Lite-On Technology Corp

TWSE:2301

Earnings Call Analysis

LITE-ON's Q3 Results: Strong Growth Despite Consumer Challenges

In Q3 2024, LITE-ON Technologies reported TWD 36.8 billion in revenue, a 10% increase sequentially, with gross profit rising 12% to TWD 8.3 billion. Each key segment—optoelectronics, cloud, and ITC—contributed to growth, particularly ITC, which surged 20% Q-o-Q. Despite an onetime impairment charge of TWD 300 million, net profit stood at TWD 3.4 billion, up 9% Q-o-Q, with EPS at TWD 1.48. Looking ahead, LITE-ON anticipates returning to normal shipping levels in Q4 and forecasts significant revenue growth from AI applications in 2025, aiming for AI to contribute over 10% of overall revenue.

Strong Financial Performance Amid Challenges

LITE-ON Technologies reported a robust revenue of TWD 36.8 billion in Q3 2024, marking a 10% quarter-over-quarter increase. The company achieved a gross profit of TWD 8.3 billion, with a gross profit margin (GPM) of 22.4%. Operating profit reached TWD 3.9 billion, resulting in an operating profit margin (OPM) of 10.7%. Notably, the net profit to the parent company was TWD 3.4 billion, up 9% from the previous quarter, with earnings per share (EPS) solidifying at TWD 1.48.

Segment Analysis Reveals Growth Paths

All three major business segments experienced growth. Optoelectronics revenue stood at TWD 7.4 billion (up 3% Q-o-Q), benefiting from advancements in visible light mini-LED and sensing applications. The cloud and AIoT segment generated TWD 12.6 billion, also up 3% Q-o-Q, although it faced challenges in factory ramp-ups. The ITC segment reported the most substantial increase, with revenue of TWD 16.8 billion, a significant 20% increase Q-o-Q, due to enhanced shipments of high-end power supplies.

Cost Management and Strategic Focus

LITE-ON demonstrated effective cost management strategies, with operational expenses increasing by only 5% Q-o-Q, leading to an improved operating margin, rising by 0.8 percentage points. The company has strategically transitioned towards high-value businesses, reducing focus on lower-margin consumer products. The share of optoelectronics and cloud and AIoT in overall revenue rose to 57%, showing a commitment to higher-margin segments.

Onetime Costs and Future Profitability

The Q3 financials were affected by a TWD 300 million onetime impairment for strategically suspended businesses, which will not recur, potentially providing a clearer path for profit growth in subsequent quarters. The overall first three quarters displayed a revenue drop of 11% year-over-year but showed resilience in core high-value sectors with improving margins.

Future Outlook Based on Strategic Initiatives

The company aims to increase its production capacity in Vietnam, targeting a revenue increase to TWD 25 billion next year from less than TWD 10 billion currently. Furthermore, LITE-ON forecasts double-digit growth in AI-related revenues, expecting this segment to contribute over 10% to overall revenue by 2025. A pivotal shift towards system integration and more value-added services forms a critical part of their mid- to long-term strategy.

Optimism Despite Seasonal Factors

Management expressed optimism for Q4, expecting both quarter-over-quarter and year-over-year growth, countering the typical seasonal slowdown. This comes after a successful transformation emphasizing lean operations and a strategic focus on high-growth areas.

Expansion into Energy Management Solutions

LITE-ON is expanding its portfolio into energy management, including new products such as AI-driven energy management systems, aiming to capture growing market dynamics in green data centers and energy efficiency solutions. This strategic move represents a vital part of their 'Internet of Energy' vision, focusing on sustainable development and carbon reduction.

Earnings Call Transcript 2024-Q3

[Julia Wang, executive]

Dear investors and friends from the media. Welcome to LITE-ON Technologies 2024 Q3 Fiscal Earnings Conference. In addition to explaining the results from Q3, we also hope that you will better understand LITE-ON's strategy and deployment after completing many operational adjustments and transformations in recent years.

