Quanta Computer Inc

TWSE:2382

Earnings Call Analysis

Quanta's Record-Breaking Quarter Fueled by AI Server Growth

Quanta achieved record highs in Q2 2024 for gross profit, operating profit, and net profit, driven by a robust 26.5% year-over-year revenue growth, totaling TWD 310 billion. AI server shipments significantly contributed to this performance, surpassing 50% of total server revenue earlier than expected. The company's gross margin improved to 8.58%, supported by favorable currency movements and seasonal demand for Chromebooks. Quanta's management forecasts continued strength in AI servers and maintains a positive outlook for double-digit growth in the EV sector. Despite higher operating expenses, the company anticipates keeping operational leverage favorable.

Record-Breaking Performance

Quanta's Q2 2024 results were phenomenal, setting multiple records. Gross profit, operating profit, and net profit all reached all-time highs. This performance underscores the company’s leadership in the AI sector and its operational effectiveness. Revenue for the quarter was TWD 310 billion, representing a 19.7% increase quarter-over-quarter and a 26.5% rise year-over-year .

Strong Financial Metrics

Gross profit hit TWD 26.6 billion, marking a 21.2% quarter-over-quarter and 27.4% year-over-year growth. The gross margin for Q2 was 8.58%, slightly above management’s expectations due to favorable currency movements and robust seasonal Chromebook sales . Operating profit surged to TWD 15.2 billion, a 30% increase from the previous quarter, and an impressive 34.7% year-over-year increase .

Growth in AI Server Shipments

A key driver of Quanta’s growth has been the substantial uptick in AI server shipments. Improved GPU supply fueled this momentum, with AI server sales substantially boosting the company's earnings. In Q2, AI servers contributed over 50% of total server revenue, a milestone initially expected only by the end of the year .

Notebooks and AI Servers

Notebook shipments were TWD 11.7 million units, rising by 11.4% quarter-over-quarter but down 7.1% year-over-year . Notebook sales accounted for a lower proportion of total sales, and this trend will likely continue as AI server contributions increase . Management expects the proportion of notebook sales to fall below 30% from Q3 onwards .

Optimistic Outlook and Plans

Looking ahead, the company maintains a strong outlook for both AI and EV businesses. The EV segment is projected to achieve double-digit growth in 2024, despite AI server sales diluting its overall revenue contribution. Additionally, AI server revenue is expected to stabilize and continue its upward trend, supported by improving GPU supply conditions .

Financial Strategy and Fundraising

To support its growth ambitions, Quanta plans to raise up to USD 1 billion in equity, which could lead to potential dilution of around 2% to 2.5% depending on the share price fluctuations . The funds will be used primarily for AI-related investments and global expansion.

Capital Expenditure and Manufacturing Resilience

The company has earmarked around TWD 12 billion for full-year CapEx, focusing on AI-related investments and expanding its production footprint globally—including in Mexico, the U.S., Thailand, and Germany . These strategic moves are aimed at mitigating risks from geopolitical tensions and diversifying production capabilities.

Continued Margins and Growth

Despite potential margin pressures, Quanta's operating leverage could mitigate any severe impact. The company’s strategic focus on high-margin AI servers and effective cost controls have kept margins resilient, with only slight expected reductions in gross and operating margins year-over-year .

Expanding AI Product Lineup

Quanta is also making significant strides in AI PC development. Current AI PC offerings are expected to expand with contributions from major players like Qualcomm, Intel, and AMD. The market uptake for AI PCs is anticipated to gain momentum by 2025, potentially driving further revenue .

Robust AI and EV Market Growth

Quanta is well-aligned with the booming AI and EV sectors. Investments in R&D and new customer acquisitions bolster its position in these high-growth markets. The company is optimistic about its long-term growth prospects, backed by a solid balance sheet and strategic investments .

Earnings Call Transcript 2024-Q2

[H. Chen, analyst]

Hello, everyone. Welcome to Quanta's Q2 2024 Results Call. I'm UBS tech analyst, Wes Chen. It is our pleasure to invite Quanta's top management to join today's call, including Quanta's Vice Chairman, Mr. C.C. Leung; CFO, Mr. Elton Yang; IR team, Ms. Carol Hsu and [ Ali Chu ].

We'll first have Carol to do a presentation of Q2 results and also the guidance for the third quarter. Then we'll have a Q&A session. Without further ado, let's welcome Carol. Carol, please go ahead.

[Carol Hsu, executive]

Thanks, Wes. Good day, and welcome to Quanta Computer's Second Quarter 2024 Earnings Results Conference Call. The call is hosted by UBS Securities, Taiwan. The presentation material for today's call is available to the public online and on Quanta's website at www.quantatw.com under IR section. This is Carol. I'm joined today by Quanta's management, Mr. C.C. Leung, our Vice Chairman and President; Elton Yang, Chief Financial Officer and Senior Vice President, and Quanta's IR team.

