Delta Electronics Inc

TWSE:2308

Earnings Call Analysis

Second Quarter Shows Resilient Margins and Growth Initiatives

In the first quarter, the company reported TWD 91.3 billion in revenue, a slight 2% decline year-on-year, but gross profit margin expanded to 29.5%. The electric vehicle segment grew 18% year-on-year, with future growth expected between 20-30%. AI-related power supply revenue nearly doubled, and investments in liquid cooling and industrial automation are ongoing. Despite challenges, the company is focusing on quality and productivity improvements, aiming for long-term profitability and market share growth.

Introduction of New Board Candidate

In the opening of the call, the company introduced Ms. Doris Hsu as a new candidate for Independent Director replacing Professor Li Ji-Ren, who will step down after the upcoming election due to term limits. Ms. Hsu is the Chairperson and CEO of SAS Group and GlobalWafers, Taiwan's largest wafer manufacturer. Her experience in the semiconductor industry is expected to be invaluable for the company's future business strategies.

Financial Snapshot

The company's Q1 revenue stood at TWD 91.3 billion, reflecting a small year-on-year decrease of 2% and a seasonal decline of 9%. Despite these headwinds, gross profit (GP) margin expanded to 29.5% from 27.5% a year ago but showed a slight contraction from the previous quarter's 30.4%. Operating profit stood at TWD 1.4 billion, a significant decrease from TWD 2.6 billion in Q4 and TWD 1.6 billion a year ago. Net profit after tax was TWD 5.8 billion, down 17% year-on-year and 36% from the previous quarter. Earnings per share (EPS) for Q1 was TWD 2.22.

Segment Performance

The company's various segments exhibited mixed performances. The Power Electronics and Mobility segments experienced year-on-year growth, while the Automation and Infrastructure segment saw a decline. Notably, the Mobility department showed the most significant improvement both year-on-year and when compared to the previous quarter. Despite a reduction in Automation and Infrastructure profits from the prior year, Automation demonstrated better profitability compared to Q4.

Guidance on Key Markets and Products

The industrial automation market in China is showing slight improvements in exports, but a meaningful recovery is yet to be seen. The company is also facing challenges from the depreciation of Asian currencies, driven by a weaker Japanese yen. In the electric vehicle (EV) market, despite certain market headwinds, the company expects a growth rate of 20% to 30% for the year, supported by a solid order flow. The AI-related power supply business accounted for 2% of revenue last year and nearly doubled as a percentage of sales in Q1. The company provides a comprehensive range of power conversion products, including AC to DC power supplies and DC-DC converters.

Investments and Expansions

The company is planning to invest heavily in its EV business and Industrial Automation, where it sees potential despite currently having a relatively small market share. Additionally, they plan to expand their capabilities in data center applications and microgrid markets, encompassing segments like EV chargers and energy management systems. Investments are also being made in new technologies like hydrogen energy.

Rising Electricity Costs in Taiwan

The company acknowledges the necessity of higher electricity costs in Taiwan, believing this will prompt users to be more conscious about energy consumption. Delta has been proactive in implementing energy-efficient measures in its buildings since 2006, resulting in significant electricity savings. They argue that improving energy efficiency doesn't increase overall costs but instead enhances profitability by reducing electricity consumption.

Expansion in Cooling Technologies

Delta is actively expanding its cooling business, especially focusing on liquid cooling for data centers. The company has developed a broad range of related products, but the application and revenue contribution from liquid cooling remain modest for now. Future revenue contributions from this segment are not expected to be significant in the short term, but long-term prospects look promising with ongoing investments and expansions in this technology.

Earnings Call Transcript 2024-Q1

[Ying Jun Hai, executive]

Hello, everyone. So we are coming to the second quarter of this year, and thank you all for coming to our earnings results. And before we start, I would like to introduce a new candidate for our Board of Independent Directors.

