AU Optronics Corp (AUO), a leading provider of display solutions, reported a 25% quarter-over-quarter increase in Q2 net sales to NT$74.3 billion, largely attributed to the inclusion of revenue from recently acquired BHTC. Despite this growth, the company recorded a net loss due to non-GAAP items, including earthquake-induced losses.
AUO is undergoing a strategic transformation, focusing on mobility solutions, vertical solutions, and the display segment. The company expects display revenue to grow in Q3, with stable mobility revenue and a slight decrease in vertical solution revenue.
Key Takeaways
- Q2 net sales rose by 25% Q-o-Q, reaching NT$74.3 billion.
- Gross profit and operating profit increased, but a net loss was reported due to non-GAAP items.
- AUO is refocusing its strategy on mobility solutions, vertical solutions, and the display segment.
- The company anticipates Q3 growth in display revenue, stable mobility revenue, and a slight decrease in vertical solution revenue.
- AUO's acquisition of BHTC is expected to strengthen its position in the automotive display market.
- The company is investing in micro LED technology and exploring foldable laptop panels.
- AUO has entered the healthcare application segment with an FDA-approved 3D medical monitor.
Company Outlook
- AUO plans to balance revenue across its three strategic pillars: mobility, vertical, and display.
- The company aims to achieve double-digit CAGR for mobility and vertical solutions.
- AUO expects OpEx to decrease as it progresses with integration.
Bearish Highlights
- Vertical solution revenue may see a slight decline in Q3 due to the timing of government projects.
- The consumer segment's demand in Q3 is expected to be muted.
- A net loss was reported in Q2, influenced by non-GAAP items including earthquake losses.
Bullish Highlights
- Display revenue is expected to continue growing in Q3.
- The company's micro LED technology is gaining traction across various applications.
- AUO's entry into the healthcare application segment is promising, with an FDA-approved 3D medical monitor.
Misses
- No specific details about Q3 gross margin were provided.
- Loading rates and Q3 profit guidance were not discussed.
Q&A highlights
- The company's growth in smart cockpits for vehicles is not affected by the demand for electric vehicles (EVs).
- Inventory levels for downstream branded vendors are healthy, despite a temporary increase due to transportation and shipping delays related to major sports events.
- No further questions were asked at the conclusion of the call.
AU Optronics continues to navigate the competitive display market with strategic shifts in its business model. The company's focus on integrating software and communication capabilities, particularly in transportation and smart city applications, underscores its commitment to innovation and growth in key sectors. The acquisition of BHTC and the ongoing development of cutting-edge technologies, such as micro LED, signal AUO's determination to maintain a strong global presence and to advance sustainability in its operations. While challenges such as muted consumer demand and the impact of non-GAAP losses are acknowledged, the company's strategic pillars and resource allocation plans indicate a forward-looking approach to achieving long-term profitability and market leadership.
InvestingPro Insights
AU Optronics Corp's (AUO) latest financial performance paints a mixed picture, with a notable increase in net sales yet a net loss reported due to non-standard accounting items. As the company navigates a strategic transformation, investors are closely monitoring its financial health and market position. Here are some key insights based on real-time data from InvestingPro and valuable InvestingPro Tips:
InvestingPro Data:
- Market Cap (Adjusted): $3.59 billion
- Price / Book (Last twelve months as of Q2 2024): 0.75
- Dividend Yield (2024): 4.34%
The data indicates that AUO is trading at a low Price / Book multiple, which could suggest that the stock is undervalued relative to its assets. This is supported by an InvestingPro Tip highlighting that the stock is trading at a low Price / Book multiple. Moreover, despite recent losses, AUO pays a significant dividend to shareholders, with a yield of 4.34%, which could be attractive to income-focused investors.
An additional InvestingPro Tip notes that the stock has taken a significant hit over the last week, which might be of interest to investors looking for potential entry points or to those seeking to understand recent market movements. This could be related to the broader market sentiment or specific challenges faced by AUO, including the impact of non-GAAP losses mentioned in the article.
For investors seeking a deeper analysis, there are more InvestingPro Tips available, including insights into the company's profitability, industry standing, and stock performance trends. With a total of 11 additional tips listed on InvestingPro for AUO, users can gain a more comprehensive understanding of the company's prospects and potential investment opportunities.
AUO's commitment to strategic pillars such as mobility solutions, vertical solutions, and the display segment is crucial for its future growth. The InvestingPro metrics and tips provided here offer a glimpse into the company's financial standing and market perception, which are essential for making informed investment decisions. To explore further, investors can visit https://www.investing.com/pro/AUOTY for a complete list of InvestingPro Tips and detailed financial data.
Full transcript - AU Optronics Corp (AUOTY) Q2 2024:
Operator: Ladies and gentlemen, good afternoon. I'm Jerry Su, AUO's Senior Director of the IR Department. On behalf of the company, I would like to welcome you to participate in today's results conference. I'm joined by five executives: our Chairman and Group's Chief Strategy Officer, Paul Peng; CEO and President, Frank Ko; Senior VP of the Display Strategy Business Group, James Chen; BHTC Managing Director, Ben Tseng; and CFO, David Chang. The agenda of today's results conference is as follows. First of all, our CFO will go over our Q2 results and Q3 guidance. And our Chairman and CEO will share the company's transformation strategy and outlook. Then we will proceed to questions and answers. We have collected questions before the meeting. We will address those questions for the first part of the Q&A session. Then we will open the line for you to raise more questions. Now before I hand over to our CFO, I would like to remind you that all forward-looking statements contain risks and uncertainties. Please spend some time to read the Safe Harbor Notice on Slide number 2. David, please.