In a moment, we will start with the financial presentation. After that, the management will host a Q&A to share our view about the business and industry outlook. During this call, we will be making forward-looking statements, which are predictions, projections and other statements about future events. These statements are based upon our current expectations and assumptions that are subject to lot of risks and uncertainties. As such, the actual results could differ materially from our forecast. We undertake no obligation to update or revise any forward-looking statements. But now let's walk through the financials.

We are excited to announce another record breaking quarter in second quarter '24. Our gross profit, operating profit and net profit have reached all-time high with margin ratios achieved unprecedented in two decades. This strong result underscores our leadership in the AI sector and demonstrates the company's exceptional operational effectiveness.

Notebook shipment for the quarter was TWD 11.7 million, up 11.4% quarter-on-quarter and down 7.1% year-over-year, respectively. The [indiscernible] volume was a surprise on the upside ahead of guidance provided in the last quarter was single-digit growth sequentially.

Revenue for the quarter was TWD 310 billion, representing 19.7% increase quarter-on-quarter and grew 26.5% from a year ago. Thanks to the improved GPU supply condition, the AI server shipment momentum started kicking in to drive the sales growth. Company's gross profit set a record high at TWD 26.6 billion, reflecting a strong growth of 21.2% quarter-on-quarter and 27.4% year-on-year, respectively.

Gross margin for the quarter was 8.58%, grew by 11 bps quarter-on-quarter and 6 bps year-over-year. The gross margin rate exceeded management's previous guidance of a sequential decline, driven by favorable currency movements and seasonal Chromebook momentum. These factors altogether helped mitigate the margin dilution from higher ASP of AI server shipments. Notebook sales contribution went down to low 30s of total sales in the quarter. We expect the proportion of notebook sales will be further diluted below 30% of total sales from third quarter onwards.

Operating profit topped 15.2 billion, making a historical high. It represented a 30% growth sequentially from TWD 11.7 billion last quarter and jumped by 34.7% from TWD 11.3 billion a year ago. And operating margin for the quarter further expanded and reached 4.91%, grew 39 bps quarter-on-quarter and 30 bps year-over-year.

The expansion of AI server sales. Second quarter OpEx ratio was kept in a healthy level, backed by an improved leverage that helped accommodate the increased operating expenses and bolstered the operating margin range. The absolute amount of operating expenses came at TWD 11.4 billion for the quarter, grew TWD 1.1 billion quarter-on-quarter and TWD 1.8 billion year-over-year. The increase was primarily driven by higher selling and R&D expenses associated with the new project ramps. The OpEx ratio was 3.68%, dropped 28 bps quarter-on-quarter and 24 bps from a year ago.

Non-operating income for the second quarter was TWD 4.4 billion, representing a rise of 1.60 a quarter ago. The primary components that drove the non-operating income included net ForEx gains of TWD 1.6 billion, net interest income of TWD 1.4 billion, dividend income of TWD 375 million, and financial asset gains drove fair value to P&L for TWD 204 million. The remaining portion went to equipment disposals.

Stepping down the income statement. Net income after tax was TWD 15.1 billion, marked a record high, increased by 25.4% quarter-on-quarter and jumped by 49.4% year-over-year. The net margin after tax was 4.88%, which grew 22 bps sequentially and 75 bps year-on-year. Tax rate for the quarter was 22%. And all the above concluded a record high earnings per share at TWD 3.92 for the quarter, representing a sequential increase of TWD 0.79 from last quarter and a surge of TWD 1.29 from a year ago.

Please flip to the next page. For the first 6 months of 2024, we shipped 22.2 million units of notebooks, down from 23.4 million units a year ago, representing a decline of 5.1% year-on-year. Revenue for the first half came in at TWD 569 billion, grew by 11.3% year-over-year. Gross profit for the first half reached a record high of TWD 48.6 billion, grew from TWD 38.5 billion the same period last year, implying 26.3% up year-on-year. Operating profit was TWD 26.9 billion, showing a robust growth of 40.5% year-over-year.

Net income after tax was TWD 27.2 billion, representing a surge of 63.8% year-on-year. And EPS for first half was TWD 7.06. The profit amount in the old level brought all-time high for the same period. In terms of the margin rate, gross margin was 8.54%, jumped by 101 bps year-on-year. Operating margin was 4.73%, up 98 bps year-on-year, and 4.78% of net margin after tax, surged by 153 bps year-on-year. Margins reached record levels in recent 2 decades for the same period.

Turning to the balance sheet. Cash plus short-term investments decreased to TWD 156 billion compared to the end of last quarter. Net cash for the quarter was TWD 8.2 billion. The noticeable decrease of cash position was a result of a surge in component inventory, reflecting the upcoming project ramp in the second half. The amount of inventory rose 25% quarter-on-quarter to TWD 185 billion, mainly due to material pooling, particularly for AI server containing massive components. We anticipate levels of inventory to keep increasing and stay high in the upcoming quarters, driven by ongoing strong [ momentum ] for AI server shipments.