As you may know, our AGM is scheduled for the end of May, at which time a reelection of directors will take place. Professor -- Mr. Li Ji-Ren, currently serving as an independent director, will step down after this election due to reaching the maximum term limit stipulated by Taiwanese regulations. We will nominate Ms. Doris Hsu as a candidate for Independent Director.

So Ms. Hsu -- Doris Hsu is the Chairperson and CEO of SAS Group and GlobalWafers, the largest wafer manufacturer in Taiwan. Ms. Hsu is a highly experienced and distinguished business leader in the technology industry. Semiconductors are a critical component of the upstream supply chain essential for the businesses. So with Ms. Hsu joining our Board, she is expected to provide us for advice on future business strategies and operations.

So now we will have our IRO, Rodney, to report the financial numbers to you.

[Rodney Liu, executive]

So Q1 revenue stood at TWD 91.3 billion, showing a slight year-on-year contraction of 2% and a seasonal decline of 9%. Thanks to a favorable product mix and reduced impact from inventory provisions, our GP in Q1 improved by 5% year-on-year despite being moderated by 11% Q-o-Q. GP margin in Q1 expanded to 29.5% from 27.5% a year ago but contracted from 30.4% in Q4.

Q1 expenses increased by 14% year-on-year and decreased by 2% Q-o-Q. With an unfavorable scale, the OpEx ratio in Q1 expanded to 21.4% compared to 20% in Q4 and 18.5% a year ago. R&D expenditure ratio was 9.8% compared to 9.9% in Q4 and 8.3% a year ago. SG&A spending to the sales was 11.6% compared to 10.1% in Q4 and 10.2% a year ago. As a result, Q1 OP margin was 8.1% compared to 10.4% in Q4 and 9.1% a year ago.

In terms of the sales of each segment, sequentially, all segments experienced a seasonal decline from the previous quarter year-on-year. Despite a lackluster macro demand, we saw growth in the Power Electronics and Mobility segments, while the Automation and Infrastructure segment contracted from a high base last year. Earnings-wise, the Mobility department showed the most substantial improvement compared to Q4 and a year ago. Power Electronics also found a moderate year-on-year expansion and a seasonal profit contraction. Despite the fact that Automation and Infrastructure experienced profit contractions from a year ago, Automation's profitability improved in Q1 compared to the previous quarter.

Q1 operating profit was TWD 1.4 billion, decreased from TWD 2.6 billion in Q4 and around TWD 1.6 billion a year ago. In Q1, we had TWD 8.8 billion profit before tax, down 12% year-on-year and 32% quarter-on-quarter. Our EBITDA was TWD 14.9 billion, down 2% year-on-year and 21% quarter-on-quarter.

Q1 tax expense was about TWD 1.8 billion, representing a 20.5% effective tax rate. Net profit after tax was about TWD 5.8 billion, down 17% year-on-year and 36% from the previous quarter. Q1 EPS was TWD 2.22.

[Unknown Analyst]

So I got 2 questions here. The first one is can you share your view on the macro demand, especially on the AI-related business and on the electric vehicle business. So I think -- and then the second question is related to -- can you comment what's the potential impact from the rising electricity price in Taiwan on your business.

[Ying Jun Hai, executive]

So for your first question, I think we have been talking about this in previous earnings calls for many, many times because I am not a scholar in economics, so I don't think I have the position to comment the macro economy. So I don't have any specific comment on the economy. So what we -- all we need to do here is we need to continue to improve our technology and focus on our business development.

Recently, I heard from one of my friends talking about their company, is actually working on the technology, which is bio-related technology. It sounds very promising, but I think besides the technology development, also, the customer relations and market assets and the management of operations are also very critical parts when it comes to a successful business. And also the supply chain management can be one of the bottlenecks when it comes to, I mean, developing a new business. So I think, from my point of view, what we need to focus on is actually always the quality of our products and then also the productivity of our operations.

