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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Okay, so hello, everyone. So welcome to Delta First Quarter 2019 Investor Conference. As usual, we will start right now and we will have our IR Manager, Rodney, to report the financial numbers of Q1.
So thank you all for coming. So before we start, I need to remind you that all the financial numbers are reported based on IFRS and the consolidated numbers have been reviewed by CPA.
So the Q1 revenue was seasonal up 6% YoY, but down 16% QoQ. The 6% YoY growth was similar to last year's. So sequentially, we saw a seasonal decline in each segment, but year-on-year, we saw increase in each segment. Automation was slightly weaker due to the sluggish IA demand, otherwise we had the little growth across the board.
Gross profit in Q1 was TWD 14.3 billion, up 10% YoY, but down 22% QoQ. So gross GP margin in Q1 was up to 26.3% from 25.6% in a year ago.
Our Q1 R&D expenses as percentage of sales increased slightly to 8.7% from 8.4% in Q4 and 8.3% from a year ago. Year-on-year, the increase of R&D expenses had a lot to do with the expansion of our EV solution team.
On the other hand, with the unfavorable scale, SG&A ratio slightly increased to 11.8% in Q1 from 10.7% in Q4, but remained flattish compared to a year ago. Total OpEx in Q1 was TWD 11.1 billion, down 10% QoQ, but up 9% YoY.
The expenses ratio hit a new high at 20.5%. We expect the ratio to be a little bit lower in the following quarters, but the absolute numbers will continue to grow. As a result, OP margin in Q1 increased to.5.8% from 5.5% in a year ago, but decreased from 9.2% in Q4. Total operating profits increased by 13% from a year ago.
So here we provide some breakdown of operating profit by sector for your reference. Year-on-year we saw the profit improvement in both Power Electronics and Infrastructure, while the profit decline in Automation was mainly related to the cost increase compared to a year ago and the lack of growth, the increasing expenses. And the non-operating profit was within the normal range. It was around TWD 800 million in Q1. So in Q1, we had TWD 3.9 billion profit before tax, down 46% QoQ, but up 6% YoY. The pretax margin in Q1 was 7.3%. And our EBITDA in Q1 was TWD 7.0 billion, which was up 6% YoY, but down 31% QoQ.
Q1 tax expenses was about TWD 500 million representing a 12% effective tax rate. The lower tax rate compared to a year ago was because of the one-off tax reversal under LTAC. So the net profit after tax in Q1 was TWD 3.4 billion. And our EPS in Q1 was TWD 1.3.
So if you have any questions, you may ask now.
So as you mentioned that actually in Q1 you have some inventory write-down. So could you please give us more detail about this inventory write-down?
So for your question, I don't think that is anything abnormal because it is actually quite seasonal. So because our revenues, I mean, the scale in Q4 is always bigger than the scale in Q1. So that is actually some seasonal matter.
So could you please give us more detail about the 5G deployment or investment cycle?
I think actually everyone, like every country is talking about the 5G right now. But actually in our point of view, we believe is still in the very early stage and actually in many countries, the 5G deployment is still experimental.
But as far as I know that because the frequency, I mean, of 5G by nature is higher than the 4G, so the coverage, I mean, the penetration of 5G, actually the penetration -- the coverage is lower than the 4G's. So you need more base stations for the 5G. So the only thing I can say is that we have got everything ready for that, but we don't think that we will see the real significant contribution in the near term.
So for your question regarding our Automation segment, I think the current issue is actually the market or those factory orders they are quite cautious about their CapEx investment, but if you look at the PMI, I mean, the China index, you can see that the PMI number in last month has already picked up a little bit from last month. So we think that it doesn't mean that -- the quiet market right now doesn't mean that there is no demand for the automation, but just there will be some orders delay or some demand delayed.
So I just came back here from our Wujiang factory in China yesterday. I can tell that the trend for the factory automation and -- is really clear, that the trend is really clear.
So the only thing -- I mean, only question for this is be posed to keep an eye on governments, I mean the U.S. government and the Chinese government's attitudes, so nobody really dare to invest a lot in the current moment, but we still believe that the trend for industrial automation will continue.
So how do you see your Power Electro business? And do you have any expansion plan for distributors in the second half of this year?