David Chang: Good afternoon. I would like to go over our Q2, 2024 financial results. In Q2, our net sales came in at NT$74.3 billion up by 25% Q-o-Q. We have consolidated BHTC. With the inclusion of BHTC revenue, our Display business benefited from steady growth in consumer electronics demand, notebook and monitor shipment growth and AC increases in TV and monitor panels, leading to an increase in our display business revenue. Moreover, our automotive and vertical business also posted steady growth. In terms of profitability, gross profit, thanks to our Aramex improvements, higher UT rates and favorable ForEx rate, our gross margin increased by nearly 8 percentage points to 11.2%. Gross profit also increased to NT$8.36 billion. We also returned to black at the operating profit level at NT$107 million However, due to non-GAAP loss, including approximately $400 million loss induced by the earthquake in April. Our net loss attributable to owner of the company was NT$231, EBITDA margin increased to 12.4%. Moving on to balance sheet. Cash and cash equivalents was NT$72 billion, short-term long-term debt combined was NT$126 billion. Yearend ratio was NT$32.2 billion up Q-o-Q on the back of reduced cash for the BHTC transaction. Inventory was NT$33.2 billion also as a result of the conclusion of the inclusion of BHTC. Inventory was at a healthy level with the inventory turnover at 43 days. Moving on to cash flow. We generated from operating activities NT$3.4 billon DNA was NT$9 billion, outflow for investing activities was NT$18.2 billion, CapEx NT$5.7 billion, acquisition of BHTC NT$12.6 billion, outflow for financial activities was NT$1.2 billion, mainly due to debt repayment. Moving on to revenue breakdown. Before I delve into more details, I would like to make a point. As spoken earlier, our Q2 revenue increased by 25% Q-o-Q. So, the revenue share of each segment that I'm going to talk about may vary. Their revenue are increased Q-o-Q. First of all, mobile PC and device, benefiting from stronger market demand and shipment growth. Posted robust revenue growth with revenue share at 19%. Vertical business with the inclusion of BHTC rose to 23%. Next slide. Shipment center's feedback area. Again, on the back of stronger market demand, area shipment increased by 5% Q-o-Q to 5,600 square meters. ASP increased by 6% Q-o-Q to $333 per square meter. Thank you. Thank you, David. Now we would like to invite Paul to give us an open remark.
Paul Peng: Ladies and gentlemen, good afternoon. Last year, in the beginning of last year, we were here at our offline results conference and one and a half years after that, we are here once again meeting with you all. So, I'm very delighted that we get to meet you face to face. First of all, let me introduce to you our newly appointed CFO, David Chang. And once again, on behalf of the company, I would like to thank our previous CFO, Ben Tseng, who has been contributing a lot to our transformation over the past few years. And from now on, he will also take on a bigger and more important responsibility with us to help us to drive consolidation and acceleration of consolidation with our newly consolidated entity, BHTC. Thank you, Ben, for participating in today's results conference. Today, we would like to take this opportunity to share with you our mid-term and long-term transformation objectives. Because going forward, what we're going to pursue will revolve around what I'm going to talk to you later on. And I hope that this sharing would help you to cast your in a more correct light going forward. However, we'll just look back at our Q2 performance. As our CFO told you earlier that we really posted quite nice growth for the Q2 -- second quarter. However, we did suffer slightly from the earthquake in Q2. We had a factory that went through some damages, which incurred some maintenance and repair expenses. And that factory had to suspend operation for some time. So that damage, that cost was a bit larger than we expected. However, it was back and running again today, and the production has resumed totally. In Q2, consumer electronics saw steady demand and inventory levels across channels were quite healthy. Brands have been preparing for restocking ahead of time, and we are seeing TV monitor panels posting upward price growth in Q2 as well. At the same time, automotive applications with the inclusion of BHTC posted stronger growth and bigger revenue contribution to our business. Previously, we have shared with you that the particular business will account for more than 20% of our revenue. It has been more than that today. It was about 23% in Q2. Thanks to the growth of our revenue, we also returned to the black at the operating level. However, due to the non-map loss due to the earthquake, we had slight net loss. However, our inventory turnover was 43 days, year in ratio was 32 days, which were still relatively healthy. AU has been making great efforts. As you know, the panel industry is characterized by drastic ups and downs in market conditions. At the highest point, our revenue was NT$480 billion but last year, it was NT$240 billion. Actually, for the past few years, we've been working very hard to put ourselves away from the cyclical nature of the panel industry because the ups and downs could be really, really drastic. Moreover, we are pursuing the second wave of growth for the company. That's why we have been pursuing relentlessly toward gold premium and gold vertical so as to drive the 2nd wave of growth for the company. I think you may be all very familiar with this slide because we have been talking about this for several times. We have been talking about we are building the ecosystem, we are adjusting our capital investment structure because we hope to pursue biaxial transformation. On the bottom of the triangle is core business. With that, we have our premium technology to pursue and enhance quality and differentiation. For example, we have been driving the development of micro LED. Going upward, we have the go-vertical transformation objectives, which is about using our core competence in display to develop differentiated solutions and to cater to the needs of various applications and fields. At the same time, we want to extend our value system and our value chain to develop more field applications. As for go-vertical, our key is to advance our co-creation, collaboration and complementary partnerships and to work with our ecosystem partners to drive go vertical transformation. At the same time, we want to shift more toward light asset business, charting a departure away from the conventional pure panel business, which is a heavy investment, heavy asset business. At the same time, we recognize that panel manufacturing is an energy-intensive industry. So as the work shifts toward net zero, we also hope to pursue lower power consumption and lower carbon emissions. So, we are hoping to extend our value chain. We are developing applications in various applications in various fields, such as automotive, retail, healthcare, enterprise, and education. So, we are transforming into a solutions provider based around our display technology expertise. More specifically, what we are going to do is to focus on the three pillars that we charted on this slide. What are the three pillars? We have the mobility solution, which includes our leading automotive technology and our automotive display system, as well as the BHTC portfolio. The second pillar is the vertical solution, which we will provide more details later. And the last one was the display segment, which is our core business previously. The reason that we made this categorization, because we hope that each of the pillars will play an arena for us to optimize our operations, so as to play out to its fullest potential. Moreover, we hope that we can allocate resources more ideally. The first two pillars, mobility solution and vertical solutions, are the segments where we are