Asustek Computer Inc

TWSE:2357

Earnings Call Analysis

ASUS Q3 2023 Earnings Reveal Strong Margins

In Q3 2023, ASUS recorded a significant net revenue increase of 17% quarter-over-quarter to TWD 126 billion, with operating profit rising to TWD 8.4 billion—a sixfold rise from the previous quarter and a 1.7x jump year-over-year. Gross margins improved markedly from 12.5% to 17.4% due to an optimized product mix and new product introductions. Expectations for Q4 include a 15% decline in the PC market but a 5% growth in components, with confidence in sustaining profitability and achieving a targeted 4-5% operating margin percentage. ASUS's continual drive in AI PCs, supported by its strong R&D and total solutions approach, positions it well for future industry challenges.

Anticipations for the Laptop Market's Recovery

The executives anticipate 2024 to be a year with low to middle single-digit growth, building on the decline experienced in 2023. The growth outlook is cautiously optimistic, driven by expected product replacement waves and a new Windows operating system update. While they project a positive impact from these factors, concerns such as inflation and geopolitical uncertainties are tempering expectations.

AI Servers Contribution and Forecast

AI servers currently represent a low single-digit percentage of the company's total income in 2023. Prospects for this segment are more promising going into 2024 and beyond, with predictions suggesting a mid-single-digit situation next year and potential to reach double digits by 2025.

Short-term Market Dynamics

The company indicates the potential for a slight quarter-on-quarter decrease in the PC market, suggesting cautiousness in the immediate future.

ROG Ally's Financial Impact

The ROG Ally product line contributes between TWD 5 billion and TWD 10 billion per quarter to the company's income. Continual improvements and optimizations are expected to help maintain similar income contributions from this product line in future quarters.

Expanding into ARM-based Solutions

In responding to the increasing introduction of ARM-based PC solutions in the market, the executives noted that ASUS is actively planning to be involved in this segment. With ARM solutions gaining traction, the company aims to leverage its partnership with Qualcomm and capitalize on the opportunities in both PC and AI PC realms.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, welcome to the ASUS's Quarter 3 2023 Online Investor Conference. Today's conference will be held by ASUSTeK Computer Co-CEO, S.Y Hsu, Samson Hu; and our CFO, Nick Wu. The conference will be divided into two parts. In the first part, the CFO will outline our quarter 3 financial results. Next, our two co-CEOs will go over our operational strategies and business outlooks. The second part will be a Q&A session. [Operator Instructions]

Let us start with the presentation from Mr. Wu.

[Nick Wu, executive]

Thank you. So please refer to the fifth slide on the PowerPoint. On this slide, you see the ASUS Quarter 3 2023 brand income statements. For quarter 3, we achieved a net revenue of TWD 126 billion, which is a quarter-over-quarter increment of 17%. We were able to achieve a significant gross margin percentage improvement from 12.5% in quarter 2 to 17.4% in quarter 3. The main improvements came from our product mix. And we were able to cycle in new products.

For the first half of this year, ASUS was able to complete its inventory adjustment back to normal levels. And so for quarter 3, we expect to introduce more products into our product mix and to introduce more innovation into our product cycle. As a result, we were able to achieve a significant growth for our gross margin percentage.

I would like to make special mention to our sales allowance, which went from negative 17.7 percentage in quarter 2 to negative 15.4% for quarter 3. Our inventory allowance also went from 2.6% for quarter 2 to 3.1% for quarter 3. These two factors have also contributed to our improvements in operating margin percentage.

As we are able to make improvements, our operating profit came to TWD 8.4 billion, 6x improvement quarter-over-quarter or a 1.7x improvement year-over-year. Our pretax profit stands at 13 billion, while our net profit stands at TWD 11 billion, while our EPS per share is TWD 14.9.

Let us next refer to the sixth slide, which has our nonoperational items. Our primary non-op items came from exchange gains at TWD 1.2 billion and TWD 2.85 billion in dividend income. And so our net non-op item income came to TWD 4.9 billion.

For Slide 7, this is our brand balance sheet. For Slide 7, what you see here is that our stock has returned to normal compared to quarter 2. We are able to return to much healthier percentages. And so for quarter 3, our main operational targets are to introduce new products and to introduce superior product mix to lead to improvements in operating margin percentage. Our inventory is valued at TWD [ 12 ] billion which is more or less the same as quarter 2. Other notable figures such as account receivable and account payable days have also more or less remained stable.