Okay, so the biggest application for our passive component business, traditionally the biggest application -- the biggest market was the IT-related market, for example, the mobile devices, the smartphone, so on and so forth, but going forward, automotive market, the bigger market -- will be the bigger or more important market for this business going forward. So -- but there will be something different like, for example, the materials will be different -- in different kind of -- for different kinds of applications. And also, the spec or the requirements for the automotive application will be actually higher than the spec for mobile devices because the environment and the vehicles are actually much more demanding. So we have been working on this for around 2 to 3 years, so I'm sure that this business will continue to grow well with the new application.
Okay, so for your second question, you were asking about whether we will have any expansion plan for our cooling fan business.
Okay, so for this question, actually we have many factories making these cooling fans already. So our factories in Wujiang, Dongguan and even in Thailand after we acquired Delta Thailand that we actually have a few -- a couple of factories making these products. But the same story because the biggest application for cooling fans, which used to be the IT-related market, but the market is actually getting more and more mature now. So the future trend for our products, cooling fan products, is going into 2 different directions: One is, we work on the bigger things, for example, the cooling fans for the vehicles and the other one is we work on the cooling fans for smaller devices. For example, we actually -- recently, we produced the smallest cooling fans for gaming smartphone. So we actually have a series of different kind of cooling fans. So we will keep working on our diversification for the product and our businesses.
As far as I know that you have announced that you will have some future plans for building up some new buildings, office buildings, including some new factories in Taiwan. So can you give us more detail about your -- the idea of building these plants and these office buildings?
So I think that for us, Taiwan is more of a R&D center instead of a really big manufacturing campus. So especially after we acquired Delta Thailand, right now, we have our factories and our manufacturing plants in China, in Thailand, in Taiwan and some other countries. But we will move some product lines, which are in the government list after trade war from China to Taiwan, but Taiwan is not going to -- but we don't have any plan to really replace China as the manufacturing base by Taiwan.
What do you think of the margin profile going forward after consolidating Delta Thailand?
So actually, we just recently started to consolidate their numbers from this month. So we still need to keep closer eyes on their financials, but we have already sent some people to their -- sent our representatives on their board. I'm sure that with the help from us, from Delta Electronics, there will be some extra help on their businesses and as well as their financials.
Okay, let me explain the products, the products in our cooling fans business. Actually, we not only have some cooling fans like the one that you can imagine that, you have many blades to -- moving blades to dissipate heat. We also have some other thermal management products as well as some other cooling products such as the vapor chambers.
So traditionally, actually, the smartphones, they didn't use cooling fans, I mean the real fans within the devices because they didn't have so much space to keep this component inside. For those kind of gaming products, the gaming smartphones because they generate a lot of heat. So they need to use this kind of fans to help to dissipate the heat more efficiently.
So as far as I know that you have like over 80% of your capacity in China. So after you consolidate Delta Thailand, how would you reallocate your capacity going forward?
For this question, I think that we will -- it depends on the final result of the U.S. and China trade war. So we don't really rush into this -- to do any reallocation.
Okay, so then for amortization, could you please give us any detail of your amortization plan for the DET deal?
We are still doing the calculations at the moment. So we don't have answer yet, but we believe that in the second quarter that we will have a clear plan for the amortization plan because right now, we are still discussing this with our accountants. Okay, so for the data center solution business, actually we provide data center infrastructure. So for example, traditionally, actually, we were selling a lot of kinds of products. So we had fans, we had towers and we had UPS. But we just sell them like double utility to the clients. But for certain kind of clients such as the big internet -- those giant internet company in the US, so for those kind of big clients actually that we can sell them a solution of our products. So that's the idea of our Infrastructure segment. So if, for example, for those kind of internet companies, actually we can sell them our -- we can sell them our towers for -- the racks, we can sell them the racks, we can sell them the UPS, and we can sell them our cooling system altogether, so that makes our data center infrastructure.
So I have a rather short-term question regarding your gross margin and operating margin. So because you mentioned that the unfavorable scale in first quarter put some pressure on your margins. So can we expect that in the following quarters when the scale is getting bigger in the following quarters and the margin can be improved?
So my answer is hopefully, but I still need to remind you that because, as you may know, that actually many components, I mean, the component costs have increased a lot in the last year and then the component costs went down by much as well recently. So because we enjoy a little bit price interest when the costs increased last year, so after that our clients, they will just come back to us and ask for the discounts when your component costs are going down. So that might be a swing factor on our gross margin.