The shareholders' equity attributed to the parent company was around TWD 186 billion, increased from TWD 169 billion at the end of last quarter. Soaring sales of high-end AI server racks and the increasing demand for expanding capacity geographically, provide localized services, has caused a subsequent surge in working capital needs.

In view of expanding our financial flexibility to support business growth and strengthening our balance sheet, the management has thoughtfully contemplated for a potential fundraising option. Today, Board meeting approved a fundraising proposal of equity issuance amounting up to USD 1 billion. Potential dilution for the issuance is expected to be approximately 2% to 2.5% if fully diluted depending on the fluctuations in the share price.

The project requires approval from government authorities and we will make timely disclosures about all the relevant information when updates are available. We are committed to the goal of striking balance between investing strategically in our future and providing satisfactory returns to our shareholders. Quanta has a clear picture of our growth path and execute it well along the way with solid records. In the meantime, we have established a beneficial cycle, where effective investments drive earnings growth to sustain a strong balance sheet and increased dividends.

Moving to the CapEx. In the second quarter, the CapEx spending amounted to TWD 3.1 billion, and year-to-date CapEx reached TWD 6.1 billion, which is well within normal range. With spending priorities focusing on AI-related investments and expanding our global footprint, the estimated CapEx for the full year will be around TWD 12 billion.

To eliminate customers' concern over political tension and origin risk, Quanta has diligently worked over years with gradually diversifying its production sites since the beginning of trade war between the U.S. and China since 2018. Nowadays, our layout of production plans across major continents are largely set. This not only allows us to offer production and services options to our customers, but also enhances our manufacturing resilience through improved flexibility whenever a contingent plan is required.

For servers, a substantial portion of our server production capacity is located outside of China, well diversified in Taiwan, Thailand, United States and Germany, to provide service in proximity to CSP's global data center deployments.

In the same class, we still maintain some capacity in Shanghai for supporting local production and service. Notebook factories in Shanghai and Chongqing resemble some low production due to supply chain cost relevance and more direct labor needs. Meanwhile, we offer flexible production alternatives in Southeast Asia on customer demand. The Vietnam manufacturing site is expected to start its trial run in late 2024.

For auto-related products, we optimized production efficiency and meet the localization demand of the auto industry. We have established operational capacity in key regions; Mexico for America, Germany for Europe, and Thailand and Taiwan for Asia. Additionally, our Shanghai factory is fulfilling the manufacturing and service requirements that customers need for China market.

Next, on to the third quarter outlook. With improved visibility compared to a quarter ago, we expect that notebook shipments for third quarter will be flat to slightly up sequentially. Despite the upside on notebook shipments in the first 2 quarters, we maintain our forecast for single-digit decline for the full year. AI-enabled PC and notebooks are still in their early stages. Choices are limited and the development of AI applications and services for AI PC isn't yet fully materialized. So we are trying to caliber various HCI devices that use scenarios.

Once the production begins and cost savings enabled by AI PC are realized, the benefits will drive the wave of PC upgrade cycle. We anticipate the blended ASP will rise for notebooks in third quarter due to the off season for Chromebooks and increasing shipment of mainstream models. However, with server sales growth surpassing other product segments, contribution of notebook sales is expected to further decrease to less than 30% in the third quarter.

As for more new models across various product segments are about to enter volume shipments, we are anticipating a sequential increase in selling and R&D expenses in the third quarter. With the escalating ASP in major product segments, including servers and notebooks and corresponding higher expenses, we foresee margin of the third quarter will decline sequentially from the peak of second quarter.

Moving to the server business. With improved GPU supply conditions, the momentum of AI server shipments accelerated and showed strong growth quarter-on-quarter in second quarter. AI server has contributed more than 50% of total server sales for the quarter, which was ahead of our expectations. Moreover, our server sales exceeded half of the total sales. We are anticipating that the strong momentum of AI servers will continue into the second half of the year, resulting in triple-digit year-over-year growth in AI server sales for 2024.

Additionally, we have noticed a gradual rebound in the demand for general company servers, driven by seasonality. Overall, AI server will still be outgrowing general company server and leading to an expanding AI server contribution in the third quarter with moderate margin dilution. The recent market noises surrounding our new GPU rollout didn't impact our view on AI server business.

Quanta is providing a variety of designs to address CSP's AI server needs. We have clear visibility into upcoming AI projects that can flexibly adjust our manufacturing to adapt to dynamic supply conditions. Generative AI is currently at its beginning of [ birth ], showing no signs of reaching its limitation. CSPs are rapidly advancing their generative AI infrastructure buildout, maintaining robust CapEx plans as set up to AI roadmap. Quanta's strong R&D capability and rich product offerings will help customer fulfill their plans and mitigate uncertainties from short-term disruption.