Next, let's refer to Slide 8. For Slide 8, if we look at our income from a product mix perspective, our PC component -- our PC market accounted for 67%, components 32%, and phones 1% for quarter 3.

The next slide is our income by region. Our region mix for quarter 3 stands at 31% from Europe, 22% from the Americas, and 48% from Asia.

Let us move to the next slide. These are our business outlook for quarter 4 2023. As we previously mentioned, for quarter 3, ASUS was able to make a very significant operating margin percentage improvement. And that is to say, for a long-term perspective, we have returned to profit. And so after such significant improvements, we have certain expectations for quarter 4. That is for regional markets such as Asia and Americas, we anticipate that there will be less -- there will be adjustments in demand, and less potent on season.

On the long term, we expect that the market will have fluctuations, but still continue to grow. Especially going towards 2024, the potentials from AI PCs will have great potentials for us. And this is a driving factor that will last for several years. So currently, we are considering this to be in a state of transition for the market and the industry, which is why we believe that there will be significant fluctuations the whole -- as a whole, it remains positive, which is why based on these -- our anticipations for the market, we expect that for quarter 4 2023. The PC market will have a quarter-over-quarter shrink of 15%. Now that, again, of course, corresponds to the fluctuations.

For the component market, we anticipate a quarter-over-quarter growth of 5%. On the whole, we do expect that the company will be able to maintain its profiting capabilities. We are confident in market visibility. We have previously reported in investor conferences that we hope to allow ASUS to come back to a 4% to 5% operating margin percentage.

Now based on the improvements we have currently made and the momentum that we have been able to achieve, we expect that we will be able to achieve those targets. We are confident in the capabilities of our team. So over the long term, we think ASUS will be able to achieve its goals. That concludes my financial presentation.

Now I will hand the mic over to our 2 co-CEOs, S.Y. Hsu and Samson Hu. They will go over our operational strategies and the business outlook.

[Hsien-Yuen Hsu, executive]

Dear investors and friends from the press, good afternoon. I am S.Y. Hsu. I will now take over the presentation.

Now this year, we have seen significant adjustments made to our company internally. We have seen stable -- we've attained a stable position in the market as we retained that leading position in spite of fluctuations. ASUS been able to hold on to its position. Thanks to its superior executive capabilities.

Now for quarter 3, we will be -- we have achieved a significant growth. So despite the anticipated fluctuations and lack of positive outlook from the global economy, we think that the long-term potentials of the market are positive despite the short-term setbacks, we think that we will be able to attend even potentially higher marginal percentages.

Next year, we do expect that the PC market, particularly the AI PC market will become a significant driving factor for the market. ASUS has always relied on its three main markets on top of other multiple drivers to drive its growth, and that is something we're confident in.

Next slide, please. As a total solutions provider, we are committed to providing total solutions that adapt to the constant changes in demand of the market. ASUS has a very unique position in terms of the AI PC market. We have a presence in everything from infrastructure, servers, edge computing, hardware and software integrations, we have a complete and total solution that is always ready to adapt to whatever challenges may arise in the future.

Next slide, please. ASUS is able to offer flexible end-to-end solutions from infrastructure like solar panels and energy storage devices to modular databases to even server designs and we always work closely with our strategic partners to even go into the supercomputing segment. So we are a very thorough player. We are able to help our clients promote products like smart manufacturing, smart medicine, attain ESG goals, smart cities and various other targets. We have solutions in all these areas.

Next slide, please. As for local solutions, ASUS also hopes to become brand in this area as well. We will make use of our industry-leading R&D capabilities to work with industry partners to create the best AI experiences. AI PCs will become the most optimal solution for both entertainment and productivity purposes. AI PC will bring about a revolutionary productivity and entertainment revolution. But at the same time, we will ensure that the privacy and the security of the applications are not compromised. We believe that AI PCs will serve as an important turning point for the industry and that it will become a crucial crux for the long-term upgrade of the industry.

The fact is, for the last 10 years, despite improvements in hardware and software, most of those improvements have been directed towards performance and does not make significant changes to the end user experience. But the development of AI PC promises big changes to such end user experiences.

Computers which are traditionally used as data processing devices may be upgraded into highly competent digital assistance. Just in the seventh this month, our Chairman was able to unveil along with Intel's CEO, Mr. Gelsinger, a very impressive feat where ASUS demonstrated its internally churned large language model that was optimized and then successfully ran on local device without the need to connect to the Internet. And the performance was fairly smooth. And so something that really demonstrates the potential of value-adding applications for the AI PC and ASUS will continue to work in this market to play an even important -- even more important role for this market.