Today's agenda consists of 3 parts. I'll first explain the financial results and performance of Q3 2024. Next, President Anson will explain the company's operating outlook and growth strategy. Then the Q&A session will be 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. These 3 segments are optoelectronics, including optoelectronic semiconductors and auto electronics; cloud and AIoT used in data centers, servers, 5G networking products, AI, IoT, et cetera; ITC, which is used in notebooks, workstations, desktop computers, game consoles, et cetera.

LITE-ON's revenue in Q3 was TWD 36.8 billion; gross profit, TWD 8.3 billion, with a rate of 22.4%. Operating profit, TWD 3.9 billion, with a rate of 10.7%. OpEx TWD 4.3 billion with a rate of 11.8%. [indiscernible] TWD 500 million. Net profit to parent TWD 3.4 billion. EPS TWD 1.48.

Overall, Q3's revenue increased 10% Q-o-Q. All the 3 major business segments grew Q-o-Q. For GPM, we benefit the growth of high-value businesses and the synergy of AI empowerment and digital operation management, GP up 12% Q-o-Q and GPM up 0.2 percentage points Q-o-Q. OP up 20% Q-o-Q and OPM up 0.8 percentage points Q-o-Q. OpEx increased 5% Q-o-Q, which is on the lower left. OpEx rate down by 0.5 percentage points Q-o-Q, in which R&D accounted for 5.3% of revenue. R&D investment continued to increase Q-o-Q, especially in cloud computing, optoelectronics, 5G and new businesses.

[indiscernible] was TWD 500 million. The reason for the quarterly decrease is the recognition of onetime fixed asset impairment of strategically suspended businesses amounting to about TWD 300 million in Q3. This is a onetime expense and we have finished the recognition. Net profit to parent TWD 3.4 billion. EPS TWD 1.48, up 9% Q-o-Q. Revenue in the first 3 quarters was TWD 98.8 billion, GP TWD 21.5 billion with a rate of 21.7%. OP TWD 9.4 billion with a rate of 9.5%. OpEx TWD 12 billion with a rate of 12.2%. [indiscernible] TWD 2.2 billion. Net profit to parent, TWD 8.9 billion; and EPS TWD 3.88.

Compared with the same period last year, revenue in the first 3 quarters was affected by the correction of the consumer market and our strategic discontinuation of some consumer and OEM products. Revenue fell by 11% Y-o-Y with high-value core businesses continuing to grow. GPM down by 0.3 percentage points Y-o-Y. OPM down by 0.5 percentage points Y-o-Y, which was affected by the reduction in revenue in the short term. OpEx down by 10% Y-o-Y, in which R&D accounted for 5.6% of total revenue, focusing on the value of core products and investing in new businesses.

[indiscernible] TWD 2.2 billion. The gap is mainly due to the recognition of onetime fixed asset impairment for the end-of-life businesses. Net profit to parent TWD 8.9 billion; EPS TWD 3.88. Revenue and profit of the 3 major segments now in Q3, Optoelectronics and cloud and AIoT accounted for 54% of total revenue and OP increased by 20% Q-o-Q.

Now let's look at individual segments. Optoelectronics revenue was TWD 7.4 billion, accounting for 20%, up 3% Q-o-Q. OP was up 16% Q-o-Q. Optoelectronic semiconductors have made new progress in the shipment of visible light mini LED and in visible light sensing applications, OP was up 16% Q-o-Q as a result. Now cloud and AIoT. Revenue was TWD 12.6 billion, accounting for 34%, up 3% Q-o-Q due to factory transferring for cloud power products, production speed of the new factory was not as fast as expected. As a result, OP fell 18% Q-o-Q.

We believe that in Q4, we will return to a normal shipment level. Now ITC revenue was TWD 16.8 billion, accounting for 46%, up 20% Q-o-Q. And thanks to the growth in shipments of IT, high-end power supplies and smart input devices and the fact that we have optimized our product mix by eliminating weak products, our OP was TWD 2.3 billion, up 46% Q-o-Q. Now compared with Q2's current assets, Q3's accounts receivable increased by TWD 1.6 billion due to increased sales and inventory increased by TWD 900 million Q-o-Q. In current liabilities, short-term loan increased by TWD 900 million Q-o-Q and accounts payable increased by TWD 5.5 billion Q-o-Q.