Moving to the auto business, we are seeing that the EV market adjustment is showing early signs of stabilization and the visibility of auto business is improving compared to 90 days ago. We remain comfortable to keep our annual sales target for auto business unchanged at double-digit year-over-year growth in 2024. The automobile industry is undergoing a transformation towards smart cars, especially those integrating AI technologies for safer and more convenient mobility. ADAS technology is the core to smart transportation, and it's also the key area where Quanta has been focusing on.

We are providing ADAS systems and AI car computer solutions directly to auto makers, both in the EV markets and traditional auto markets, and post well balancing from the trend of smart transportation. Auto customers is adjusting layer product roadmap to accommodate evolving market demand and Quanta's autonomous technology solution continues to gain customer traction. We are encouraged by our progress in new customer acquisition and excited about the new project win in the pipeline.

Despite short-term setbacks in the EV market for the past few quarters, the long-term growth prospect for smart mobility remains strong. The multi-year project plan and rigorous product engagement process for auto business ensure that we maintain a leadership position in technical innovation. We are also aligning our capacity expansion plans for auto business as well in the coming years.

To close, the remarkable results are encouraging for our management team and all our employees. This signifies our ability to formulate precise and visionary strategies and work effectively to implement them in our operations. Along with the quarterly results, we reported the monthly sales of July for TWD 124 billion this afternoon, which grew 12% month-on-month and 43% year-on-year, indicating an acceleration of AI server shipment is on the road.

Despite the recent market concerns around AI servers, CSP's CapEx on AI is a strategic investment in their growth roadmap over the next decade, and that won't be affected by short-term product transition cycle. Data center customers keep pouring tons of money into their AI infrastructure. It demonstrates their ambition and commitment to a future centered in AI.

Due to the complexity of AI server systems, effective supply chain collaboration will be crucial than ever. Therefore, CSP comprehensively considers and selects partners from many aspects for R&D capabilities [indiscernible] experience of successful fulfillment, financial [indiscernible] and the like to secure the success of their AI stack.

Quanta has been dedicated in customized computational design since its inception. We collaborate with all the industry partners to integrate the advancements throughout the supply chain and then serve as the last mile hub of technology solutions. Our extensive expertise related over the past decades perfectly aligns with CSP customers' for AI solutions. On top of that, the diversity of product lineup and proven records help us to navigate supply chain turbulence smoothly, while expanding our digital lead in the market at the same time.

In response to the rapid business expansion, we are speeding up strengthening our competitiveness. Fundraising is one of the ways we secure resources to realize our business roadmap. We will maintain prudent and effective investments and keep fine-tuning business operations to optimize returns. Our commitment to financial strength ensures that we can balance investing in our vision with increasing dividend payout, staying in a healthy and sustainable growth trajectory.

And that concludes the review of the second quarter results and business outlook. We will now open the call to Q&A. Please limit your questions to one and one follow-up. Thank you for standing by. Now may we introduce the first question, please.

[H. Chen, analyst]

Thank you very much, Carol, for the presentation. [Operator Instructions] While we are waiting for the first question from the audience, please allow me to kick off with a few questions first.

First, I'd like to clarify in terms of Carol's presentation in terms of AI server contribution. You just mentioned that AI server contribution will be 50% in the third quarter. Is that for second quarter or third quarter? That's my clarification.

And also, you mentioned that that's ahead of expectations. So could you clarify about the comments earlier in terms of AI server in terms of total server revenue mix?

[Elton Yang, executive]

Yes. Carol touched on in prepared remarks. AI server contributes to the total server revenue over 50%, which is ahead of our expectation. In the last earnings call, we guided, by year 2024, over 50% contributed by AI server, but now we have reached the target by second quarter. And we're expecting to accelerate in further quarters.

[H. Chen, analyst]

Okay. Got it. That's amazing, because if second quarter AI server is already more than 50% of total server revenue mix, and your second quarter gross margin and operating margin can continue to go higher. So could you elaborate a bit more about the margins. How do we think about the margin difference between general servers and AI servers? It looks like the AI server margin, even though there's a lot of [indiscernible], but seems still quite decent.

[Elton Yang, executive]

Yes. We are excited about the performance in the second quarter for the margins. Despite of the dilution from AI server, our total margins still can keep certain basis point growth due to the favorable currency environment, seasonal kind of contribution and less healthy product contribution definitely as well develop a [ cost control ] effect. So that makes our gross margin still be maintained slightly higher than second quarter -- than the first quarter, sorry.

[H. Chen, analyst]

Okay. Got it. Thank you, Elton. My next question is about CapEx, because I remember last quarter, we guided CapEx would be around TWD 10 billion.

[Elton Yang, executive]

In last quarter, we guided about TWD 10 billion to TWD 12 billion. Now we revised up, taking up to TWD 12 billion for the full year.

[H. Chen, analyst]

Got it. So could you elaborate about what drives this difference that we raised our CapEx spending? Which are the key areas that we will spend our CapEx?