Next slide, please. For many years, ASUS has been committed to innovation and R&D and has retain that impressive R&D capability. Using that capability, we are able to introduce a series of new products like the Eee PC in 2018 or the Nexus 7 tablet we worked with Google to introduce or the Ultra Book that we worked with Intel to introduce.

We have constantly -- these impressive products that cemented our position. But coming back to the present, the AI PC is quickly developing market that involves multi-model, multi-platform circumstances. And so with such a volatile environment, ASUS will need to be able to constantly adapt and cater to end user needs. We are, therefore, confident that our lead in R&D will help set us apart from our competitors.

Next slide, please. ASUS has always been committed to its goal to become a long-term growth company. We continue -- we are committed to our three main market segments, alongside other driving factors to achieve our long-term growth. The year 2023 has been a very challenging year for PC markets. There are economic challenges, but we were nonetheless able to demonstrate our resilience and return to profit.

Particularly in the gaming market, we are able to deliver performances that are better than the market average. For example, our introduction of ROG Ally outlet tapped into previously export market and became the market leader in [ game ] segment. That is why we remain excited about the capabilities, the potentials of the market. We believe that as the market continues to evolve, ASUS will be able to catch on to the opportunities and remain a leader.

[Samson Hu, executive]

Hello. I'm Samson Hu. I will be conducting an overview of our business units as well as our future outlooks for ASUS. First, let's look at system business group. For quarter 3, despite the seasonal fluctuations, we were able to achieve a small amount of growth compared to quarter 2. However, end user confidence remains low. However, enterprise expenditure is also low.

So we're not expecting any significant rejuvenation, which is why for quarter 3 from a year-over-year perspective, we are experiencing a 10% to 15% shrink. However, ASUS remains a leader in the gaming PC market. For the past 3 years, our market share remains the highest and has continued to grow. Fourth, three consecutive quarters, we have achieved a 12% growth, and our market share is also the largest at between 25% to 30% of the market.

So for this segment, we will continue to optimize our product mix and fortify our brand position, improve our profit sharing and market sharing. In doing so, I think the AI PC market is one in which we anticipate closer collaboration with our partners. That compounded with our market-leading R&D capabilities, we should be able to release the most attractive solutions, AI PC solutions to our customers and thereby completely revolutionized end user experiences for both productivity and entertainment. This is something that we are highly confident in, we will be able to become a leading brand for the AI PC segment.

Next slide, please. As for the open platform business group, in quarter 3, we were able to achieve 15% to 20% growth year-over-year. Now this includes products like motherboards and graphic cards being our two main product lines. Both of those product lines achieved a double-digit growth year-over-year. So for both volume and prices, they have grown positively. As market-leading brand, we are received favorably by the market. And in fact, I would like to make special mention of the fact that ASUS has won the European Hardware Association, Reader Awards, the EHA awards in several categories.

These categories include best motherboards, best graphic cards, best gaming monitors as well as best routers. So they have been -- our products have been rated as the best among competitive brands. And in fact, this is our ninth year in a row to be awarded the best motherboard award in Europe, while this is our seventh time winning our Best Graphics Card award and our sixth time winning our Best Laptop and Best Router award.

Besides these acknowledgments, our server solution -- several product segments will also serve to be an important profit driver going forward. In fact, for quarter 3, we were able to achieve a 40% growth year-over-year. This demonstrates our commitment as well as the progress that we have attained. This shows that our teams and our product solutions are on track to reach our 5x growth in 5 years' target.

Next slide, please. For our AIoT business group, our first 3 quarters saw a 30% growth year-over-year. Furthermore, we have been able to make significant breakthroughs in quarter 3. The first is something that many of you may already know, that is we are taking over the Intel NUC mini PC business. The NUC business is now being integrated into a new NUC business unit inside ASUS. Now with ASUS having its existing mini PC department augmented by the Intel NUCs, we anticipate wide deployment in industrial, commercial and manufacturing industries.

We also anticipate that there will be possibilities in the smart medicine field besides the AI medical information system that we previously shared. That's something that we've been working with hospitals to deliver on. ASUS is actually also the leading provider of ultrasonic handheld scanner products in Taiwan with over 50% market share.