going to allocate more resources, whereas the display pillar will play more of a supportive role to ensure the growth of the previous two pillars. But of course, the technology portfolio of the display pillar will continue to develop and expand. For example, micro LED will be a priority of ours. When the first two pillars grow to a sufficient scale, we will continue to increase our capability to withstand the cyclical nature of the panel business. And moreover, we will be able to optimize our operations of the display business and to optimize the performance of the display segment. So, in terms of our operations, we will break down our revenue based on the three pillars going forward. For example, in the past, we had TV, monitor, mobile PC and device, and automotive display, et cetera. Mobility solutions includes automotive display, display HMI, and BHTC. These will constitute mobility solution going forward. So, what will happen is that we will incorporate the yellow and blue parts into the mobile PC solution. So, the blue part is where we have been invested heavily previously, which is our automotive display and display HMI. Secondly, in terms of vertical, previously we've had PID and GD and smart applications such as healthcare, enterprise, retail and education applications, plus applications in the service field and our energy business, which are all categorized as vertical solutions, the light blue and the dark blue parts here. As for the display segment, which includes TV monitor, mobile PC and device and a partial portion of the virtual business, which includes LED and system DMS. As well as its display, be it micro-LED or mini-LED or set products such as monitors, the manufacturing and design and ODM business of these products will be categorized as display segment. So, going forward, what we will show you is things like this. We will break down our brick business into the three pillars. So, we have reorganized our business as such. If you look at the past five quarters using the new breakdown, the pure display business has been seeing its revenue share going down incrementally whereas vertical and mobile solution -- mobile solution, both are gaining shares. In the previous quarter, the non-pure panel business, which excluded the display business accounted for 42% of our revenue. If we take a longer-term view, last year in 2023, display accounted for 60%, nearly 60%. Our hope is that with decreasing resource allocation in this segment, we will invest more in vertical and mobility solution segments. So, these 2 segments will see revenue share growth. Moreover, the reason that we are so prioritizing these 2 segments is that they both deliver steadier revenue and business. So, with more, with steadier revenues and business conditions, we hope that we will be able to better withstand the simplicity of the panel business. So, this is what we are going toward. Now about our third quarter outlook, I think you have been waiting for this. In Q3, as we have been seeing, the Consumer segment has been seeing its demand rather muted. This year, the seasonal demand is less strong as previously. So, in the second half, inventory restocking momentum will be slightly less pronounced. However, thanks to our diversified client portfolio, we expect our display revenue to still grow. At the same time, our mobility revenue will remain on par with Q2. As for the vertical solution, basically, we are expecting growth. However, our Energy business is associated with the timing of the project schedule of government projects, which will likely drag down slightly our vertical solution revenue. In Q3, our vertical business revenue will be down a little bit but overall revenue will still be up slightly despite, the more muted season on demand. Now I would like to hand over to Frank who will talk about -- more about our operations and our business updates especially, with regarding our three pillars.
Frank Ko: Ladies and gentlemen, good afternoon. I would like to share with you more about our business updates. As Paul has shared with you our transformation goals and with regard to the third the three pillars. I would like to provide more details about the three pillars and the priorities of each pillar. For the past few years we've been talking about our transformation objectives hoping to leverage our expertise in the display technology and to maximize our advantages to provide solutions. This is something we have been very committed to and we have been driving toward. When it comes to the three pillars each of them has some characteristics specific to the industry and our positioning in the industry mobility solution mainly includes automotive displays and solutions. With the acquisition of BHTC we now have the capability to directly engage with carmakers around the world. Today there are all kinds of cars. We have EVs internal combustion engine cars and hybrid cars and what's really inside a vehicle? It's very important to every consumer when they purchases -- when they purchase a new vehicle and of their -- in --when it comes to their purchasing decisions displays play a very critical part in how they are going to experience in the vehicle over the past decades or so. Anyone has been investing in automotive display technology and with the assessment of the smart cockpit solutions displays has become a very important platform for intelligent applications. Automotive applications compared with other consumer electronics provides more steadier visibility and growth momentum. Which we believe will help us to sustain our transformation. Moreover, through our efforts and the acquisition of BHTC we get to directly engage traditional established carmakers and the emerging carmakers. We now have opened up more relationships with these new companies and the established companies, which is helping us to build relations with them and to land orders significantly. As we are driving vertical solution transformation we are pursuing growth in smart applications smart solutions besides that we are leveraging our energy business and smart manufacturing service solutions which are not directly related to display applications, but are more about our smart manufacturing capabilities. We are leveraging these capabilities to provide services to our customers. I think you may have noticed that you are now living in an environment where we may have been using many displays in your private places or in your, in public places. You have notebooks, you have cell phones and you have many public displays around you in your everyday life. Over the past 10 years or so, we have developed strong expertise in industrial commercial displays. And we also have developed medical applications, including retail applications, ATM applications and touch technology, et cetera. So, we have been secure a strong position in many vertical arenas. After the COVID pandemic, labor shortage has increasingly become severe in the retail setting or in the health care setting or enterprise setting, education setting, et cetera, smart displays have increasingly become viable solutions to address the issue of labor shortages. For example, in airports, in immigration counters, many of the processes have been automated rather than being labored-based previously. You have to go through facial recognition and password recognition, all automated. And for that, smart applications, smart display applications are pivotal. Health care, education, enterprises, which account for a big part of the global GDP, much of it are relying on is relying on smart display applications. So, what we're doing is we are leveraging our capabilities and we are working with our ecosystem partners to build upon their software and hardware integration capabilities to provide vertical solutions. In terms of medical applications or in solar PV or smart manufacturing, which I will talk more later, we are also having solutions that are very variable today. The