[Elton Yang, executive]

Yes. Definitely, we are more on relocation of production site to tap the EV market and the server market's requirements. But it is in our prepared remarks, we have Mexico, we've U.S., we've Thailand, Vietnam, German, all expansions, okay, to catch up for the EV business and the server business growth.

[H. Chen, analyst]

Got it. Okay. My third question is about the auto business you just mentioned. Based on the comment previously, actually, we still maintain our full year guidance of low double digits. And the outlook seems to be better than 90 days ago. Any further comments about the auto business? And also, what's our progress in terms of adding new customers for auto business?

[Elton Yang, executive]

I think Carol touched on it. It is kind of a long-term certification process to win orders and the long prior life cycles of the business. So the first thing we need to clarify, we're not only talking about EV customers or about traditional carmakers as well. So our primary interest is not car vehicle instead of EV. So we keep winning the orders from traditional carmakers with long processing time. So during the time, we still win a new project, certified by new customers. That's why we're quite excited regarding the development, the kind of long-term multi-year marathon kind of business.

[H. Chen, analyst]

Okay. Thank you very much, Elton. Let me take a pause here. Operator, can you help us take the questions from the audience?

[Operator]

We've next question from Howard Kao.

[Howard Kao, analyst]

So my first question is on AI server definition. Can you please remind us what is your definition of AI server? Is it inclusive of just any servers with one accelerator module? That's my first question.

[Elton Yang, executive]

No, I think we have a more rich definition about AI server, all about including Hopper or Blackwell, we'll treat them as AI server, instead of only GPU.

[Howard Kao, analyst]

I see. So I guess, to clarify, you guys are only defining AI servers as servers that are equipped with Hopper and Blackwell. I'm guessing also ASICs as well. But for some of the lower-end kind of GPUs like maybe the L40S in the past, are these also considered in AI server in you guys' definition?

[Elton Yang, executive]

Yes. We also have ASIC kind of AI server from our CSP customer as well. We treat them AI server as well.

[Howard Kao, analyst]

Got it. And within this AI server business year-to-date, so in the first half of this year, between ASICs and GPU servers, is there any color you can help us provide which is the bigger portion of your AI server business today? And how that potentially could evolve going into the second half of the year?

[H. Chen, analyst]

Howard, could you please repeat your question again?

[Howard Kao, analyst]

So within the AI server business, between ASIC and GPUs in the first half of this year, can you talk a little bit about what is taking up a bigger portion of the AI server business today? And how that potentially could evolve going into the second half of the year? Whether ASICs are growing stronger or GPUs are growing stronger, just any color on that?

[Elton Yang, executive]

We don't break down the kind of label to kind of specific on chips. But for the time being, the mentioned product still comes from NVIDIA.

[Howard Kao, analyst]

Got it. And maybe just one last question from me before I jump back into the queue is on your margin guidance. So first of all, I guess, congratulations on the quarter. Forgot to mention that earlier. So very, very strong numbers in Q2, and you guys are guiding margins to be down on a sequential basis. I guess my question is more on a year-on-year basis. So if we look at your kind of server outlook and your notebook outlook, it seems like product mix is going to be a little bit unfavorable on a year-on-year basis versus Q3 of last year. You have more higher ASP products ramping up in Q3 this year. So from a year-on-year perspective, is it fair to assume that margins will be down year-on-year as well?

[Elton Yang, executive]

In the third quarter, we are more higher ASP products, including notebook as well as the server. So that's why there's our comment, there's some margin pressure [indiscernible] third quarter for the gross margin as well as operating margin. But operating margin, the magnitude should be less compared to gross margin due to a higher revenue contribution to provide operating leverage.

[H. Chen, analyst]

Thank you, Howard. Operator, can we have the next question from the audience, please.

[Operator]

[Operator Instructions] Yes, we have next question from [indiscernible].

[Unknown Analyst]

I just have 2 questions, right? So the first question is chatters about the potential B Series delays and, of course, the H Series potentially having a higher lifespan. Just wondering what is the management's guidance in terms of the revenue and profit impact in 2025 against the previous expectations? That's my first question.

[Elton Yang, executive]

Could you repeat your question again, sorry?

[Unknown Analyst]

Yes, no worries. So I think there are a lot of chatters about how there could be a potential delay in the Blackwell chips, and of course, how the H-Series chips can have higher lifespan. Just wondering what is the impact on the revenue and profits in 2025, if we're to play out this scenario, factoring the delays and the lifespan expectations.

[Elton Yang, executive]

First of all, about the delay case, well, we do not comment on rumors, and we're going to see it for our members. Let me repeat again, what we witness and realize from customers is that demand remains very strong. Since the CapEx keeps growing and revised a couple [indiscernible]. But even in this event, [indiscernible], it might be the only prior transition schedule to change, okay? But demand remains intact since it's sort of a different ASP among the Blackwell against the Hopper. So the revenue is definitely lower, small during the Hopper's phases before my way into the Blackwell. But other than that, we don't see so much impact about our business.