As for smart manufacturing, ASUS has also made progress. ASUS was able to integrate solutions like AI demo smart factories, and AI smart production lines to promote the smart upgrade of various manufacturing industries.

Next slide, please. This slide is, as usual, our focus, which is our gaming brand and ecosystem. Once again, I would like to stress that ASUS has a presence across each gaming market. This is one of the major focuses of our company. For quarter 3, the gaming segment accounts for 50% of our in-house share. And we were able to achieve that, thanks to our commitment to our product image to our commitment to total product solutions as well as our community management practices to help garner favorability from the gaming segments.

Specifically, we have also dedicated R&D innovations to optimize gaming experiences in our products. For example, our ROG Nebula gaming monitor is a very good example of our R&D capabilities. We've also deployed ROG intelligent cooling solutions into our products that are implemented into our products and have been received very favorably by the consumers. Again, this resonates with our ability to win the EHA best gaming laptop awards.

Next slide, please. Sustainability is always a very important topic. And as I previously mentioned in previous conference -- investor conferences, sustainability is something that has already been integrated to daily operations for ASUS.

I would like to take this opportunity to share some of our latest progress. In order to accelerate our carbon emission reduction goals, we are now or just last week, we have been certified by the science-based directive targets certification. SBTi is a Paris protocol-based emission control scheme that hopes to limit global warming to 1.5 degrees Celsius and to reach net zero by 2050. And so we were able to be accredited by SBTi, and that's something we're very proud of.

In terms of our products, we are also continuing to offer low carbon emission and high energy efficiency products. Efforts in this field have allowed us to be acknowledged as EPEAT Climate+ Champion. This I think, highlights our dedication to climate change mitigation, especially in the electronics devices market.

Lastly, I would like to once again thank investors and our friends at the press for covering ASUS. I think after the challenges that we have faced this year, we were able to make it past the worst of the times, thanks to the efforts of our teams. And in the future, we hope to continue to increase our competitiveness as we continue to invest into ourselves. And our core business units are going to be expanded as we continue to expand into market segments like AIoT and AI PC, all of the driving factors will be important for maintaining long-term growth going towards 2024.

[Operator]

[Operator Instructions] Our first two questions come from China Times. The first question. ASUS has already been delivering on orders for AI server solutions like [indiscernible] 40S and others. However, with the recent development of American chip export policy restrictions, has that affected your order deliveries at all.

[Unknown Executive]

Let me start by addressing the export restrictions. Immediately after the restrictions were unveiled, we entered into a meeting with our partners. They said that they immediately started a meeting to discuss potential solutions to stay in compliance with the American regulations. Now I'm sure as American company, our partners will stay in compliance with American regulations, and ASUS will, of course, also stay compliant with the new restrictions.

Of course, the Deemed regulations post positive and negative externalities. For example, some of the demand that can no longer be fulfilled by Chinese companies will have those demands now be given over to ASUS. So that's a positive. However, as a negative. The new restrictions will limit some of the products that we can no longer sell in certain regions. We will always stay compliant with the regulations.

Now again, talking about AI server solutions, I think that's a segment in which we've worked very closely with NVIDIA and various countries like Vietnam, India and Singapore have placed orders for those AI servers in not in significant quantities.

And so I think this call as well with the 5-year 5x growth target for our AI server business units. I think that shows that we are still on track for reaching our growth target as we stay compliant with American regulations.

Our second question once again comes from China Times. Generative AI mix use of various models, what are your implementation schedules for those models into phones and personal computers. Furthermore, what presence does ASUS plan to adopt into the market for these AI solutions in each market segment.

I'm aware that AI is a very popular topic for our friends at the media as well as our investors. Now just last week, I had a conference in the southern regions of Taiwan and some media are asking about this, so I will give you the same explanation again.

Now basically, I think that for AI PCs, they can be divided into several parts. This is something that has been covered in various occasions asked by various parties. The first is that the AI PC has the hardware which would be the neural processing unit that's added to the chips, so that's a hardware part. But on the software part, we also need AI software that will be able to make use of those NPUs and what powers this AI softwares would, of course, be the large language models that supports the functionalities of this AI software.

So it's going to come down to the readiness of the hardware and the software to decide how quickly we can put these solutions into implementation. And again, I would like to stress that there are different definitions for what a vendor may consider AI PC solution. On one hand, you have companies like Intel, where last week, they held a major event in Taiwan. And this is something that's reported by the media. So I'm sure some of you already know.