Third pillar, display, which is our core competence. We continue to add value to our LCD technology, which continues to be the mainstream display technology with the highest CP ratio. And we continue to secure a very strong position in this segment. And with the support of our core premier strategy, we continue to develop in micro LED research and development, and we have been commercializing and mass-producing micro-LED displays. As we have seen, micro-LED provides strong capabilities in large displays, automotive transparent displays and large public information displays. And they offer very strong differentiation and high brightness and high-power saving performance to allow us to provide more innovative and more comprehensive products. And the lower bar here, the green bar is very important, which is ESG and sustainability. which is about using our ESG capability to pursue transformation, to support our transformation through the three pillars. And I think you may pay attention to our mobility solution, which we have been placing great importance to. The reason that we want to highlight this is that mobility solution is positioned as a key group driver for our company in the midterm. And we expect in the coming years, this business will contribute to our revenue nicely, posting double digit growth -- double-digit CAGR growth over the next few years. The reason that we are convinced that we will be able to deliver growth, especially with the inclusion of BHTC, is that if you look at the growth of car sales volume alone, it's not that significant. It may be only 1% to 2% per year. And if we continue to sell car displays alone, we may be able to tell you that we are going to sell more displays for each cockpit. We may grow from one panel to two panels or three panels, but the growth will still be quite limited. So, but still I want to provide you with this figure. If you look at this chart here, if you look at the number of car displays alone, the CAGR of the next four years will be in the mid-single digit range. However, with our positioning in the automotive displays, with the inclusion of BHTC, if you look at the lower left bottom, you will see that we get to provide a wide array of portfolio here. We have multiple components and units and many different products inside a smart cockpit. Besides display HMI, we also have climate control and many other products, including the traditional mechanical rotary knob and button, which to this day are still hard to be replaced by touch panels. And in the future, there's going to be more CBC [ph], ECU units and autonomous driving units. AUO will become a very unique company in the industry with the tier one capability, with a full portfolio of smart cockpit products and with hardware and software integrated solution capabilities. So, we will be able to secure a very good position in the industry. Through BHTC, we also get to change our positioning in the value chain. We get to transform from a tier two supplier to tier one. We used to be a tier two provider. We sell panels to the tier one system integrators, which then sell their products to car makers. By integrating with BHEC, we will get to have both tier one and tier two comprehensive capabilities. Tier one is about assembly and integration capabilities, whereas display makers have the core competency in display technology. By the integration, with the integration with BHTC, we will now have the capability to integrate display plus analog. So, we get to play the digital displays along with traditional rotary knobs and software and hardware integrated capabilities. Through this, we get to be very convinced that we will be able to deliver double-digit growth going forward. Moreover, through this strategic transformation, we are also becoming a much stronger global company. In terms of our R&D presence, besides Taiwan, we also have sites in Germany, India, Finland, Mainland China, helping us to leverage the local research and development capabilities to serve carmakers around the world. Moreover, in terms of our manufacturing sites, besides Taiwan and Mainland China, we now have Bulgaria, Mexico and India, which are very important manufacturing locations for automobiles around the world. So, this acquisition helps us to become much closer to our customers. As for our progress with the consolidation of BHTC, I'm happy to tell you that 120 days post the acquisition, we have been expanding our consolidation progress nicely. As Paul shared with you, we have delegated Ben to become a Managing Director stationed in Germany so as to accelerate the consolidation among the two entities and to really play out the advantages of both sides and develop new products to really leverage the synergies and deliver stronger performance. This slide is our strategic road map of the Mobility Service BGMSPG. Building on our display expertise, we are going to provide smart cockpit solutions, which we will integrate design and user experiences, of which we would need to integrate many parts and components. In terms of display, we will go from display to display HMI. For that, we will have to incorporate touch functionality, sensors and climate control per of BHGC. So basically, the 5 sensors that you're going to have inside the cabins, the vision, operatory, tactile, everything will be integrated and accommodated through these offerings. And that will become a very important foundation for us to pursue growth in the smart carpet arena. In terms of passenger car, commercial car, we believe there will be 9% to 10% CAGR going forward. And we will be able to integrate our comprehensive capabilities to surpass market average. Secondly, more if you take a longer-term view, the autonomous driving will accelerate V2X development, connecting to smart city applications alongside advertisements on the streets. So, when everything is connected, in the future, people that buy the cars may not be the one that's go -- that are going to drive the cars. And mobility service will provide a very important impetus for the services going forward. So, by integrating software and communications capabilities, we will have offerings in the passenger information system and roadside advertisements capabilities. And at the same time, passenger information system will deliver a annual growth of more than 10%. And with our positioning in passenger car, commercial car and railway transportation, we believe we will enjoy a very important space in the mobility solution arena. So, on the left, we have smart cockpit and the right we have smart cities, which are going to be very important part in our MSBG roadmap. Moreover, in terms of our vertical solutions, in the next slide, as you can see, we have smart display vertical solutions and footprint in solar PV and smart manufacturing aspects. Healthcare is a leading contributor to the global GDP today, as smart retail, smart enterprise, and smart education are fast-growing segments. We are going to leverage our display capabilities to provide offerings in smart retail, healthcare, enterprise and education and other areas. And here we have two photos, which captured the real cases that we have been doing in Taiwan. For example, in the smart retail setting, we have the public information displays for which we're using LED displays to provide digital smart shelf labels. Then we also have cloud digital content management system that help us to provide one-stop advertising and marketing platform to help customers and store owners to deliver their campaign information in real time in the retail settings. Alongside with AI solutions, which will further empower our customers in the vertical fields. In terms of vertical settings, we also have solar PV energy business, our smart manufacturing, water recycle, carbon emissions management services, which are an extension of our core manufacturing and management capability has become very important part of our business. Today