighting OEM and some motherboard OEM. We are strategically controlling these proportions. But as for the EOL, it has to do with the lack of demand on the market. This product is now gradually disappearing on the market.
Okay. So in the macro environment, what are the specifically, what is the product in question, could you tell us ?
It should be fine. It's because, as you know, we are the only ODD maker in the entire world, right?
Hello, Anson. Sorry, one follow-up question. You said that in Q3 and Q4, individually, there would be Y-o-Y positive revenue growth. That means that in Q3, the Q-o-Q could reach 20%, which is a much stronger momentum than usually. I'm trying to understand why? And also LEOTEK acquired the British company. So in Q3, is it going to be included in the financial reports? Or what are factors behind?
Well, your calculation is very accurate, maybe a bit lower than 20%. In terms of the growth areas, as I told you at the beginning, among our 3 major business segments in Optoelectronics, growth comes from Optoelectronics semiconductors. I have explained to you why earlier. Second, Cloud & AIoT, our growth comes from 2 things: First of all, power supply; second, AIoT, which is our security protection products and IoT products; third, in terms of our ITC power, there are 3 things where we believe major growth can come from. First of all, PC low power because, as I said, AI PC is now driving many things and AI PC uses more power consumption. So AI PC uses higher voltages. For example, desktops, when they introduce AI PC, the power supply goes up to almost 800-watt. As for AI edge workstations, the power goes up to almost 2 kwatt. What does that mean? Well it means that the ASP goes up, so that's about PC.
I also mentioned mini LED because in order to enhance the overall quality or look of AI PC, they, in the past, used LED, but now they use mini LED. and mini LED has higher unit prices and the usage volume is also higher. In the past, used one under the keyboard, now they use 4. So that drives the ASP for keyboards as well. Last but not least, as I said, in H1, all the 3 major game console clients -- companies were our clients. But after Q4 of last year, a lot of inventories were being built up. So in Q1 this year, they were digesting these inventories. Only until now in Q3, do we start to see some orders coming from the companies. So these are our growth momentum for Q3.
I want to emphasize that new businesses take time. It's impossible for them to contribute to our revenue within a short period of time, but we can expect that, next year, they will contribute more. But in H2 this year, we can return to Q-o-Q or Y-o-Y growth because of that as well.
I also want to ask you about automotive. You said that you would strategically reduced car lighting OEMs. What about car cameras? Do you have new projects? And also in terms of EV charging, do you have some updates for us?
Okay. As I said, in car lighting, we have some OEM business. But in the past few years, we have been transforming ourselves. You mentioned 2 important automotive products. First, we moving towards ADAS camera solutions in our transformation. And right now, we already have 2 major clients, and we have entered their businesses. Of course, they are Tier 1 clients. So when OEM goes down, camera sensors business goes up gradually. That's one thing.
As for EV charges, Well, in the past few quarters, we have told you that in terms of EV, in terms of Level 2, we are now going from EV service providers towards -- gradually towards North American car makers. We are having cooperation with them. And in the future, that will happen in Europe as well in terms of Level 2 cooperation. As for DCS chargers, it's now mainly 30kwatts. And our major market now is carpets our major business. In Q2, our 30k watt and 600-watt have been UL certified. And in Q3, we start to see some small orders being delivered on for car fleets.
So in terms of cars, in terms of EVs, OEM goes down, but our DC fast chargers and AC chargers as well as camera solutions go up gradually. So that's my answer for you. Thank you.
Anson and Julia, this is Sharon from Morgan Stanley. I have 2 questions for you. The first one is related to liquid cooling system, another vendor on NVIDIA's reference design list is converted in their recent earnings conference, they said that one of their advantages is that their service network is very complete. So within 2 hours, they can go on site to support. May I ask you, based on your current goals and your development directions, is service part of your stope, or you cooperate with ODMs, so the maintenance and service go through ODMs and you don't get involved? This is my first question.