For Intel, they think of AI PC as a CPU that is built with a neural processing unit, and that their OpenVINO toolkit has enabled independent solution vendors to develop potential solutions. Now for these ISVs, that includes providers of video streaming solutions as well as other solutions. And so all of these ISVs are now starting to interpret AI functions into the solutions by using the OpenVINO toolkit.

And of course, those functionalities will be powered by the Intel hardware in order to bring about revolutionary experience for the user will be -- they will be able to deliver on things like an AI assistant. And so for Intel, they think that this sort of ecosystem is what they consider an AI PC deployments.

However, we also, on the other hand, have a company like Microsoft, they are more focused on whether the end user will be able to smoothly run these AI-based solutions using their local hardware. And so the expectation is that the user will be able to completely and smoothly run these Microsoft AI-based solutions. And that will be things like Windows copilot or other Microsoft 365 related applications. And that would, of course, be things like Microsoft Teams, Microsoft Outlook and Microsoft Office. All of these in Microsoft Office -- in the expectation of Microsoft is that they should be able to run very smoothly just using local hardware and being able to do all of that is what they consider to be the AI PC deployment they are looking for.

Now for ASUS, I think no matter which definition or perspective you adopt, the AI PC takeoff will probably happen next year. If you adopt the Intel perspective, then we can expect that to happen early next year. But if you're looking at it from the Microsoft perspective, wherein Microsoft 365 applications can be run locally using neural processing unit hardware acceleration than something like that will probably take all the way until June or July of next year.

So it does depend on what definition and what vision you have for AI PC because the market right now is in the state of constant flux, but ultimately, I think the most important thing is whether the consumers will be sold on these AI solutions.

For ASUS, I think that -- we -- first, I think that we think that as a leading brand we already have certain expectations on what AI-related solutions would look like. And so we're going to make use of our powerful in-house R&D capabilities as well as the AI solutions that we debuted last week. That is -- I'm referring to the in-house -- ASUS in-house AI large language model that was shown to run very smoothly on local hardware at the Intel event, because we were able to have a large language model be optimized to the point where they can actually be run on ASUS Zenbook.

So if you're able to do that, then you are probably also able to run the model on of laptop hardware. And so being able to run off that very smoothly is something that we're striving for. And in order to achieve that, we hope to work with ASUS as a group throughout our various business units as our partners to introduce a meaningful AI solutions. So that is our goal for this market.

[Operator]

Our next question comes from BoA Merrill Lynch.

The question is, how long do you think the AI PC market will be for 2024 and 2025, whether you think that market will mainly be focused on the enterprise and commercial markets. Also, we're curious about the ASUS strategy for AI PC and whether the AI PCs will, on average, have a higher margin compared to traditional PCs?

[Unknown Executive]

So I think this is a continuation of the previous question, so I'll answer this as well. Now as I talked about previously, AI PCs require certain conditions to work because AI PC is a completely new form of personal computing. And so I think users will need some time to get used to that new experience. This is something that we'll have to work with system integrators and the industry as a whole to continue to optimize and continue to improve. But this is a process that takes time. So given such circumstances, our ambitious estimate plays the penetration ratio of AI PC for 2024 at low single digits.

By 2025, we're not certain whether that will become a double-digit penetration ratio that will depend on whether the single-digit ratio penetration ratio we get for 2024 will be high or low. Of course, this will also be hinged on the majority of our technology as a whole. Because if it's able to deliver a meaningful change for the consumers, then maybe we will get a higher penetration ratio.

So very simply, I think we are just aiming for a low single-digit penetration ratios for 2024. And as for the outlook for 2025, that remains to be seen. But of course, as a brand, we are actively working with our upstream suppliers as well as partners like Microsoft to look for possibilities to collaborate and provide solutions. And ultimately, we hope to deliver a meaningfully different experience. And that will be able to help us push AI PC, the market, into a state of rapid growth.

As for the proportion of consumer to commercial PCs, I think that AI PCs will be rolled out to both consumer PCs and commercial PCs simultaneously. It is not going to be a staggered deployment situation. As for the strategy that ASUS is planning on using, I think, again, we have thorough presence throughout the entire AI market. We have plans to help push our AI PCs and AI PC solutions to deliver on a meaningfully different experience compared to our competitors. As for margins, I think this will be a bit technical because AI PCs will need additional requirements both in terms of software and hardware, and that's an opportunity for value adding.

