Delta Electronics Inc

TWSE:2308

Q2-2025 Earnings Call

[Unknown Executive]

Hello, everyone. Welcome to our Q2 earnings call. So before we start the Q&A session, we will have our IR, Rodney, to report the numbers of Q2.

[Rodney Liu, executive]

So now we are going to review the financial numbers of Q2. Q2 revenue reached TWD 124 billion, marking a record high quarterly results. This represents a 20% yield year growth and a 4% sequential increase. That said, the strong appreciation of NT dollar against the U.S. dollar in Q2 somewhat weighed on the reported growth making it a little bit lower than originally expected.

Gross profit in Q2 was TWD 44 billion, up 25% year-on-year and 17% quarter-on-quarter driven by robust shipments from our data center-related and passive component businesses. GP margin in Q2 was 35.5% versus 34.1% a year ago and 31.8% in Q1. Both the dollar amount and the margins were record highs. Q2 OpEx increased by 14% year-on-year and 7% quarter-on-quarter, with SG&A growing a little bit faster than R&D expenses in Q2. R&D expense to sales was 9.5% compared to 10.2% a year ago and 9.3% in Q1. SG&A spending to sales was 10.9% compared to 11.2% a year ago 10.7% in Q1. The OpEx ratio declined to 20.4% from 21.4% a year ago, but slightly increased from 20.0% in Q1. Thanks to the favorable GP margin, OP margin in Q2 substantially improved to 15.1% from 11.8% in Q1 and 12.7% a year ago, reaching an all-time high. The operating profit in Q2 increased by 42% over the year and 33% over the previous quarter.

So in terms of the segmentation performance, year-over-year, Infrastructure delivered the strongest revenue growth followed by Power Electronics, thanks to the robust data center demand, Mobility, however, continued to struggle due to ongoing market weakness. While automation was impacted by broader macroeconomic headwinds. Quarter-over-quarter, Power Electronics recorded the fastest growth while mobility and infrastructure showed very modest sequential improvement. Automation on the other hand, remained relatively soft.

Earning-wise, except automation, all other segments recorded varying degrees of Q-o-Q improvement. On a year-on-year basis, Infrastructure posted the strongest profit growth, followed by Power Electronics. In contrast, Mobility's 1Q loss amid ongoing market softness, while Automation also came under pressure from the macro headwinds.

Q2 was TWD 900 million versus TWD 1.6 billion in Q1 and TWD 1.9 billion a year ago. The loss in foreign exchange income was driven by the strength of Thai baht over U.S. dollars, while the losses from the investment were mainly related to some minority holdings. In Q2, we had TWD 19.6 billion profit before tax, up 30% year-on-year and 25% quarter-on-quarter. Q2 EBITDA reached TWD 26.8 billion, up 24% year-over-year and 17% quarter-over-quarter, setting another all-time high.

Q2 tax expense was about TWD 4.2 billion. The effective tax rate in Q2 was 21.6%. Net profit after tax was about TWD 13.9 billion, up 40% year-on-year and 36% quarter-over-quarter. So the Q2 EPS was TWD 5.37, achieving a new historical high.

So now we have a look at the accumulated numbers of the first half. So the first half revenue was TWD 242.9 billion, up 25% from a year ago. Gross profit was up 31% year-on-year with margin improving to 33.7% from 32% a year ago. So the OpEx in first half was up 18% year-on-year with SG&A up 18% and R&D up 17%. So thanks to the improved economics of scale (sic) [ economies of scale ], SG&A as a percentage of sales dropped to 10.8% from 11.4%. The OpEx ratio also shrank to 20.2% from 21.5% a year ago. As a result, OP margin in first half was up 59% year-on-year and OP margin improved to 13.5% from 10.5%.

So in terms of the segmentation performance, Infrastructure and Power Electronics delivered strong revenue growth, followed by a moderate pickup in Automation. Mobility, however, continued to face soft demand. On the earnings side, Infrastructure recorded the most notable profit expansion with Power Electronics, and Automation also seeing some improvements. In contrast, mobility swung to a loss amid a continued weak market environment.

So the non-OP income came in at TWD 2.5 billion, down from TWD 3.3 billion a year ago. So in first half, we had TWD 35.2 billion pretax income. So the first half tax expense was around TWD 7.9 billion, representing a 22.3% effective rate. So the net profit after tax was TWD 24.2 billion versus TWD 15.7 billion a year ago. So the EPS in first half was TWD 9.31, up 54% from a year ago.