we are serving many customers, vendors and companies around the world, be it solar PV semiconductor companies or other tech companies. They have been adopting our solar PV modules and smart manufacturing and carbon emission management systems and solutions. Actually, solar PV energy has become a pivotal case of our transformation story. More than 10 years ago, AU specialized in the manufacturing services of the hardware components and modules of solar PV panels. In the past few years, we have been shifting to become specializing in the management and operations and construction of solar plants. In a few years ago, there was a frenzy surrounding solar PV power generation. While the frenzy has been eased somewhat over the past one year or so, our solar PVenergy business continued to generate profits. So, this is where we have -- where we are now at our transformation journey. And also, on this slide, I would like to share with you our performance and our structure. On the left, we have several subsidiaries and affiliates that we have been investing in the U.S., but besides U.S, we also have other investments in Europe and Japan and other countries. In the U.S, we have 230 plus professionals. Last year, we generated $230 million in revenue. Today, our Board of Directors passed our acquisition of a full taker over of Evercore in USA. Over the past year, we have been investing in Evercore implementing. And today, we finally got the approval of the Board of Directors to purchase the remaining stake. Evercore is a U.S. based enterprise office interactive solutions provider. With the acquisition of Alphacore complemented by Rise Vision and Conkey, we will get to engage directly with customers in U.S. In the enterprise education and retail space. Through this strategic roadmap, we hope to accelerate our go-vertical development and overseas development. For our 3rd pillar, display, which has reached a certain maturity. Our positioning is that we hope our display business will continue to provide steady cash flow for the Company. On the upper left, this is the performance of our TV panel business over the past few years. Most times, when people talk about the panel industry, they would pay much attention to the ASP of TV panels, which affect the perceived notion of AUS performance. But if you look at the past few years, our TV panel revenue share has dropped to about 20% or so. And last year, it was 19% compared with more than 40% 10 years ago. So there has been a big change. Going forward with the advancements in Mobility and vertical business, TV panel pricing will have a dwindling impact on our operating performance. In addition, the industry generally expects supply and demand on the market to be more balanced in the next few years as the cyclicity changes. Moreover, this will help us to deliver more steadier performance, helping us to deliver our expertise in the display technology. Moreover, AI PC and automotive applications align nicely with our LTVS technology portfolio. Take AIPC, for example, the increase in computational capability will call for much bigger power consumption. This will mean that the power consumption of other components will have to be reduced. So, the power efficiency profile of panels will be very important for AIPC. The same story also goes for automotive applications. As power train gets stronger and engine gets stronger for automobiles per charge model remains to be a very important point. And this will put stringent tests to the components inside every vehicle including the components of displays. In terms of our resource allocation we will increasingly lower the CapEx in the conventional LCD manufacturing. As Paul mentioned, we will go toward controlling our CapEx and having light asset. Then we will gear more toward the two new growth engines which are mobility solution and vertical solution. First micro LED which is part of the gold premium transformation strategy. We have been talking about micro LED technology with you in multiple cases previously in the micro LED aspect we are a leading company in the world. My priority employs inorganic material. It is self-emitting. It offers high brightness low power consumption and why the angle features it also gets to integrate with multiple materials it has full potential to breach the barriers of the conventional flat LCD units. And it is especially very strong in automotive and outdoor applications. It is also a good option for high aperture display applications and with micro LED-based transparent displays, they can be applied in various places for example in Kaohsiung we are utilizing micro LED to provide windows for cruise ships. As I said, it helps to breach the barriers of many boundaries restrict that have been restricting the applications of LCDs. Last, we would like to talk about our core competence in display technology. We continue to push toward lower power consumption and bring their profile in terms of the operations of factories will continue to improve our operating efficiency and utilize pre-manufacturing techniques including water reservation, water circulation and power saving features. So as to improve our manufacturing capabilities. At the same time, we are delivering circular materials and sustainable materials to our customers to help them to pursue ESG and improve their brand value and product values. While computer just concluded there's still much frenzy surrounding AIs impact and implications. What are the correlations between AI and panels? I would like to share with you this light. We said that next year AIPC will account for about 20% of the global notebook shipments and will account for 70% of the total shipments in 2028. As AI laptops employee MPUs, the increase in computational power will necessitate other components to be more power efficient. Here is on comparison between the power consumption of LTPS and other display technologies. On the upper right in terms of power consumption LTPS is only 40% plus single-layer of lead. Even with Tandem OLED, which is employed by a major brand. Under the same resolution specs, LTPS is still much more power efficient. So, from the perspective of users, LTPS displays offer longer battery endurance and are cooler as well as lighter. Moreover, from the perspective of manufacturing, as we said, panel manufacturing is energy-intensive. So, it's very important to employ power saving techniques. If you look at the carbon footprint of manufacturing, be it emissions or power consumption, OLED is 40% higher than LTPS. Therefore, LTPS is much better than OLED in terms of the power efficiency in use or manufacturing. We are going to leverage these advantages of LTPS, and we believe that this advantage will play to our benefit as the AIPC becomes much more dominant in the market so as to elevate our positioning in the notebook market. I would like to have a to take this opportunity to thank you for participating in our results conference. We have to share with you that AU is no longer a company operating only in the Greater China region as you understand us to be. If you look at this slide, you would know that we have a global footprint in terms of our manufacturing service and marketing and sales. Today, AUO and we will be increasingly a global company. AUO will be a global company based in Taiwan. Today, we have many more colleagues that are international employees and we have many staffers of various nationalities in our fabs to help us pursue global development. Thank you very much for your participation. Thank you, Paul and Frank, for your sharing. Now, we would like to address the questions that we collected from analysts before the meeting.
Operator: The first question is related to BHDC. As the BHDC and AUO merger has been completed for more than three months now, could you elaborate more on the potential synergies? Is there any project or new customer acquisition coming from the deal? Ben, would you please?