Current assets up TWD 1.8 billion Q-o-Q, while current liabilities up TWD 6 billion Q-o-Q. The quick ratio dropped slightly to 1.28x. The cash recycling cycle improved by 8 days Q-o-Q, reflecting the improved effectiveness of working capital management. Net cash position TWD 63.9 billion. This will prepare and help improve business performance in the future as well as investment and growth in core businesses. BVPS 37 and the reason for the quarterly decrease was that cash dividend of TWD 2 per share was paid in Q3. In Y-o-Y terms, BVPS increased by 3%, indicating that the intrinsic value continues to go up.

Since 2021, the company has strategically increased the proportion of high-value businesses while reducing noncore businesses. Since then, GPM has increased from 18.5% to 21.7% in the first 3 quarters of this year. OPM increased from 7.9% to 9.5% in the first 3 quarters of this year.

Optimization of operating model. We are moving towards system integration to develop high-value businesses, the share of optoelectronics and cloud and AIoT in overall revenue has increased to 57% in the first 3 quarters of 2024 compared with only 52% in 2021. The rising share of high-end businesses has led to an increase in overall profitability.

Now a quick overview of the first 3 quarters 2024. Revenue TWD 36.8 billion, GPM 22.4% and OPM 10.7%, up 0.2 and 0.8 percentage points, respectively. 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. R&D investment increased and accounted for 5.3% of revenue in the quarter, focusing on investment in cloud, optoelectronics, 5G and new businesses. Net profit to parent TWD 3.4 billion and EPS 1.48, up 9% Q-o-Q. Revenue in the first 3 quarters was TWD 98.8 billion, GPM 21.7% and OPM 9.5%, EPS TWD 3.88.

Now the 3 core businesses. Thanks to the improved specifications of AI server power supplies and cloud computing products, high-end power supply revenue has grown steadily.

Now ITC. The proportion of high-end products has increased and shipments of high-end power supplies and smart input devices have continued to increase Y-o-Y. Among optoelectronics, semiconductors, visible light mini LED and invisible light core applications continue to increase. This concludes the financial report for the first 3 quarters of 2024.

Next, President Anson will explain the company's operating outlook and growth strategy. Thank you so much.

[Anson Chiu, executive]

Thank you, Julia. First of all, I'd like to tell you, dear investors and media friends, thank you. Thank you for coming. As far as I know, today is a good day. So there are many technology companies choosing today to organize their earnings conferences. The fact that you come here in person shows that you prioritize our company and want to know our future development and strategies. I will try my best to answer your question so that you can better understand LITE-ON's future strategies and development directions. I'll first take a few minutes to talk about a few things.

First of all, today, there are many investors that are concerned about LITE-ON's future. After our lean transformation, what is our focus in terms of tracks or new businesses as our mid- to long-term development strategies. The story dates back to more than 1 year ago, where we put forward LITE-ON's 10-year vision. Focusing on energy management as our direction, we put forward the framework of Internet of Energy, IoE, under this framework, there are 3 important areas that we continue to work on.

The first one is green data center. This is a very important area. The second is clean mobility. And the third one is EI or efficiency infrastructure. I think that when we put forward this framework of IoE, these are the 3 important areas. Last quarter, in the United States, there were 2 very important exhibitions, which are related to our development strategies and tracks. One of them is called OCP or open compute.

Every year, they have a large exhibition in San Jose, focusing on the green data centers as the main theme of this exhibition. They talk about future data center development. I think before my presentation, we went there. And last year, we brought our latest liquid cooling solutions to the exhibition. And this year, we also brought our more advanced products to this exhibition showing to our customers. Now let's take a look at a short video clip so that you know at OCP what LITE-ON has shown as our direction. Please play the video.

[Presentation]

[Anson Chiu, executive]

Okay. Time is limited, so we cannot play the full video for you. At this year's OCP Summit, we used green resilience as the theme, and we demonstrated for the first time the NVIDIA-driven integrated AI cloud server cabinet solution. This product meets the requirements of GB 200. And it combines LITE-ON's 5 core capabilities.