[Unknown Analyst]

So first of all, congratulations on the very strong results this quarter. So I have 2 follow-up questions to ask. So first of all, we know that we have a very long-term ambition and long-term plans, I mean, regarding the data center-related businesses. And then we also saw one of your peers, American peers, they just gave the market a pretty positive outlook for the next couple of quarters. So could you please just give us some updates or give us maybe more color on your plans, I mean, regarding the data center-related business or your product road map and so on and so forth.

[Unknown Executive]

So first of all, I mean, in response to your question, as I previously or repeatedly, I mean, explained, the data centers, especially those hyperscalers, they continue to invest aggressively into the data center -- AI data center deployment. And it seems to be a pretty clear trend right now. Of course, I mean, going forward, especially if you're looking into the next couple of years, it's still very highly subject to whether this AI deployment can really translate into the profit contributions or the revenue contributions. But still, if you look at the recent results just announced by the U.S. hyperscalers, I think if I remember correctly, I think at least some of those hyperscalers, they actually reported pretty decent results, which can somewhat underpin their continuous investment. So that would be the preliminary view on the AI investments or data center investments by those hyperscaler customers.

[Unknown Executive]

So I may have some points to add on. So first of all, I do believe that in terms of the product footprint, we do have a pretty complete spectrum in terms of the product footprint, I mean, to the data center market, including our power products, power solutions and cooling solutions such as the liquid-to-air cooling solutions and also the liquid-to-liquid cooling solutions.

Speaking of the liquid-to-air solutions, we do believe that we actually enjoy pretty high market share in the liquid-to-air liquid cooling market. But speaking of the adoption rate of liquid-to-liquid systems, I think it's something we are not entirely certain about. While it does, I mean, offer better energy efficiency than liquid-to-air and significantly lower CPU cost, but the infrastructure complexity, cost and long deployment time make the adoption challenging. But ultimately, the penetration rate will depend on data center operators' strategic considerations, which remain unclear at this point. In contrast, liquid systems are gaining traction due to their faster deployment.

[Unknown Analyst]

Okay. So the second question is related to your service revenue. I mean if we look at the service revenue accounts for the total revenues, I mean, for your -- sorry, for a U.S. competitor, say, Vertiv, they actually account for quite a big part of their revenues. So when will we see, I mean, this service revenue is going to be, become a big part to your revenues.

[Unknown Executive]

So in terms of the service revenue, I think currently, they accounts for relatively pretty minimal part of our revenues. So I think it's going to take quite some time before we see it become more meaningful, I mean, in terms of the service revenues.

[Unknown Executive]

So I also have some points to add on in terms of the service revenues. So as a head of I mean, the M&A activities, I mean, at Delta, so we actually have been looking at -- we are also looking at the opportunities in the market and seeing that if there are any opportunities that we may maybe acquire some of the service, some of the target companies, they offer the services, I mean, to those data center customers.

And then also speaking of the service, I mean, if you look at the data center market, you can actually further separate it into the white space and the gray space. So it's actually more complicated than we think -- than we thought. So I think -- but we actually keep an eye on the market in terms of the potential acquisition opportunities in this area.

So in terms of your question related to how we view the AI outlook in the second half of this year. I think I just checked the data. I mean for the CapEx spending, CapEx plan of Delta -- sorry, of Meta this year, it should be TWD 72 billion. So I think in terms of the outlook for the second half is probably not going to see any significant turbulence. So that would be my point of view.

[Unknown Analyst]

So my question, how much was the impact of tariffs in Q2? And has it been passed on to customers?

[Unknown Executive]

Most customers have agreed to absorb the additional U.S. tariffs, though we cover some upfront, so which was good as operating expenses. However, considering the scale of Delta, the overall impact was not very significant. Can.

[Unknown Analyst]

Can I assume that your margin expansion -- strong margin expansion, I mean, in Q2 was mainly related to the very fast growth of your AI products?

[Unknown Executive]

But actually, if you look at our GP margin in Q2, I think it's just about like 1 percentage point higher than the previous year. So of course, I mean, the overall server power or overall data center-related businesses, I mean, the margins -- those margins are higher than other product lines. But we think, yes, of course, they are higher, but just yes.

[Unknown Analyst]

So what is your current -- I mean, the current adoption rate of power? Will large-scale adoption only happen after [ Kuber ] platform launches? If not, under what conditions might CSPs adopt earlier?