Ben Tseng: Thank you for the question. Since the merger in April, consolidation and synergies have been taking have been taken and they are we are working step by step. And we have been seeing some synergies materializing. In terms of the contribution to RPML, some will happen earlier, some will happen later. But we can look at the synergies in the revenue and cost perspectives. First of all, from the perspective of revenue, AUO is a company with advanced and a full lineup of display technologies. We are able to provide high quality products and solutions. More importantly, we provide a vision surrounding pioneering display technologies to help our customers deliver values. At the same time, BHTC has more than 20 years in service in Tier 1 carmakers, plus very strong software and hardware and system integration capabilities. Under the trend of display being merged with more sensor and mechanical components, we believe the consolidation between the companies will help us to elevate the added value of automotive display HMI solutions. In April, the two entities' merger has been completed. Since April, Frank led a joint team formed by AU and BHTC representatives to visit OEM customers around the world. And we are very glad that we have been receiving very positive feedback from customers. Customers told us that they believe the new mobility solution will provide larger in scale and more robust capabilities in our solutions. At the same time, it will help us to deliver more advanced display technologies to customers. Here, we're very happy to also share with you that we have gained very clear accolades from our customers. In April, right after the completion of the merger with BHTC, AUO landed a HMI solution deal from a brand-new customer in the commercial space in Europe. The customer told us very clearly that the reason that they picked us was that they believe the consolidation will help to deliver much more robust software and hardware integration capabilities. Going forward, AUO and BHTC will combine the advantages of the both parties and to serve our customers as a one team and continue to secure more new projects so as to drive stronger growth momentum for the mobility solution pillar. So that was the revenue aspect, but as you know, the automotive segment is very unique in the fact that it has a much longer qualification period. And revenue contribution probably won't happen until two or three years after a project has been won. So besides winning new projects, we would also pay attention to the timing of cost synergy. So, in terms of the cost saving benefits, we quickly took stock of the resources of the two companies and immediately we identified some low hanging fruits in terms of cost savings. For example, AUO has idle cash in our subsidiaries in Suzhou and Xiamen and we landed the idle cash to the Shanghai subsidiary of BHTC, which used the cash to repay the parent company in Germany in Euros. This helped the company to avoid Forex risk and also reduced withholding tax. The interest alone would the interest savings alone amounted to EUR3,000,000 every year. And similar cases can be seen in many other places, including the complementary nature of the manufacturing sites of both companies, the optimization in production lines, the improvements in product management and quality management and also the improvements in automation capabilities as well as cost reduction of procurement. Of course, some cost optimization benefits will not materialize until sometime later, and they will not happen without the collaboration between us and customers as well as supply chain partners. But the benefits yielded from such collaborations will be extended far beyond today. For example, mechanical design -- the design of mechanical components, the optimization of materials, et cetera, which will help us to optimize our cost. And will benefit our cost structure for the long run. Because of this, we have set up a cross-functional task force for which we have identified appropriate projects to achieve further optimization. So, to achieve these long-term benefits, we will have to work with our customers and our supply chain partners. Finally, in terms of cost synergies, we are also focusing on OpEx, prioritizing using fewer resources to support our growth going forward. AUO and BHTC each enjoys strong growth momentum in the Automotive business, which requires resources allocation to support growth going forward. The KOS energies will come from many aspects, including the sharing's of test devices, the mutual support of R&D staff and the utilization the optimal utilization of operating sites and management resources as well as the optimization of logistics and transportation. These are the aspects that will help us to sustain our optimization efforts going forward and also helping us to support our long-term growth using less resources going forward.
Operator: Thank you, Ben. The next group of questions are financial questions. First, could you provide an update on the full year G&A and CapEx? Secondly, as you pursue a Super SU transformation, you will have more than panels in your business portfolio. How will that affect your demand for working capital? And how will that affect your profit structure? David, please.
David Chang: In terms of D&A and CapEx, we maintain our guidance that we provided last quarter, meaning that the full year depreciation amortization will be around NT$34 billion. CapEx will be no more than NT$33 billion. Secondly, in the future, as we focus on the three pillars, as Paul and Frank mentioned. We will allocate more resources in mobility solution and vertical solution and micro LED of the display business. So overall speaking, the conventional display business' CapEx will gradually decrease. As we focus more on mobility and vertical, the working capital implications will increase. To our group, we will shift away from heavy capital investment and shift it toward appropriate management and using working capital appropriately. As we focus more on the three pillars, how will this play out for our profit structure in terms of margin? Vertical solutions margin will be higher than mobility, which will have a margin profile that is better than display.
Operator: Thank you, David. The next question is related to display market updates and now look. Recently, there are panel makers utilizing OLED in the IT and automotive applications. What is your view about this trend and how would you deal with this trend? James, would you please?
James Chen: Ladies and gentlemen, good afternoon. Recently, some brands are promoting dual layer OLED panels and it has created quite some buzz. Tandem OLED requires more complicated process and it will entail higher carbon emissions. However, the complexity in process will also mean a drastic increase in cost and the cost could be multiple times higher than LTPS manufacturing at the same time. The power consumption will still be about 40% more than LTPS and the carbon emissions is 40% more. Therefore, only very few models will employ such kind of OLED panels. At the same time, LTPS delivers better power efficiency and in our next generation LTPS technology, which is ECO [ph] plus LTPS. We will further lower the power consumption and we will improve this feature in terms of the reflection of ambient light. So, for long-term use and eye care, this technology will be very beneficial. For automotive applications, we employ LTPS and AmLED. This has been a mainstream technology in the market. In terms of automotive applications, high brightness is required, and LTPS consumes only half of the energy of OLED models today. OLED only accounts for 1% of automotive applications, whereas LTPS accounts for more than 30% and will very soon breach 50%, and many carmakers still have concerns about the cost and reliability of OLED, and they continue to employ LTPS panels.