For example, for the CPU, you're going to need to have an additional neural processing unit. And as for VRAM size, that is also something that will need to be expanded. When you're running a larger model, that model is going to require extra memory. And so all to that effect, AI PCs will have more memory compared to traditional PCs. So I think our expectation right now is that the MSRP AI PCs will be higher than traditional PCs, and that is my responsible question.

[Operator]

This, again, is a question from BoA Merrill Lynch. Does ASUS still have its goals set on a long-term operational margin target of 4% to 5%. And we're also curious about the margins for the server and the AI server products.

[Unknown Executive]

Okay, so I think when I gave the financial results -- financial results we've given, our internal goals are set to 4% to 5%. Now of course, our business units will work the hardest to increase the value of our products to perhaps elevate that numbers a bit higher. As for the margins for servers, AI servers, I think this is something that is already reported very heavily in the industry.

Now ASUS, I think we are more or less on par with industry average in terms of our margin percentage. So that's something that you can reference, you can reference the market numbers for that.

[Operator]

Our next question comes from the Financial Times. We would like to congratulate ASUS on your -- assessing your 5-year 5x goal. We're curious about your clients and their industries. At the same time, we're also curious about what concrete strategies you will take to reach your goal.

At the same time, we want to ask about the revenue proportion of AI server to regular servers.

[Unknown Executive]

I think that the person that asked the question did a lot of homework, so they knew very well how our products line up. Now clearly, I think that we are mainly focused on local CSP perspective. We have set certain price takers for our server business unit. That is to say for traditional server and AI servers, they will be given both a lot of attention. As ASUS continues to work with our partners, we are confident that we'll be able to edge on our competitors when it comes to getting the parts required for those AI servers from our suppliers.

Now what is the regional percentage for 2024. I think there is a good chance that AI servers will account for 50% or even higher of our income.

[Operator]

The next question comes from KGI Securities.

What do you think about the rejuvenation for the laptop market. For example, if you look at gaming, commercial or commercial and Chromebooks, looking at all of these laptops, which type of market you -- market segment do you expect to recover the fastest. And what are your anticipations for each product segment?

[Unknown Executive]

So let's start from a broad overall perspective for the fiscal year 2024. I think in the last investor conference, I talked about how for next year, we have certain expectations. Now 2023 is, of course, we saw certain shrinks compared to last year. Now in the last investor conference, we've mentioned that there's probably going to be -- we're probably aiming for the high single-digit numbers.

Now again, as everyone probably knows, there has been certain fluctuations in the global economy as well as in geopolitical factors.

Now another driving factor, I think, is the fact that the pandemic in 2020 triggered a massive surge in demand for new hardware. Now after 4 years, that is from 2024, we are anticipating another wave of replacement. So that's going to be a positive driving factor for us. So that's probably a positive growth factor that we can look forward to.

Yet another factor is that Microsoft is going to be updating the Windows operating system next year. So that is definitely also going to be a positive driving factors. And yet another driving factor again, is the AI PC that we have talked a lot about. That is definitely something that has a lot of potential.

Now last time, we did mention that we've anticipated the global economy to become a positive driving factor because we were looking at the inflation of Europe and America, and expecting those numbers to become -- to come under control next year, though then that was then compounded by the black swan events, which I'm referring to the Israeli, Palestinian conflict that's taking place in the Gaza, that is, of course, a negative factor. Now I'm happy to report that this signs that the conflict is contained, but that is, of course, a negative factor.

So right now, just in terms of inflation, we do not expect significant improvements to be made for at least the first half of next year. Now maybe inflation will come under control in the latter half of next year, but that, of course, remains to be seen. So on the whole, I think next year will be a year with low to middle single-digit growth year.

Now as for the performance of each product segment, whether it's gaming, consumer, commercial or Chromebooks, I think they are all very different products. So let me go through them Now firstly, I think our gaming laptop consumer base and gaming ecosystem as a whole still has a lot of potential. So next year, we think that the gaming market will likely still have a decent growth.

As for the commercial laptop segment, I think there are positive and there are negative factors. The positive factors, of course, the new Windows OS coming out and some old operating systems no longer being supported by Microsoft that will definitely drive some replacements. However, IT expenditure for enterprises will likely still be limited by the high inflation. So that is something that's working against that. These two factors will work against each other to affect the growth possibilities of this segment.