[Unknown Executive]

So as AI servers become increasingly complex, the trend of moving power supplies to a centralized rack is becoming more apparent. We already have some designs, ready with customers. And once they decide to adopt, we can quickly enter mass production. But the [ Kuber ] platform requires not just a stand-alone power but also high-voltage DC stacks due to its extremely high power consumption, which requires higher voltage to manage current heat within controllable limits.

In response to your questions, I mean, in terms of the deployment for liquid-to-liquid solutions or systems, so I think as we just explained, if you want to really adopt or deploy the full liquid-to-liquid solutions, I think you actually -- I mean, for data centers, they actually require -- I mean, they actually have very high requirement in terms of the infrastructure or the facility level. So I think at least, the liquid-to-air solutions are going to be probably the mainstream for a while, considering the reasons we just mentioned.

So for those reasons just explained, so if you really want to adopt the liquid-to-liquid solutions that you may -- I mean, of course, either you build up the new factories or sorry, new data centers or you have to retrofit the existing ones. So considering all those reasons. So we may probably not really going to see that happen in the short run.

In terms of our overall production plans for the -- for our data center-related business, I think considering the cost, I mean the manufacturing cost, and the supply chain, so I think it's more likely that we will continue to produce the components in Asia. Of course, I mean, if you look at the tariff of Thailand, if it remains high, I mean at the 36% level. So we may not continue to expand or to move or shift our production to Delta Thailand -- to Thailand if the tariff remains at this current level.

But in terms of the capacity in the U.S. We already have some capacity in the U.S., and we are also building a new plant. The current expansion plan actually has not been adjusted during tariff change. So our primary purpose for expanding in the U.S. is to be closer to customers and offer better system solutions and services. And however, manufacturing costs in the U.S. are much higher than in Asia and the lack of a complete supply chain makes full component manufacturing very difficult. System assembly is fiscal, but replicating Asia's supply chain is very challenging.

[Unknown Analyst]

So my question is related to the humanoid robotics. So for example, I mean, Delta is going to -- or maybe has the plan to participate or to penetrate into this market. So when you may consider to -- sorry, where you may consider to produce the components or the products of the humanoid robotics.

[Unknown Executive]

I think we do believe that, I mean, the market for this humanoid robotics is enormous in the future. But I think the key in terms of the service robots, it's not really related to maybe the components or the hardware you produce, but it's more related to the software, especially the AI embedded in the robots.

And then also, you have to separate the fields, I mean, the application fields. So whether this robots are for the industrial purpose or the robots are going to -- in the service field, especially to be co-work or co-live with human beings, so in terms of the specs, in terms of the design could be hugely different between or among those different applications.

So in terms of our plans, this robotic market, we are going to actually launch Delta Robotic Research Center in August. So maybe, I mean, just -- maybe that we will have more insights to share after we dig more deeply into this market.

[Unknown Analyst]

I actually noticed that you showcased your containerized AI data centers during the Computex event this year. Could you please share more details or give us more colors related to in terms of your plans on this containerized AI data centers?

[Unknown Executive]

So I think if you look at the current AI data centers are mostly operated or built by those hyperscalers. But in the future, when the colocations or maybe other enterprises, they are also going to build up their own AI data centers. It's just -- I mean, actually the solutions for those customers providing an integrated solution and system to those customers. And for the fast -- especially it actually can be, I mean, fast deployed. So I think -- so the customers, I mean, the target customers are different.

[Unknown Analyst]

So my question is related to the tariff. So currently, we still don't know how high the Taiwan -- I mean the Taiwan's tariff is going to be. But do you have any scenario plannings if our maybe if our tariff is going to be higher or maybe just on par with or maybe lower than Japanese and Koreans' tariff rate? So do you have any, I mean, -- sorry, scenario plannings for the tariffs?

[Unknown Executive]

So first of all, in terms of the tariff, because still, I mean, at this point, we don't know the tariff, what level of the tariff it's going to be for Taiwan. But for now, as we just explained, our customers have absorbed most of the tariffs by themselves. So it actually hasn't really had any significant impact on us. But in terms of the manufacturing footprint, we actually also have a pretty diversified manufacturing footprint, not just -- we don't just have factories in Taiwan, but also elsewhere.

So the tariff is something that we -- totally out of our control. But we, as a company, we do have to -- I mean the only thing that we can do is always to be more agile and more flexible to fill customers' need. So I think actually since 2015, our strategy of being more diversification, not just in terms of the product lines, but also in terms of the production capacity, the geographic locations of our capacity. So as you can see, right now, because at this point, we are -- I mean, having this meeting, we still don't know the tariff level. So it's no way for us to really plan your capacity based on the pretty unclear and uncertain tariff levels.