Okay, so for your question asking about our OpEx number. As we are -- we chose certain areas or certain fields which are our -- the growth drivers for the company going forward. So for these new businesses, actually we still need to keep investing many resources into these new areas. So the only thing I can say this, the absolute number of the -- the OpEx number -- the OpEx will continue to grow for sure, but we hope to manage the expenses ratio within a certain range. Because after we consolidate Delta Thailand, actually the scale will become back up -- the scale of the whole company will become bigger, much bigger, so the OpEx ratio may go down a little bit compared to the current level. But I think that at least 7% invest into R&D is the policy, I mean, of Delta.
Okay, so my question is still regarding the data center solution business. Because as far as I know that I heard about some companies, for example, Intel, they have revised down their guidance for the rest of the year, especially for the second half of the year. So how do you think of this segment?
My answer is, we don't feel that passive, I mean, for the demand for the data center solution business.
Okay. So actually the business nature and the seasonality of data center solution business and the IT, for example, -- for like Notebook and desktop PC business are actually quite different. So for example that for Notebook business, there you have a pretty rather clear seasonality, but for data center there you don't have this kind of seasonality because each of the big clients or big customers within the market, they have different kind of CapEx cycle and different plans for their new investments. So the seasonality there is not so clear -- I mean is not so clear compared to the Notebook market.
Okay, so after you acquired Delta Thailand, how should we think about your CapEx plan going forward, for example, for this year and next year?
So actually, our CapEx number has been like TWD 10-plus billion for a couple of years, so I don't think that after we acquired Delta Thailand, you will -- it's going to increase a lot because Delta Thailand itself is actually a cash-in company. So it wouldn't have so much impact on our CapEx. But for ourselves, actually, we have acquired some land for new office buildings, as we just mentioned earlier. So our CapEx investment may increase a little bit for this reason.
So how do you think of the demand or the outlook for the second quarter this year?
So right now, that we actually expect in the second quarter normal seasonality, which means that organically speaking excluding the contribution from Delta Thailand, we will still have some growth in the second quarter.
So if you say that actually, we will have some organic growth in the second quarter, so what are those growth drivers in the second quarter?
I think Infrastructure is one of the growth drivers and telecom power is one as well and the cooling fans, passive components business. But the IT-related products or businesses would rather flattish -- would rather be flattish.
Okay, so for your question regarding the renewable powers, especially our wind power business, actually, we don't have so much exposure in the wind power market. We only provide power, I mean, the convertors, the inverters for the wind power market. But many -- as far as I know, there are many countries, for example, the European countries as well as China, they have largely done their construction in this wind power, but Taiwan here is still thinking of building some new infrastructure for the wind power.
Do you still have any other questions?
My question is still about the data center solution business. How do you think of the ASP and the margins of data center solutions going forward?
So the scale and the power consumption of the data center is actually getting bigger and bigger. For regular size of data center, it's normally around like 2 megawatts. So many of those bigger data centers -- the power consumption of those bigger data centers actually equals to the power consumption of a city. So the power efficiency of data center is crucial for the data centers and for internet companies.
But if you look at the data traffic, actually the data traffic is growing significantly, so that is a pretty clear trend. So within data centers, the GPU and CPU consume the majority of the power, which is something that we can't change, but the things we can do is we can improve the conversion, the power efficiency of the power supply of the servers.
So there is major for the power efficiency of the data center, which we call it PUE, power usage efficiency. So the normal PUE of data center is around 2.0, but ours is 1.3 plus. So in order to achieve better power efficiency, actually we can do 2 things: One is we can improve the efficiency of the power supplies of those devices, including the servers; and the other thing is we can improve the cooling system, the design of cooling system because when you are -- when those devices are running within the data center, actually they are generated -- that you need to use the air conditioning system to dissipate the heat and so it consumes even more energy. So these 2 things are the things that we can do in order to achieve better power efficiency.
So in that case, we believe that the design of the data center infrastructure is really, really crucial.
Okay, so as you say that -- as you said that the demand -- the near-term demand in -- the near-term high demand in China depends on the trade talk between the U.S. and China governments. But can you give us some more idea, like, about your strategy? How should -- how are you going to deal with this?
So our strategy is always we try to transform ourselves from component supplier to a solution provider. So we are actually working on many different things. But one thing that we try to provide a more integrated solution with our in-house products to our clients and the second thing is we try to integrate many different kind of softwares of our products and we streamline the interface and the platforms, softwares within the factories. So our goal is to making the -- I mean the manufacturing lines and helping smarter and smarter. So if you have don't have any other questions, thank you for coming today. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]