So taking our on-board EV business, for example, even though -- I mean, as everybody knows, there were some headwinds in the electric retail market. But still, we managed to grow by 18% year-on-year, so it is still a growing business for us. But in the electric vehicle market, it's highly competitive and also has become increasingly crowded. So of course, I think nobody can achieve like maybe 100% year-on-year forever, but still 20%, 30-some percent, 20% to 30% growth rate, we think, is still achievable for us.

And speaking of the profitability of this business, even though I think it's still kind of subscale in terms of the revenue scale, but still, I think it's going to be profitable for the year. So speaking of the AI development, I think it's still in the -- I mean, for the whole AI [ center ] is still in the very initial stage.

And in terms of our Industrial Automation business, I think even though that -- in terms of the China's economy shows a slight improvement in exports, but it is not yet a meaningful recovery. Additionally, the depreciation of Asian currencies driven by the Japanese yen is relatively unfavorable for us, but we will continue to strengthen our vertical-specific solutions, hoping to make some breakthroughs.

[Unknown Analyst]

So my first question here is can you share your view on the seasonality of this year? As we can see, you experienced a relatively weaker Q1. So can we still expect the traditional seasonality for this year?

[Ying Jun Hai, executive]

So I think in terms of the seasonality, we actually always have a pretty typical pattern for the seasonalities. In Q1, it's typically weaker because there are just fewer working days because of the Chinese New Year. So for this year, we still expect a typical seasonality pattern for the whole year.

[Unknown Analyst]

So my second question is related to your AI power supply. As you used to mention, your AI-related power supply accounted for 2% of your revenues last year. So can you give me an update about your AI power supply?

[Ying Jun Hai, executive]

So I will have our IR, Rodney, to share -- to give you the update on this.

[Rodney Liu, executive]

So last year for the whole year, our AI-related power accounted for 2% of overall revenues. So in Q1 because the AI-related power continued to grow and then also because of the seasonality for other businesses, so that's the reason our AI-related power as a percentage of our overall sales almost doubled in Q1 compared to a year ago.

[Ying Jun Hai, executive]

So I would like to add on a few points on the AI-related power. There are so many discussions around this AI server powers. But actually, at Delta, we are able to provide products -- I mean, the power conversion products from grid to the chips.

So I think in terms of the AC to DC powers, there are actually more companies or more players in the market. They are able to produce or provide such products. But for Delta, we are not only able to provide the DC to -- the AC to DC -- the front-end AC to DC power supplies, but also, we are able to provide the DC-DC converters.

[Unknown Analyst]

So in terms of your DC-DC converter, can you let me know the -- where we can find a DC-DC converter in the system? Is it just on board -- on the motherboard?

[Unknown Executive]

Yes, it's actually we have to -- in order to power up the chips, we have to put the DC-DC converters as close as possible to the GPUs or CPUs.

[Unknown Analyst]

So my next question is can you share like how much -- in terms of the content value increase between the AI-related power and traditional server powers.

[Unknown Executive]

We couldn't really provide the details in terms of the pricing. But generally speaking, the AI-related power in terms of the power output per unit is actually much higher than the traditional server powers. Also, the requirements for the AI server powers is also much higher. So in terms of the value, I can be sure to say it's actually much higher. But in terms of how much higher, because this is part of the trade secret, so I couldn't really comment on the details.

[Unknown Analyst]

So can you give us some updates on your cooling business?

[Unknown Executive]

Well, traditionally, when we were talking about the cooling business, we -- normally, we refer to our cooling fan business because our expertise, I mean, lies in the air cooling technology. So Delta actually has been involved in data center cooling for a long time but primarily in air cooling products related to defense. In the future with AI servers requiring extensive use of liquid cooling, we will also actively take part in this market.

So we have already developed a range of related products, including 3D VC, cold plates, manifolds, coolant distribution units and chillers. However, the application of liquid cooling is still limited at this stage so its contribution to the company's revenue is not going to be significant this year.