[Unknown Analyst]

Got it. Very clear. My last question is for the GB200A. Would it sort of cannibalize your sales from the existing CSP? Or do you think there will be an incremental revenue for your side?

[Elton Yang, executive]

We don't comment on specific product. It is just purely based on the customers' requirements to efforts to ship out. So in our client roadmap, we're just following customers' requirements. We cannot see where the customer -- we don't see any change for the time being for customer's forecast. So we do not comment on what [indiscernible] what are the products, to be fair.

[Operator]

We have next question from Anthony.

[Albert Hung, analyst]

Hello. This is Albert from JPMorgan. My first question is, thank you for providing all these AI server contribution color in first half. Based on your comment, second quarter AI server contribution can be more like 25% of total company revenue, right? May I get an update on the AI server revenue contribution on a full year basis, please?

[Elton Yang, executive]

Sorry, we don't provide that kind of granularity about AI server for full year. But what we've commented is, we foresee, starting from the third quarter, AI servers' contribution should further grow to the total servers' revenue.

[Albert Hung, analyst]

Understood. Is it fair to say we should see another decent ramp-up in August and September sales with continued easing GPU supply?

[Elton Yang, executive]

Yes. So for the time being, we don't guide beyond 90 days. For current quarter, we're expecting that to grow with smoothly to GPU supply to help our supplies.

[Albert Hung, analyst]

Understood. And for AI server margin, I think [ Chris ] has touched on this. If I look at, for second quarter this year, AI server contributed more than 25% of total revenue versus almost 0 in, say, second quarter last year, but your margin actually stayed quite resilient. Year-on-year, it's actually up. So that means your AI server margin should not see much difference versus the [ corporate ] level. May I know, is it reasonable to expect this kind of margin to sustain into second half? Or was there any [indiscernible] fee or one-off fee in second quarter AI server margin?

[Elton Yang, executive]

Let me comment about AI first. It's kind of thing, we do anything, we will get the new project, [indiscernible]. So to us, it is kind of regular type of thing instead of one-off. So we don't see that kind of one-off facility. Secondly, during the past 1 year, we did a lot of effort for the first half. Meanwhile, among our total portfolio, we also -- not just -- so we also have EV, we also have notebook. There's some change difference about prior mix, about the notebook also changed a lot. So till 1 year's time strength, improving our locations to low down our cost [indiscernible] do the comparison, but we do a lot to help our margin definitely, okay?

[Albert Hung, analyst]

Understood. And for CB, convertible bond, as you suggest, there could be USD 1 billion. May I know how much this USD 1 billion can be used for -- if you use this USD 1 billion in working capital, how much can you generate for AI server sales? Is it fair to say, your [indiscernible] days, 80 days. So mathematically, we can generate like TWD 4 billion plus kind of revenue, is it a fair assumption?

[Elton Yang, executive]

We don't have a major number telling how the [ ECB ] compared to how many AI revenue contribution. But what I can say is, it's huge. That's one of the reasons why we say we are excited about AI servers' contribution. That's why we are to do the fundraising to procure the key components with 6 sites of the amount for the [ ECB ]. The whole purpose for [ ECB ].

[Albert Hung, analyst]

Understood. And my last question is in the other non-op income, there is a huge number in other income in non-op. May I get some idea as to what's that? And is it recurring? Because it seems that in every quarter, Quanta has a lot of other income in [indiscernible].

[Elton Yang, executive]

Okay. As Carol just touched on in terms of the other non-operating contributed by we have dividend income about TWD 375 million plus some of the mark-to-market gain from our financial book is TWD 204 million. The rest go for the equipment disposal. When we do the relocations, we definitely have some equipment disposals. So that's again from that disposal.

[Operator]

Last question from Howard again. Howard, please.

[Howard Kao, analyst]

So I just wanted to follow up. I think you were going to talk about the margins regarding my question on a year-on-year perspective earlier and I think I got cut off. So maybe can I just circle back to this question again. So I guess let me re-ask the question. So my question was, looking at your product mix in Q3 of this year, it seems like we will have a higher percentage of higher ASP products this year in the third quarter versus last year. So while your guidance was for a sequential basis, on a year-on-year basis, should we also expect margins to decline?

[Elton Yang, executive]

I do expect, think so as well.

[Howard Kao, analyst]

Got it. And just one clarification from me, and that would be my last question, is on your AI server target. So 90 days ago on the call, you guys mentioned that you guys are expecting AI server revenues to reach more than 50% of total server revenue for the full year, and you guys have already achieved that in the second quarter. So I don't know if I missed this earlier, but is the implication here or the assumption here that because you guys have already achieved it in the second quarter, the full year target is unchanged, that AI server will still be above 50% of total server revenues?