These capabilities are: first, high power supply compliant with our [indiscernible] standards; second, comprehensive liquid cooling system; third, integrated chassis design; fourth, smart power supply management software; and fifth, connection of software and hardware systems. These are the most important core capabilities of ours in the company. This demonstrates LITE-ON's comprehensive capabilities in independent design and R&D technology. More importantly, as you know, in the past, LITE-ON's business model was more OEM and ODM oriented, right? And previously, I told you that in the future, we would want to move towards a system integration and solution as our important development directions to prove that we move towards this direction.

So in terms of green data center technology capabilities, we focus R&D resources on new tracks and establish new capabilities, new products and new customers and create mid- to long-term revenue momentum.

Well, there is another good example here. I mentioned on our future IoE framework and there is efficiency infrastructure, right, the third one. Last quarter, in the United States, there was another exhibition. So I'd like to take this opportunity. This exhibition is called RE+. I want to also show you another video for you to have a taste of this exhibition. Now please play the video clip.

[Presentation]

[Anson Chiu, executive]

From this video, you heard a brand name, TeraHive. I'm glad to have this opportunity today to officially announce to you that in EI we use TeraHive as the brand to officially enter the North American market in Q3, focusing on home energy storage as our Phase 1 development direction.

In terms of efficiency infrastructure, we combine LITE-ON's capabilities to integrate power supply management software and hardware systems. We also launched a home energy management solution. At this year's RE+, we demonstrated our energy storage, inverters, distribution boxes, EV chargers and other hardware equipment which are combined with our self-developed, AI-driven energy management platform to better predict electricity consumption, effectively reduce electricity bills and provide uninterrupted power backup.

These 2 examples show that under the IoE strategy, LITE-ON is gradually moving towards market applications of energy storage, saving, control and conversion in order to achieve the net 0 strategic goal. In addition, this year, we released the 2023 sustainability report. In terms of environmental sustainability, LITE-ON is deeply involved in industrial connections in response to renewable energy. Our carbon reduction intensity has reached the standard by nearly 15% ahead of schedule.

In terms of social responsibilities through the LITE-ON shop and the first ever [ minus double 11 treasure hunt ] secondhand charity market, if you remember from last year, so this is how LITE-ON enhances the power of doing good and implement its social responsibilities. At the end of this year, we will host [ minus double 11 ] again but this time will be larger because it is going to be co-organized by 8 industry partners together to jointly support social care.

Finally, in the 10th edition of corporate governance assessment of listed companies, we maintain our top 5% ranking. What we are trying to tell you is that in the future, LITE-ON will continue to practice sustainable management through the 3 aspects of ESG.

I just told you about this IoE framework. Under this framework, green data centers are an area of greater concern for all of you, especially in terms of cloud power supply. This year's 33 kilowatt power cell power supply for the new generation of AI servers are shipped in Q4 gradually.

It is expected to increase in volume in Q1 next year. We are optimistic about the high growth performance of related businesses in 2025. As for cooling systems, liquid to air has already been approved by customers and samples can be shipped in Q4. When I was preparing this script, that we also have liquid to liquid CDU, right? In Q3, it should have been approved by customers and put in their RVL that we weren't sure about that, so I originally only was going to tell you that we finished customers system testing. But this morning, I received a message telling me that our 600 kilowatt CDU has been officially approved by customers and has been put in their RVL. I'm glad to share this good news with you today.

In terms of power supply cabinets and liquid cooling systems, we comply -- we are connected with our major customers already. And in the future, AI-related revenue will account for more than 10% of the company's overall revenue in 2025. In terms of production capacity deployment, we are conducting global diversification to shorten supply chains, serve customers nearby and strengthen global flexible supply capabilities. In terms of data centers, the 2 major markets are North America and in my opinion, Southeast Asia. So initially, we will focus on these 2 regions. Originally, well, 2 years ago in Vietnam, we started mass production already. We hope to expand, to build capacity in Vietnam.