[Unknown Analyst]

So my next question is do you have any expansion -- I mean, capacity expansion plan for the liquid cooling products?

[Unknown Executive]

So Delta has advantages in liquid cooling, span several areas. For example, Delta is one of the few companies with a complete solution. And then secondly, we have a more diversified manufacturing footprint. So in terms of the manufacturing capacity, I think we actually produced the cooling products, both in our China production base and in our Thailand production site. So it's actually subject to the clients' requirements.

[Unknown Analyst]

So do you have any capacity expansion plan for your liquid cooling or your cooling products?

[Unknown Executive]

Yes, we do.

[Unknown Analyst]

So for your cooling solutions business, would you normally just provide some components to your customers or you provide solutions to the customers?

[Unknown Executive]

I think it's actually also subject to the customers' requirements. So I also have a few points to add on this cooling system or our cooling solutions. So even though people are, I mean, talking about the liquid cooling solutions, but actually, eventually, I mean, for the whole cooling system, eventually, you still need to have a fan to dissipate the heat. So it's not just about air cooling or liquid cooling. It's actually a system. It's -- you got to have a complete system to dissipate the heat in the data centers.

[Unknown Analyst]

So how -- my next question is how do you see the future increases in the company's OpEx?

[Unknown Executive]

So in terms of our investments, I mean, into our businesses, I think there are a few businesses we are -- I mean, we will continue to invest. So for example, our EV business is definitely one of them. So as you can see from its history, after we have been investing into this business for over 13, 14 years, actually finally became profitable. It has become a profitable business after we have -- had been investing into it for more than 13 years. But going forward, we think there are still a lot to do and a lot to work on in terms of this EV -- on-board EV business. So we will definitely continue to invest in it.

And then also, our Industrial Automation is another business we will continue to invest. We have been developing this business for almost 30 years. So the global market for the industrial automation is around TWD 25 billion, but we only own like maybe TWD 1.5 billion of it, so which means that in terms of the market share, our market share for this business in this market is still relatively low. So we still need to -- we still have a lot to work on.

And then we will also continue to invest in the data center applications, including the power management solutions for data centers and also the cooling solution and cooling technology for the data centers. And then we also see there is a great opportunity in terms of the micro grid market. So we think that is still in the very early stage in terms of the development of the micro grid. So we actually have a few businesses related to this micro grid market including our EV charger business, our [ energy charger ] system business and so on.

And as we are actually transforming ourselves into more branded business, in that case, we not only need to have the engineers and technical stuff in the headquarters. But also, we will have to have more engineers in different regions in order to service the local markets because in terms of -- I mean, order to do the solution business, you will have to be closer to the clients. So that's the reason why we would need to have a more diversified footprint not only on the manufacturing capacities side but also on the R&D capabilities side.

And then also our new investments into the hydrogen energy, which we just licensed the technology from a U.K.-listed company last year, which is also part of this micro grid system. So we actually continue to invest into many business opportunities. We do understand and realize that we will have to be responsible for our existing shareholders. But in terms of the long-term business development, we can't just, I mean, cut back the investments for the new opportunities just because of the softer economy, circumstances or some -- or maybe due to the sluggish demand for 1 or 2 years. So that's the reason why we will continue to invest into the new opportunities.

[Unknown Analyst]

So my next question is related to the rising electricity costs in Taiwan. Do you think there is going to have any impact on the business?

[Unknown Executive]

I think given the current circumstances, increasing the electricity cost in Taiwan is necessary. So for example, if I ask you like do you have any idea about like your -- how much your -- I mean, typically, your electricity bill is, I think very few people can answer me this question. So why is that? It is actually because we actually have very, very low -- we actually enjoy very, very low electricity costs in Taiwan.

So I think it's always -- I mean, we have always -- coming back to this user pace principle. So we think rising the electricity price is actually going to be helpful in terms of helping the users to be more energy conscious. So I think compared to increase the power supply in Taiwan, more important is we have to save as much as possible. We have to save the electricity consumption or reduce our electricity consumption as much as possible. We believe that is actually the more critical thing to do.