[Elton Yang, executive]

To be high above 50%.

[Howard Kao, analyst]

Higher than 50%, got it.

[Operator]

Next question is from Angela.

[Angela Hsiang, analyst]

I have a question regarding the auto business. As you just mentioned that your second quarter gross margin basically is helped by some low price from book despite the AI server weighting increase. Can I know that is that also helped by auto business, as we just want to know that auto sales in last 2 years probably in the mid-single-digit to mid- to high-single-digit, and can we know that now how is the contribution here? And I basically think that the higher-margin auto business, will that be also another factor to offset the AI sever increase, which is diluted in gross margin. So basically, we can expect the overall gross margin is not sharply declined in the coming future.

[Elton Yang, executive]

We're not expecting any sharp decline from our EV margins till the time we will design, get a win from our customers, and they are more than [indiscernible] in this field, definitely. So we don't foresee any dilution from our EV business. But according to the -- our AI server, our server has grown than what we expected. They will further dilute the EV revenue contribution to our topline. But we're still confident about double-digit growth for 2024 for the EV business.

[Angela Hsiang, analyst]

Yes. And let me clarify it. I know that sales from auto actually will be done by AI server sales expansion. So probably we'll see a double-digit contribution. But what we know that is that EV relatively higher gross margin can offset lower AI server, so later overall gross margin only very moderate decline in the coming future. Can we expect that this way?

[Elton Yang, executive]

Yes. EV will be still a handful of margin rate of our total margin rate from AI servers. But again, AI servers is contributing more. So in terms of weighting average, it's still higher impact from AI servers.

[Angela Hsiang, analyst]

Okay. Got it. And as you just mentioned that notebook actually the sales will be going to below 30% in second half. Can we know that how much percentage from non-notebook server is the major one, is that right? I mean, can we expect like over 70% of the non-notebook sales from server?

[Elton Yang, executive]

So the simple math is notebook versus non-notebook is 30:70.

[Angela Hsiang, analyst]

Yes. But about that non-notebook 70% more and can we see that over 70% from server?

[Elton Yang, executive]

We just commented about server contributes about 50% of total revenue. AI servers contribute over 50% of our total server revenue. This is our framework.

[Angela Hsiang, analyst]

Okay, I see. That's for the whole year or for the second half?

[Elton Yang, executive]

For the second quarter.

[Angela Hsiang, analyst]

Second quarter. Okay. Okay, got it. So the second quarter, over 50% from server and over 50% of the server revenue from AI server, am I right?

[Elton Yang, executive]

Exactly.

[Angela Hsiang, analyst]

The last question from my side is about the OpEx. We know that the operating leverage will help the OpEx ratio lower down. Is it a better for us to use the absolute value or the ratio of the OpEx in the coming quarters? That's my last question.

[Elton Yang, executive]

Yes, the absolute dollar amount of OP expense actually grow. Carol touched on in our prepared remarks actually to the sales spend as well as R&D expenses. So we're expecting the number will grow along with more basic come from AI server in particular from R&D. So we are expecting full year OP expense to be higher than 2023.

[Angela Hsiang, analyst]

Okay. Higher than 2023. So 3% of the OpEx ratio -- is this full year's -- for the whole year this year?

[Elton Yang, executive]

OP expenses will [indiscernible] operational leverage due to higher revenue. Even with a higher OP expenses, but the ratio could be down further. I just wanted to mention. I think the margin pressure from gross margin as well as the operating margin, but the magnitude will be less in the OP margins due to the operational leverage.

[Angela Hsiang, analyst]

Yes. Okay. So value will be higher than 2023, but ratio will be lower.

[Elton Yang, executive]

Yes, the absolute dollar amount could be higher, but the ratio would be low in terms of OP expense.

[Operator]

We have our next question from [ Britney ].

[Unknown Analyst]

I'd like to ask following on with the OP margin as well. You mentioned earlier that the 3Q margin will be lower from a second quarter peak. Can I ask is this almost an all-time peak as AI server is likely to be a structural growth driver?

[Elton Yang, executive]

Yes. The AI server has more high ASP, more high margin dollar, but the top line is so big. So they're trying to impact our gross margin as well as the OP margins.

[Unknown Analyst]

Understood. My second question is in regards to the inventory increase this quarter. You mentioned that it was likely to continue to increase. I just want to clarify if that is true, that inventory will continue to increase to support the strong AI server shipments to come? Or should I say, what will be the expected level of inventory, either by percentage of sales or days, will we see to stabilize? Or what's your thought on inventory?

[Elton Yang, executive]

In the past 2 quarters, the inventory days had stayed quite stable. [indiscernible] because we also a higher revenue as well. But inventory piled up, as we touched on in the prepared remarks, it's all our preparation for the upcoming new projects ramping up. So in terms of total inventory, 65% go to the material, 5% go to the WIP, the rest go for finished goods. The lion's share of the total revenue all goes to the inventory and also materials, sorry.