As for the consumer laptop segment, we are, again, generally quite optimistic. I think that's going to align with our expectations for the PC market as whole. As for the Chromebook segment, I think there's likely no longer going to be a similar explosive growth that we saw during the pandemic. Because during the pandemic, there were a lot of new purchases for Chromebooks that may be going into next year, some of those Chromebooks will need to be replaced.

At the same time, the [ GIGA ] program for Japan may also drive some of these Chromebook demands. So that's my analysis as a whole. Thank you.

[Operator]

Our next question comes from Morgan Stanley. We would like to congratulate ASUS on its exceptional performance for quarter 3. Our question is about how much AI servers account for your income compared to quarter 3 this year and quarter 4 this year? And also, what expectations do you have for AI servers going into the financial year 2024?

[Unknown Executive]

So right now, I think the AI server products segment accounts for low single percentage for the year 2023. Going into 2024, I think that might become a mid-single-digit situation. As for 2025, that's when we have the potential of reaching double digits. That's the most likely situation.

[Operator]

Now here's the second question also from Morgan Stanley. Our question is, can you talk about your visibility for the 1Q PC market? Do you think that the market is going to grow or shrink?

[Unknown Executive]

Okay. Now right now, we don't think there are very clear and concise numbers that we can reference. But per our estimations, it is possible that there is going to be a small-scale quarter-on-quarter shrink.

[Operator]

Now our next question comes from -- our question is can you talk about how much ROG Ally accounts for your income and your expectations for this product goes future quarters?

[Unknown Executive]

I think as we talk about previously, the ROG Ally accounts for about TWD 5 billion to TWD 10 billion region per quarter. And so right now, given our results for quarter 3, and our expectations for quarter 4, the number is still going to be in that region.

Going into next year, I think as we make more improvements as we possibly adopt these improvements and optimizations into the Ally is going to be even more optimized version of the Ally coming out. And hopefully, the Ally will make similar contributions to our future -- to our income in future quarters.

[Operator]

The next question comes from UBS.

Right now, a lot of PC platforms are now introducing Arm-based solutions. So does ASUS have -- does ASUS have any plans or projects for this segment?

[Unknown Executive]

So for the ARM-based solutions, which is really Qualcomm, they have been working hard not just in the phone market, but also trying to deploy their solutions to the PC market. So ARM -- so Qualcomm has been working closely with Microsoft for that because I think in order to put Arm hardware into personal computer, there's going to be -- you're going to need support from the operating system. So that, I think, makes sense.

And Qualcomm is one of our partners in the phone market. And so as they try to push into the PC market and have products there, we will also work with them there. And furthermore, Qualcomm was among the first wave partners for Microsoft in deploying AI PC. And I think as Microsoft -- so I think ASUS will definitely take part in whatever plans that Arm-based PCs are going to do.

[Operator]

Now we believe that we have more or less covered all the questions and the issues that you have raised. If you have any other questions, you are welcome to contact our Investor Relations team. I will give our conclusion -- I'll be giving the mic back to our two co-CEOs.

[Hsien-Yuen Hsu, executive]

Once again, I would like to thank our institutional investor friends and our friends at the media for the coverage and the attention you've given us. Of course, I would also like to thank our team at ASUS for helping us make it through this very challenging year in 2023. That was how we're able to deliver on this relatively exceptional quarter 3 results.

So I think looking at quarter 4 and 2024, I think, again, our biggest asset is our research and development team and AI PCs will, of course, be very, very important for that, because we think that AI PCs will be an important turning point. It's going to give end users a very different experience in terms of how they use their computers.

So we definitely want to capitalize on those possibilities as we work with R&D and work with our upstream suppliers to provide better hardware and software integration to give a truly differentiated, truly value-added AI-based solutions to thank our shareholders.

[Samson Hu, executive]

Okay. I am Samson Hu, and I would like to once again also thank our friends at the media and our investors for your continued support. I think for these past 2 years, whether it is ASUS or the industry as a whole, we have experienced significant challenges.

We have constantly made improvements and adapted to these new obstacles. And so I think having encountered and overcome these obstacles, we are more and more confident for the development of our new products and for the operational capabilities of our teams internally. And as we welcome the great possibilities offered by AI PCs, we are more and more confident.

Now there will, of course, still be challenges and unforeseen factors in the future. But thanks to our challenges, the challenges we've overcome, we are more and more confident. Thank you.

[Operator]

This concludes our online investor conference.

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