Okay. Let me answer you first. Service is very important. I mentioned 3 key factors. The last one is service. As you know, in the past, there were many problems. So people are worried that if there's a problem, can we immediately deal with it? So they use this as a key factor, which is understandable because this is really a pain point if we want to compete in this sector, we need to do it. So global service is something that we are working on. There's no question about that. And we serve ODMs. We need to provide service for them rather than then providing service.
You mean that if a rack is put inside a data center and if heat dissipation is identified as the problem, you need to go there rather than the ODM? Right
If that's the case, then we will have to cope with the problem.
When you running your support team, is it true that in the main regions, you need to add people to your service teams?
Well, I think it depends on the market. Right now, our clients are mainly North American so we will first set this up in North America. In terms of globally, we will continue to evaluate if there is such a need to do it. In addition, solving problems is 1 thing. But as a source, we don't want problems to occur in the first place, otherwise this would become a big burden. Our thinking is that we make our products well so that they don't cause problems. This is our real focus. This is why integration really key because when everything goes through different suppliers, they have to integrate by themselves. But if they don't have their domain know-how, then there might be problems, but now the key components are in our own control. We know how to integrate them.
When we have the integration technology, service becomes less important. So this is how we win our clients, this is an important point.
Okay. Got it. Another question, Leo Tech just acquired Dialight's transportation department. I'm trying to understand what's the revenue scale of this transportation department? And when will this deal be completed and start to contribute to your financial reports? And what is the rationale behind this acquisition? In my understanding, this is more about public service. A while ago, you mentioned smart city management, but it feels that this is quite different from your existing businesses. So does it mean that this is just a starting point. And in the future, there will be other city management related M&A projects. This is a focus of your new businesses?
Well, indeed, first of all, tech is independent from light on. It's our subsidiary. Its revenue is not high. There are 2 main businesses, which are traffic lights, and street lights, what's it called in Chinese? Okay. My Chinese is getting so bad. So these are the main businesses. And in these 2 businesses, we achieved almost 30%, 30% to 40% of market share globally. So there is limited room to further expand these businesses. So in the past few years, we have been active in transforming ourselves, but where to go, where we get future smart city applications. And in order to do that, traffic is the most important issue.
As you know, when you go to a city, especially a big one, traffic is a big problem, a lot of traffic jam, right? And when traffic lights or streetlight type problems, the maintenance cost is very expensive. So our idea is that we need to enhance our capabilities in this domain. We want to build up different capabilities, especially a management platform with AI, which can manage information. And with information management, we can then solve, for example, traffic problems in cities. And when there is a sudden incident, it can be dealt with directly, immediately, and we can also collect traffic data in cities. And in the future, there is something we are working on right now, how can we analyze carbon emissions from cities. So this is something complete.
In order to have such a management system, there needs to be capabilities. This is why we buy this company. It's not about their revenue, their revenue is not high, but they have the capabilities. So we buy this company because we want to buy their teams, their capabilities so that they can start to help us move into this direction of smart cities in our transformation. This is what we want.
So in Leo Tech's acquisition, it doesn't really help the company's revenue significantly, but in terms of our future transformation, these are important capabilities that we need to have. When we have done, when there are business opportunities related to smart cities, then we will be in a good position, right? When there's this trend and wind, it will be like wind beneath our wings.
Anson. I'm the researcher from Delta Securities. I want to ask you about your AI power supply and liquid cooling solutions. How are you different from Delta solutions? And if in August, you passed the RVL certification. How much market share are you confident to get?
Well, these are customized things. So it's impossible to compare that way. It's not standardized, so it's not really comparable. Second, to answer your question, we don't use market share to look at it because we try to meet clients' requirements. We provide customized service for clients. So for example, for certain clients, if they go through a certain ODM, then they use our solutions 100%.
I asked this question because Delta got this certification a long time ago. It's a different certification. I mentioned that the list and on that list, we don't see delta there.
Got it. You can go to check by yourselves. There are only 3 companies, 2 of them are foreign companies. One of them was just mentioned by someone else a while ago.
I want to ask you this, we see that in the last 1 to 2 quarters, the tax rate is higher than before. So is this a one-off? Or is this future baseline?