[Unknown Analyst]

Understood. Last question is a little bit of a side topic. But you mentioned that there is so far the AI PC and notebook side, there hasn't really been much upside in the third quarter. Can I ask going forward when do you see that Edge AI or a replacement demand to kick in, in the near future?

[Elton Yang, executive]

First of all, we're still expecting old PCs to convert to AI PCs eventually, okay? Along with the Edge PC plus the Windows 10, the service is going to end of life. Plus we'll come out with a new CPU and Intel AMD will come out with a new CPU by later this year. We're expecting eventually the AI PC will kick in and initiate retreatment cycle onwards. So we're still excited about AI PC onwards.

[Unknown Analyst]

When do you think the jump would happen?

[Elton Yang, executive]

Sorry, can you say that again, sorry?

[Unknown Analyst]

When do you think this AI PC shift/replacement to happen?

[Elton Yang, executive]

I think that the main replacement cycle will kick in probably by 2025.

[H. Chen, analyst]

We still have a few questions from the participants. Operator, can we take 2 more questions. And for each participant, could you limit yourself to one question, please? We want to accommodate as many questions as possible.

[Operator]

We have the next question from John.

[Unknown Analyst]

Just one quick one on EV. In the opening remarks, you'd mentioned that EV, you're seeing early signs of stabilization. Can I just ask, like, did you mind to share a bit more like what are you seeing here? And given that you say visibility is better, what about exactly are you seeing here? Even though that double-digit growth is being maintained, like as compared to the initial expectation of double-digit growth, are we in a better double-digit growth environment? Or is it a sequentially better double-digit growth kind of environment?

[Elton Yang, executive]

Let me clarify. Our target market at first. We don't target EV customers only. We also target traditional carmakers as well. Since everybody want to migrate their [indiscernible] for small car, smart vehicle. So more our orders come from, particularly from traditional makers as well. So that is why we have become more confident to get the [indiscernible].

[H. Chen, analyst]

We have to move on to the next question. Please feel free to e-mail us if you have any follow-up questions.

Operator, can we get the next question, please?

[Operator]

The last question is from Alex.

[Unknown Analyst]

This is Alex. I just want to have one question. For AI server, because you are using the buy-and-sell model and bearing inventory for customers. So is it possible for you to charge some finance fee to support your profitability?

[Elton Yang, executive]

We don't have that thing in the deal between we and the customers. So our daily job is to talk to the vendors, customers, how to make the balance between the profit and whatever we did, okay? So buy and sell, sort of things with different customers, different models, but we are more than happy to deal with the customer with a different format, and we will try our best to negotiate with the customer how to lever down our burden as well, okay? That's our daily life.

[H. Chen, analyst]

I have one last question through an e-mail. The investor wants to clarify, because Q2 AI server revenue was better than expected. Is that because of better GPU supply, or you're seeing better demand? And on full year basis, because we have a stronger second quarter, do you expect to see a stronger AI server growth outlook for the year?

[Elton Yang, executive]

Firstly, let me reemphasize, demand is always there, never changes. There was just concern of material supply. And material supply is getting better in the second quarter is why we come out with better expectation to revenue contribution. And going forward, for the second half, we're expecting more contribution from AI server. That's why we are more confident about that.

[H. Chen, analyst]

Okay. Got it. Thank you. I know there are still many questions that we're not able to get to them one-by-one today, but feel free to contact either me or Quanta's IR team. Thank you so much, the management, C.C., Elton, Carol, and [ Ali. ] And thank you all for your participation.

Sorry, one last thing. I forgot to invite C.C. to make the final remarks. C.C., please go ahead. Congratulations on good results, by the way. Thank you.

[Chee-Chun Leung, executive]

AI actually brings us a lot of vision to the future, starting from 1.5 years ago when the ChatGPT came out and we were talking about different type of products and first one is the server. Important. Because of the server came out and getting more talked about. Then we will bring out the business on AI PC. So at this moment, a lot of power companies already focus on the AI server. And because of the supply due to the call of last year, so [indiscernible] a device program into the AI server. But this year, I think after February, supply situation is getting better and better. That is the reason why we have good [indiscernible] on AI server.

But AI PC comes after, because at this moment, only AI PC is from Qualcomm, okay? They quote them as a Copilot+. And this could [indiscernible]. But Intel and AMD, I think they could only get approved on the speed and capacity, so that they could name it Copilot+ only starting from around September or November time frame. So right now, it's only one set of product we are looking forward when it is getting more foothold and AI PC getting more popular. Hopefully, we are looking for a good result for the AI PC next year.

We hope that both of our digital categories grow continuously. Thank you.

[H. Chen, analyst]

Got it. Thank you very much, C.C., Elton, Carol, and thank you all for your participation. And congratulations for the good result and good margin performance. And thank you all for your participation. This concludes today's call. Thank you.

[Elton Yang, executive]

Thank you.