Last year, the revenue was only TWD 2 billion-or-so. And this year, our original goal was TWD 17 billion. But as Julia told you, the speed hasn't been as fast as expected. So most likely, this year, we can achieve TWD 12 billion. So there is a gap of TWD 5 billion to TWD 6 billion in terms of production capacity.

In North America, we focus on Plano in Texas. Mass production has begun and we have received customer certification. In the future, we will continue to expand our production lines in North America. At the same time, we continue to expand our after sales service team to provide customized and high-efficiency services and global supply chain management.

Next, I will take a little bit of time to share with you some of our thoughts on Q4. As Julia told you, our core business performance continues to grow, mainly driven by increased shipments of cloud computing power supply up to electronic semiconductors and higher power supply for IT applications and smart input devices, which are high-end keyboards. The cloud business mainly focuses on the shipment of high-end power supply management systems.

The Optoelectronics semiconductor business has benefited from the application of visible light and invisible light in AI vision -- AI machine vision, wearables and security protection as well as the demand for mini-LED and infrared LED, driven by AI PC, the revenue growth trend is clear quarter-by-quarter. Despite the impact we talked about, the main growth drivers of the ITC segment are high-end input devices and the growth of low orbit satellite shipments, which will bring growth momentum to Q4.

So overall -- well, in the past, when we looked at Q4, it was relatively a low season for companies but we are optimistic about Q4 this year. We believe that we can achieve Q-o-Q positive growth and also Y-o-Y growth.

Okay, our overall performance this year has been affected by consumer products and also by capacity acceleration limits. But as I told you, our lean transformation has come to an end this year. And in the future, we will focus on the tracks where we can grow rapidly. And through that, we hope to drive up the company's operation.

This concludes my presentation. Julia reminded you that the typhoon would probably be inevitable. I'd like to also remind you to pay your attention -- pay attention to your safety. I wish you a great day ahead.

Now is the Q&A session. We open the floor for questions and we will provide further explanations. Thank you.

[Cheng-Tai Lee, analyst]

I'm Terry from KGI. I have 1 question. You talked about your energy storage business, right? The home energy storage market is quite competitive in the United States. So I want to know your strategy, how do you make your products stand out on this market?

[Anson Chiu, executive]

Well, indeed. But let me first explain to you why we entered this market. It wasn't really about business opportunities in home energy storage. It's because in IoE, we want to build a micro grid structure and energy storage plays a very important role in this, which means that we need to obtain such domain know-how in order to develop in micro grid. On this market, of course, we need to compete with others.

How do we do that? Well, our biggest strength is our self-developed software, which is the AI-driven energy management platform. This is our biggest differentiator compared to our competitors. Its interface is very easy to use according to customer feedback, the user experience is very great. This is the first thing.

Second, our product design is also better. After all, power supply is our strength. So our design is lighter and thinner. The advantage is that it's easier to install. As you know, batteries are quite heavy. When these SI companies need to install them on the market, it's a big difference if the product is easy to install. So thinner and lighter design is our second differentiator.

[Cheng-Tai Lee, analyst]

I want to ask you about Q3 cloud profit going down and the impact from Vietnam. What is the actual situation when a new factory ramp-up isn't smooth, is this a onetime incident or has this been the case for some time? Usually, it should be a continual process, right?

[Anson Chiu, executive]

Currently, our cloud customers have gradually asked us to move to Vietnam. At the beginning of Vietnam, it wasn't focused on high-end power supplies. We first moved our networking products there. This is why I told you a while ago that 2 years ago, the revenue there was only between TWD 1 billion and TWD 2 billion. And in Phase 2, we moved some ITC products such as keyboards, mouses and also adapters. So these smaller power supply products were moved there in Phase 2.

In Phase 3 now, we move high-power products there. For example, our newest 5.2 kilowatt products and 3 kilowatt products are gradually moving there. As you know, high-power products have more complicated design compared to other products. We cannot deny that these products are more profitable. So when the moving process is not smooth, our shipments have been delayed, leading to many customer complaints. We have put in many resources to solve this problem. In my opinion, the impact should be short term. Q3 was affected. But when we look at Q4 in terms of both profit and revenue, I believe that we can return to a normal level.