Operator: Thank you, James. [Operator Instructions].
Diana Chang: Good afternoon, executives. I am Diana from UBS. My first question is about your three pillars, including vertical mobility and display. Do you have a projection for the revenue breakdown of the three pillars? And in the mid- to long term, as your product mix changes, do you have an objective or target for your margins? Second question is about NAPLP. I think there's increasing interest in advanced packaging. Could you provide more color around your preparations and your view of this technology? Thank you.
Frank Ko: Hi, I'm Frank. First up, about the revenue breakdown, our goal is for them to each take a portion equally. We share a slide on our 2027 goal, which is for mobility and vertical Solutions to account for more than half. And after that, we would focus on improving the revenue growth of these two pillars and improving their portions. So, the goal is to persistently improve Mobility and Vertical Solutions revenue. And how would that affect the display business? Will that mean the display business in any way? We believe it will actually provide a steady outlook for our display business because as we deliver more steady growth in for our revenues, there will be a less impact negative impact on our UT rates. And we will get to focus more on providing high quality products and delivering better mobility in vertical solutions, which provide higher visibility and in turn, help to stabilize the older visibility of display business and also our UT rates. And about the pent up LP. It has been a hot topic for the past three weeks or four weeks. Actually, AU has done some studies in the past. So, this topic is not a new topic in the industry, has been here for the, a very long time, but it was discussed in the packaging industry. Actually, several Osaka vendors in Taiwan have allocated production in this aspect. And globally, Korean foundries have mass-produced some products using this technology years ago. For example, they have been using this to manufacture processors for wearable devices. The reason that it has not been ubiquitous or widely adopted is that it has this kind of cost profile, cost structure, that limits its applications. If you consider replacing circulars or PCB substrates with glass substrates, the change in cost is actually quite limited, hence limiting its applications in the past few years. The reason that this has become a very hot topic was that a company -- a leading company is considering exploring the possibilities. It's also because AI chips become much bulkier. For AI packaging, you need to package high-bandwidth memory as well. So, it means that you have to deal with power consumption and cooling issues. Therefore, the companies wish to replace circular silicon wafer with square substrates. That's one point. Of course, there are also technical requirements or considerations. For example, in terms of the cooling aspects or thermal or power profile, glass substrates deliver better cooling characteristics. They deliver more favorable thermal expansion coefficient. So, the variation in terms of expansion are more limited, which lead to higher stability under high temperature. And glass may be a better alternative to address the warpage issue as chip size gets larger. This is one of the initiatives that we think glass substrates or this kind of packaging technology would entail. But whether or not this will become a mainstream, we would need to have more research. But we are convinced that in terms of glass techniques or process or know-how, we have built a very strong foundation. And we have been doing some studies in the past. When the time calls for it, we will be able to drive our progress forward very quickly. But at the moment, we will focus more on the aspects that we deem more important. And we will be investing resources and working with our partners to develop the technologies and process required for further development. And if there's any decision that we are going to make, we will let you know.
Unidentified Analyst: Good afternoon, thank you for taking my question. I am Kevin from Morgan Stanley (NYSE:MS). I have two questions. First is about the synergies of BHTC acquisition. Could you share with us your OpEx target past the consolidation? Secondly, could you provide more color on your macro-LED and mini-LED product plans and market progress? Thank you.
Paul Peng: In terms of OpEx, I will address this question. In Q2, our OpEx was NT$8 billion or so, partially attributable to the contribution of BHDC. As the two entities just became merged, this OpEx was at a higher level. As we have been through consolidation for more than 100 days, we are utilizing many methods to integrating our resources. Under the current revenue level, I think this OpEx level is quite high. And with our collaboration steepens, we believe the OpEx will gradually go down. In terms of micro LED, this year, we have showcased our products at CES and Touch Taiwan. We have demonstrated our capabilities to deliver Micro LED solutions in many areas. In terms of large-size displays, we have mass-produced a model along with our partners, which is available on the market today. Also, in terms of transparent displays, we have been applying them in multiple areas, including commercial, cruise ships, etcetera. And it is expected that transparent display will become a very attractive product going forward. And we have been receiving very good feedback from users in the commercial aspects, including car windows and smart cockpit applications, moreover wearables because in the outdoor environment, such applications would need to be high brightness and Micro LED is a high brightness technology. So, besides car windows, you also need to have high brightness displays in many aspects. Micro LED is in use, employed in organic materials, and it withstands high temperature and humidity, making it a very suitable technology for automotive displays. Micro LED is a key aspect of our gold premium strategy. At the same time, it aligns very well in, with the other two pillars that we have. Going forward, in the AR goggles, silicon based Micro LED will also serve as very strong applications because when it comes to AR goggles, you need to have high brightness technology. Macro LED happens to fit right into that feature. Also, in terms of HUD, heads up displays for cars, Micro LED also is a right fit. So, these are the market segments that we have been gaining traction in. At the same time, when it comes to the conventional monitor or notebook panels, we continue to do our studies and we are working on providing foldable laptop panels. This year at MWC a major notebook client of ours employs transparent micro LED in their new product. So, in terms of emerging or advanced applications, micro LED are very strong, but also in the conventional space, micro LED provides very good solutions.
Lisa Chen: Hi, I'm Lisa from Yuanta Securities. I have three questions. You talked about Avocor acquisition. Could you tell us more about the reason that you take over this company and also the synergies that you expected from the acquisition? The second question is on your loading rates. Could you provide more color around your loading rates in the past two quarters and also provide us a projection for Q3? Moreover, about your profit, you have provided revenue guidance for Q3. Will you expect your OP to stay in the positive range? Could you also please provide some guidance about Avocor?