This idea has always been part of the DNA of Delta as we always believe that saving the electricity or, I mean, taking actions in these approaches is actually not going to increase the overall cost of a company but reduce the cost of a company and help to improve the profitability of a company instead. For example, in terms of the efficiency of the buildings, there is actually plenty room to improve in terms of the efficiency of a building. So that is also precisely the reason why we are involved into this Building Automation business.

So that's actually also the reason why starting from 2006, we determined that all of the new buildings of Delta, that we have to make them a great building because it's actually not a really difficult thing to do in terms of just making some minor changes in terms of the designs of buildings, can actually help to improve the efficiency, especially the electricity -- I mean, the energy efficiency within a building. So by doing so, we actually saved a lot of electricity just by improving the intelligence of a building. So if we are able to duplicate this system or this mechanism into other buildings in Taiwan, I think we are able to save tremendous energy consumption -- to reduce tremendous energy consumption for the country.

So jumping back to your question. I think when the cost, the electricity cost was low, nobody really cared about the cost, the overall cost. So when the government is trying to increase the electricity price, it can actually help to increase the awareness of electricity consumption among the users. That is my view on this.

[Unknown Analyst]

So my next question is related to the liquid cooling products. When do we expect the revenue contribution of this liquid cooling products to account for like 1% of your total revenue?

[Unknown Executive]

I think it's -- well, for your question, I think that, as we said, we are -- actually, we don't expect to see a very meaningful revenue contribution for the liquid cooling products for this year.

[Unknown Analyst]

Can you comment on the average selling price for your liquid cooling solution?

[Unknown Executive]

I think it really depends because in terms of the size of the solutions, it's highly complicated. And then they are all customized. There is -- in terms of the concept, it's quite similar from one supplier to another, but in terms of the design, can be very different.

[Unknown Analyst]

So in terms of the -- your EV -- on-board EV business, as we can see from the report, your on-board EV business only had like around 18% year-on-year growth in Q1. But your guidance for this business is still like 20% to 30% for the whole year. Does that mean that you are actually expecting -- you expect an acceleration for the business for the rest of the year?

[Unknown Executive]

So currently, because we actually still see a healthy order flow for our EV -- on-board EV business, so we think that 20%, 30% is still achievable.

[Unknown Analyst]

So the next question is about the competitive landscape for the liquid cooling market, as there are so many players in the market claiming them so far able to provide liquid cooling products to the clients.

[Unknown Executive]

So I think in terms of the competition in the liquid cooling, as I said, we have -- I mean, our advantage is we have a relatively complete product offerings in terms of this liquid cooling solution. So I do believe that we are in the leading position. But eventually, it's still subject to -- I mean, it still depends on whether you're able to solve the problems for the clients.

[Unknown Analyst]

So can you share your view on the competition landscape for your DC-DC converter product?

[Unknown Executive]

I think, as you must know that there are actually a few players in the market. They are pretty aggressive in this market. But I think that we are actually -- so I think our -- well, in terms of the specialty of the -- I mean, other competitors in the market, especially for those power module makers -- I think because for this kind of DC-DC conversion product, as you know, that they are the on-board products, so you actually have to have, I mean, pretty profound packaging know-how in terms of how you're packaging the products on board. So I don't believe that those competitors, they actually possess this know-how.

[Unknown Analyst]

So my last question is regarding the -- how do you see Tesla. Tesla, I mean, laid off their supercharging division.

[Unknown Executive]

I think it was actually a surprise to everyone, even to the employee of Tesla. Actually, I got a friend. I mean his kid just got hired by this apartment (sic) [ department ] but he didn't actually made it onboard, and he got laid off because of this. So I think it's definitely going to be a turbulence, I mean, for the market. But in terms of the long-term implication, I think that we still need to observe.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]