[Cheng-Tai Lee, analyst]

May I try to understand in terms of high power, starting from Q3 this year, what is the percentage moving to Vietnam and what will be the percentage next year? Will customers expect to see China plus One now a days and also Taiwan plus One perhaps? So meaning in addition to Taiwan, they hope to have a second base or location, especially in the area of AI.

[Anson Chiu, executive]

I think at least 40% of our production capacity will be built in Vietnam. Right now, the percentage is less than 10% and there are already some bottlenecks for us. Gradually, the percentage will continue to go up next year. The factory learning curve can be solved, I think, because these products are new to the factories there.

So -- and the design is more complicated. So the yield rates and the output have been affected. In Q3, we have put in many resources to solve this problem but the learning curve issue can be overcome. And I believe that in Q4 and next year, this won't be a problem to worry about anymore.

[Cheng-Tai Lee, analyst]

My second question is about next year's cloud and AI power supply growth rates. What are your thoughts? Your competitors are very optimistic about this growth next year, what do you think?

[Anson Chiu, executive]

Okay. We are the same. We have to explain to you in terms of power supply. Our products are a bit different from them. We have mainly PSU and power cell products. Our competitors have D2D converters, which we only start to work on in Q4. In terms of market shares, if we look at general purpose servers, we are about the same as our competitors.

As for AI, we lag behind a little bit. Our market share right now is behind them but I believe that in terms of AI, when ASP goes up, so the revenue in terms of Y-o-Y terms, will be relatively optimistic. Of course, not as good as systems, they are talking about a few times growth for revenue, power design and system design are different. Our ASP cannot double like that but I think double-digit growth should be achievable and expectable.

[Cheng-Tai Lee, analyst]

Got it. You talked about AI accounting for 10% next year, could you give us some breakdown and updates in terms of cooling and PSU and also some other things?

[Anson Chiu, executive]

I think power will still be the main thing. I told you about liquid cooling. Liquid to air in Q4 have samples to be shipped. As for liquid to liquid, our 6,000 kilowatt CDU was just approved by customers for mass production to achieve volume that requires a process still. So 90% of our growth next year will still come from power, including power shelfs.

As I told you, the 33-kilowatt power shelfs for new generation AI will be a main driver. Next year, power shelfs will go from 33 to 72 kilowatt and in 2026, it will go up to 100 kilowatt. We continue to codesign with our customers. In terms of revenue, when AST goes up, the revenue will account for a larger share, naturally.

[Cheng-Tai Lee, analyst]

Got it. My last question. Consumer products since H2 last year have been a drag due to withdrawals or adjustments. So for next year, how do you look at consumer products in terms of their growth and strategy?

[Anson Chiu, executive]

Let me clarify 1 thing. We -- in terms of business model, we withdraw some products not because they are consumer products but because they are OEM products, including some motherboards that we do for customers and also some networking products. This year, consumer products are not good. That is a fact.

Let me give you 1 example. Game consoles. In Q4 last year, it was already very bad. But in Q4 last year, we shipped many things. Still, in retrospect, these things became inventories. In Q1 and Q2 this year, they didn't sell. Originally, we hoped that in Q3, there would be better opportunities for game consoles but it seems that this hope did not materialize in Q3 because for customers, they didn't do well. So they were very conservative about shipments. And Q4 traditionally is a low season. Indeed, consumer products this year do not perform as well as expected. That is for sure. But it doesn't mean that we give up on these products, these are still part of our core businesses but they are affected by markets and seasonalities.

[Cheng-Tai Lee, analyst]

So we -- I didn't understand well in Q3, you have some onetime OEM suspension loss. Does it mean something like game consoles or something else?

[Anson Chiu, executive]

No. As I said, we didn't make this decision in Q3. It was a gradual process of withdrawal. Let me give you an example. The motherboards that we made for customers, it's not considered as a consumer product.

[Unknown Analyst]

Anson and Julia, this is [indiscernible]. You mentioned that in Q4, you started to sample sidecar CDUs, can we expect that you are negotiating orders with the 4 major CSPs or have you received orders? If you can disclose some customer details?