Paul Peng: We have been working on strategic collaboration with Avocor for some time now. A few years ago, AUO invested in a Taiwanese company sector which is a partner in the education ecosystem. It is a specialized company in Taiwan's K-12 education space. It also marks a very important example where we have extended our presence from large-size PIDs or interactive whiteboards to a very specialized education application space. And with that, we also pushed our presence forward into the high education space, helping sector to provide its solutions in universities around Taiwan. For example, on the slide that we shared with you previously, one of the photos that we had was from a top university in Taiwan which has a smart classroom. And at the same time, we also helped this company to provide solutions in the enterprise space. For example, in Taiwan, the stock exchange has adopted our solutions. So, besides education, we also have entered into the enterprise space. Today, besides AUO, many other companies are also increasingly more globalized. We have teams around the world who have to work across time and space. And this is a change that has been happening post the COVID pandemic. So, teleconferencing has been a very important driver for companies to improve their work efficiency today. This is the case with many companies around the world today. And Avocor is a company focused on smart display applications for enterprises. This company is a fast-rising brand in North America. And in the past few years, it has been performing very strong in terms of revenue growth. And today is still a somewhat small third scale company. What we have been able to achieve is pursue collaboration through Avocor, and using the PIDs for AUO Display plus and Jeptar, we have performed we have formed a very strong ecosystem road map using our core competency in display technology and leveraging our set product partners in our ecosystem and to leverage -- also leverage vertical application partners to really create win wins for all. And actually, education and enterprise applications rely heavily on local services. And through the collaboration with Avocor, we hope that we will be leveraging its local service and channel sales capabilities to pursue better development. And with this, we also are pursuing growth in the E&E space. I will address the second and third question from Lisa. First of all, about gross margin in Q3, I think Paul has provided some guidance for our Q3 revenue. So, I am not at liberty to provide more specific detail about our Q3 margin because that would be associated with financial forecast, and we are not at liberty to disclose such information. As for the third question on the loading rates, In the Q1, it was around 80% and in Q2, it was slightly better than 80%. And beyond Q2, I think with our presentations and discussions earlier, including the guidance that we provided, I think you can refer to our projection for the three pillars. I would suggest that you look at the three pillars, especially with the mobility solution and vertical solution and automotive display HMI and the inclusion of BHTC. As mentioned, we expect our display revenue share to lower gradually. So, I think if you want to project for our revenue or profit, the conventional methods including loading rates, area shipments or unit price projections may be less meaningful. We will recommend you change your modeling using Theta based on the growth momentum of our three pillars.
Unidentified Analyst: Management team, good afternoon. I am Jamie from KGI. You talked about your three pillars and the fact that mobility will account for 26% versus 16%. So, these two will account for 42%. If you are to post double digit CAGR, do you mean that we can expect that you are going to deliver 5% revenue growth incrementally? And also, for your gross margin, as Debbie mentioned, vertical would deliver stronger margin than mobility, which will still have a stronger margin than display. Does that mean that in our modeling we can allocate perhaps 10% of margin to that and for the other half we will have to look at the supply and demand of the display business? Is that the right approach to do modeling?
David Chang: Thank you. I think you have given quite a precise analysis. For the first question, in terms of our long-term outlook, yes, we are expecting a double-digit CAGR for mobility and vertical and we expect to see them persistently going up year after year. As for the margin, of course, we are still allocating our resources at the moment. And for these three pillars we are hoping to achieve optimal resource allocation, including we are seeking to utilize DSBG's resources and resources for automotive applications more optimally. We will also pursue growth for the mobility solution and vertical solution business group. So, we hope to achieve optimal utilization of our resources and in terms of gross margin, vertical will be higher than mobility. With resource optimization done, we hope that on average they will be higher than display and that is our goal. All in all, what we are going to do has to do with one thing that Paul mentioned, that is we want to ensure that our profitability will be steadier going forward and we want to become a solution provider that can build upon our display expertise that we have built over the past 20 more so years. We haven't talked about healthcare application today, but a analyst asked me earlier that how did we manage to deliver such powerful 3D medical monitor and that monitor delivers very strong simulation effects. I will have to tell you that we didn't get to build that 3D monitor just because what we have been doing last year. It has actually been a result built upon our expertise that we have been accumulating over the past decade or more, and we are just deepening our presence in the medical application segment. Today, we have gained FDA approval overseas for that 3D monitor. As you can imagine, this kind of product would probably deliver few revenues in the beginning, but going forward, its pricing and margin will definitely be much higher than the pure display products. And it will help us to drive our GoPremium, GOVertico [ph] business going forward.
Unidentified Analyst: We have two questions from online participants. First of all, could you provide us with some cover around the inventory levels of the downstream branded vendors? Secondly, has your mobility solution guidance been affected by the recently lower demand for EVs?
Unidentified Company Representative: In terms of the impact of EVs on our mobility solution growth. As people are adopting EVs and are departing away from internal combustion engine vehicles or people may opt for hybrid cars, they don't affect smart cockpits because smart cockpit solutions deal with users directly. You would need to have smart carpets in all kinds of vehicles, and this is something that we have to pay attention to in terms of our strategic road map. With the merger with BHDC, a U.S. Mobility solution is the only provider in the world, in the industry that is able to provide digital and analog rotary button solutions. This will allow us to support the development of many brands. Thank you. In terms of inventory levels of brands, after the conclusion of Q2, due to the prolonged schedule of transportation and shipping schedules, Thus, the restocking activities in advance of the three major sports events. Inventory levels have been one week or two weeks higher than the normal levels, but they are still perceived as healthy levels in response to the sports events. After the conclusion of the COVID pandemic, brands have been dynamically and working relentlessly at adjusting their stock levels. And today, people the inventory levels have been quite healthy across the board. Thank you.
Operator: We don't have any other questions on the floor and online. This concludes our Investor Conference today. If you have any other questions, please feel free to contact us at AUO's IR department. Thank you.
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