And also in terms of the capacity, it's not just for this year, for next year, it's actually for the long-term plan. So in terms of our long-term capacity planning, it's not going to really be adjusted by the short-term changes. So what we can actually do is not -- I mean to plan our capacity based on the unclear and uncertain tariff policies. But what we can do is, as I said, be more agile and more flexible and then quickly respond to any crisis. So that is what we can do. So this kind of short-term changes is not going to really impact on the long-term strategic direction and planning.

[Unknown Analyst]

So my first question is -- because as we know that in Q2, some of your customers actually -- you actually had some pulling orders because of tariffs. So should we still expect the normal seasonality, which means that we will see the high season, the peak season in Q3?

[Unknown Executive]

And then so my answer is, I think what I can say is I think the second half -- I think if things go smoothly. I think the second half, I mean, of this year is still going to be better than the first half of the year. But for next year, it's still too early to comment.

So in terms of your question related to with our assembly plan -- I mean final assembly plan in the future. I think as I just -- I mean earlier -- so I think, as I said for the U.S. market, I think it's very likely that we will have the final assembly in the U.S. But still for the components manufacturing -- I mean to produce the components in the U.S. considering the cost and the supply chain is not really feasible -- it's not really a feasible thing to do.

[Unknown Analyst]

So I have a question related to your capacity planning in Thailand. So considering the current high level tariff to Thailand, so is there any ongoing expansion plan in Thailand?

[Unknown Executive]

Yes, we are actually -- I mean, still in the process of building up our new factories in Thailand. So as I said, those are for the long-term development and long-term planning. So is not going to really adjusted by the near-term changes.

[Unknown Analyst]

So in terms of your AI power -- sorry, AI server powers, can you give us a split between whether they are for the GPUs or for the ASICs?

[Unknown Executive]

So sorry, we don't have the split.

[Unknown Analyst]

Okay. So I have a question regarding the R&D expenses as a percentage of your total revenues. So as we can see that the R&D as a percentage, I mean, as a percentage of your sales was about 5.5% in Q2. So should we expect this, I mean, 9.5% is going to be the new norm in terms of the R&D percentage level going forward?

[Unknown Executive]

So I think going forward, we will continue to invest a lot into R&D. It's not just for existing businesses, but also for new businesses. But our plan is more like to maybe to maintain or keep the R&D expense ratio like maybe around 9%. But of course, it's still very much subject to the revenues, the top line growth.

And then I mean, we actually continue to always keep an eye in the market, and then we always try to maybe to get into the new businesses. So we will continue to invest into the new areas. But of course, we have to consider many factors very carefully. For example, whether those new areas or new businesses are going to be related to our core competencies, like they are -- maybe they are the natural extensions of our core businesses. And that would be a very critical criteria when we are assessing the opportunities of the opportunities of the new areas or new business.

[Unknown Analyst]

So the first question -- I mean, my next question is related to the solar panels. As we can see, recently, the typhoon in Taiwan, I mean, the southern part of Taiwan actually hugely -- has hugely damaged many solar panels in Tainan. So do you think that's going to be a big issue to Delta? And then also, as we can see, I mean, in the U.S., the government seems -- I mean, they are phasing out some of the subsidies for the solar industries. Is that going to be a big issue to Delta?

[Unknown Executive]

So I mean, in terms of the damage, the recent damage in Tainan, actually, before we launch any renewable energy plants, I mean, we actually always make sure to conduct very strict due diligence. So I mean, even though that recently we have seen very serious damage, I mean, in the southern part of Taiwan. But to Delta, we actually only had very, very minimal damage in terms of the solar panels set up in our own factories. So we don't actually see that as a very big issue to us.

And then speaking of the second question related to the U.S. government, it seems like they are kind of phasing out some of the subsidy for the renewable energy, especially maybe the solar systems. I think we are not in a position to really comment on the policy. But still, we do believe that for the enterprises there is still pretty high demand for the renewable energies in order to meet their decarbonization target.

[Unknown Executive]

So maybe we will have the final questions from the audience.

[Unknown Analyst]

So my question is still related to the tariff issue. I mean, the Thailand tariff currently is 36%. So I think if the tariff of Thailand does remain 36% is definitely going to be a big impact on the...

[Technical Difficulty]

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