[Anson Chiu, executive]

Currently, what I can tell you is this: We focus on NVIDIA. So our sidecar or in loads are certified by them and then put in their RVL. We are not the only company, of course, in their RVL. For different products, there are different competitors. Ultimately, it depends on who the ODM is and how we cooperate with them in order to introduce our products into their system. In terms of orders, next year, we do have some orders, a slow volume.

This is why I said a while ago that in terms of revenue, it's still not the major share because it's still blooming. Power is relatively larger for another reason. That's because I've told you many times that PSU and BBU are connected. I have told you this many, many times. But surprisingly, it wasn't until this year Q4, or even next year, do we start to see the demand and the volume. Well, customer -- this should have happened earlier according to customer projections but it didn't materialize. But it's better than never. So PBU and PSU, when they go up, power demand is driven up as a result.

[Unknown Analyst]

Can I understand it as the following, sidecars enter NVIDIA's RVL list? Can we say that your target customers in the future will be Tier 2 data centers and enterprise customers?

[Anson Chiu, executive]

No, you cannot say that because this is just for NVIDIA to do their system certification. They have their own solution but we have other customers with their own solution. So the same topology is given to NVIDIA but also to other [ super 4 ] major players for certification. We just use this as an example because this is already public information.

[Unknown Analyst]

First question. You mentioned that in Q3, there was a onetime impairment of TWD 300 million, which product line is it?

[Anson Chiu, executive]

ODD.

[Unknown Analyst]

Okay. And second, someone asked about Vietnam. I want to follow up. You said that because of factory transferring being not smooth, the results are not as good as expected. Do you set up a revenue target for next year in Vietnam? If so, it sounds like cloud power supply contributes more there, so what is the percentage? And liquid cooling will also expand capacity there, right? If that's the case, what will be the revenue contribution?

[Anson Chiu, executive]

Okay. In Vietnam, according to our original planning, this year should be TWD 17 billion and next year TWD 25 billion but we don't achieve TWD 17 billion this year because of lack of resources. We hope to achieve that next year. And this includes networking products, ITC products and also data center products. Data center products include power supply, liquid cooling and cabinets. They are planned to be produced in Vietnam. Initially, I think within 1 year, the percentage will not be very high. I think initially, let's say, 20%. So if we can -- well, sorry, if the data center products can have 20% of revenue in Vietnam, that will already be good.

[Unknown Analyst]

Okay. You also mentioned 1 sentence saying D2D converters in Q4, starting -- you start to work on that. Could you give us some details?

[Anson Chiu, executive]

Sure. D2D plays a very important role in AI data centers, right? But the orders are too concentrated. So customers don't want to always rely too much on 1 single supplier. Therefore, they come back to us asking us to put in resources to make this D2D product. We understand customers' pain points. So in Q3 this year, we started to put more resources on that. In Q4, we will finish 2,000 kilowatt in next year. In Q1 or Q2, we hope to launch 4,000 kilowatt. This is to meet customers' needs and address their pain points.

[Unknown Analyst]

I want to ask you this. In energy storage, batteries account for a major cost, so what will be the margin like?

[Anson Chiu, executive]

Currently, the GP is about 20% -- well, between 17% and 20%. That's what we see now. Of course, at the very beginning, the volume is smaller. If the design, manufacturing and supply chain can be improved, I think maybe the GP can achieve 25% without difficulty.

[Unknown Analyst]

How do you look at converters revenue contribution next year?

[Anson Chiu, executive]

As I said, there are a few major customers but it's hard to say now because this is the first time that we support this product. Of course, we hope that at the beginning, things can go smoothly. But we don't include this product in our major production. More resources are put on PSU. We only have some resources for that. So D2D converter is not a major source of our revenue. That is just to meet customers' needs. Of course, there will be some revenue but it's going to be minor.

[Julia Wang, executive]

If there are no further questions, this concludes our conference today. All the files will be put on our official website. Thank you for your participation. Thank you so much. We wish you safety during the typhoon. Thank you.