Thank you for the question. We estimate that this year, the tax rate be slightly higher than last year. It's roughly 23% to 24%. The main reason is because we have operation presence overseas. So our combined tax rate is affected by changes to global minimum tax regulations. In some countries or regions, when they increase their minimum tax, our combined tax rate is affected as a result. This is why this year, the tax rate is slightly higher than last year.
I think there's one question over there.
I want to ask you this. When we look at the whole rack you target some systems to work on. So how do you cooperate with your clients? And also it seems that if you can do all the difficult things, then you may want to advance a step further to work on the entire rack. This is my first question. Second, AI servers have now emerged and the specs are very different from in the past, it turns out. And now AI servers on the market don't have that many special brands. So are you starting to see other GPU companies that may want to design customized AI server racks in the future? Are you feeling this possibility right now?
We don't do the whole system. We just do liquid cooling, heat deception inside the system. So I don't think that we are as capable as Quanta or we win. We cannot compete with them now. But we provide the liquid cooling system for them, and they add other device to form a system. Second, I believe that there won't be a monopoly in AI. There will be different ways and solutions. We think that this is a necessary trend. It's not possible for the market to have a monopoly. And now the cost pressure is very high. So ultimately, there needs to be cheaper and better solutions in order for the scale to go up so that more people use AI more.
So in theory, this should be the right trend. So there won't be just CSPs. We believe some enterprise companies, some enterprise clients may also want to make AI closer to the ground, to the batch rather than same on the cloud always. Because, as you know, the cost would be very high that way. So this is a necessary trend.
So I'm Jerry from [indiscernible]. Here is my first question. There have been several years of lean focus, eliminating some below GP products, and there have been the M&A of COSEL and LEOTEK. So in the next 3 to 5 years, what's your M&A strategy in terms of Cloud & AIoT, Optoelectronics and ITC? Are there different M&A possibilities? And what are the products? For example, after lean focus in the next 3 to 5 years, what's your revenue target, a double-digit growth? How do you look at your product mix in the next 3 to 5 years? For example, is it going to be 1/3 for each of the 3 major business segments? Or what might be the changes?
In terms of our M&A strategy, based on the existing businesses, we focus on 2 areas, which are cloud and Optoelectronics. This is something that we have been actively approaching. If we look at the businesses in the next 3 to 5 years, we focus on the architecture, meaning energy storage saving, conversion and control, meaning how to create and Internet of energy ecosystem. We build our own software capabilities and system integration capabilities. We believe that these are the core, and we do that by ourselves. As for hardware or other things, we find some suppliers who we use M&A to add those products. So this is our strategic thinking.
If we can implement these strategies successfully, ultimately in the next 3 to 5 years, we aim to maintain a double-digit growth.
Got it. My second question, in terms of liquid cooling, which may account for 10% next year, what's the margin like compared to the corporate average margin?
Well, in the last 3 to 4 years, we have been adjusting this I'm sure that you are clear about this. We went from a GP of 14% to more than 20% today. This means that our new tracks and businesses won't have a GP below 20%. Otherwise, we wouldn't do it, but we choose these tracks when we evaluate future business opportunities, there are 2 important crit aria, first of all, the GP shouldn't be below 30% Second, the CAGR should be maintained. It shouldn't be a one-off product. Otherwise, we wouldn't want to do it either. So these are the 2 criteria for us to evaluate new tracks if the new track is worth our investment.
A follow-up question, is it right to say that this year is a year of bottoming out after many years of main focus, is starting from next year or in 2 years, there will be a double-digit growth at baseline?
Well, as I said, in Q2, our lean focus has come to an end. There won't be this strategy anymore. In the next 3 to 5 years, the most important thing is to grow our core businesses and also how can we implement our new businesses rapidly. This is an important indicator to see whether we can -- maybe in H2, we can -- whether or not we can return to Y-o-Y growth? This is an important indicator to look at.
Thank you for your questions. We are almost out of time. This concludes our earnings conference. All the documents will be put on our official website. Thank you for your participation. We wish you a great day. Thank you.