Asustek Computer Inc Regs

for the second quarter of 2023. Today's conference will be hosted by Mr. S.Y. Xu, Samson Hu, and our CFO, Nick Wu. First, our CFO, Nick Wu, will talk about the financial results for the quarter, and then our two co-CEOs will talk about our strategy and outlook. This will be followed by a Q&A session. If you have any questions, please click on the question mark on the left side of the web interface and ask your question. We will collect and answer these questions. Now let's welcome Mr. Nick Wu to report on our financial results. Thank you. Please look to slide five. This is our brand income statement for the second quarter of 2023. As you can see, our net revenue was one hundred and seven point five billion NT dollars for the quarter for a quarter over quarter growth of five percent in a year over year decline of seven percent. We earned a profit of 1.2 billion NT dollars, which is a return to profit after two quarters of losses. The net profit is 2.59 billion NT dollars, and the EPS is 3.5 NT dollars per share. As you can see at the bottom of the slide, we are disclosing two unique items, which is sales allowances and inventory allowances. Due to some adjustments in sales channels and inventory, we had an increase in sales allowance from minus 16% in the first quarter to minus 17.7% in the second quarter. But due to successful inventory management, the inventory allowance returned to positive, to positive 2.6%, a growth of 1.7 percentage points compared to the first quarter. So these two items, sales allowance and inventory allowance, approximately canceled each other out in terms of quarter over quarter changes. In fact, our gross margin for this quarter grew from 8.1% to 12.5%, and our operating margin improved from minus 3.6% to positive 1.1%. showing that our main product lineups and prices and sales momentum have all improved, which we are very happy to see. And this is all due to the hard work of our teams. It has beaten our expectations. Now please look to the next slide, slide number six. This slide discloses our non-operating items. In the second quarter, we had investment income of 571 million NT dollars, and our investment income was 351 million NT dollars. The total non-operating income was 1.2 billion NT dollars. Looking to the next slide, slide number seven, this is our brand balance sheet. So you can see that in the second quarter of 2023, our inventory value was about 117.5 billion NT dollars, approximately flat from the last quarter. This is due to our expectation of further sales growth in the third quarter and the beginning of a new product cycle in the next half of the year for PC and components. So we are preparing the inventory. In terms of days of inventory, the number of days peaked last year in the second quarter at 180 days, and now it is at 103 days. So this reflects a return to normal for our inventory. Inventory is at normal levels. Now please look at the next slide, slide number 10, which is our product mix in terms of revenue. So you can see that PCs accounted for 64%, components accounted for 34%, and phones, due to the launch of new products, accounted for 2%. The next slide is our region mix. For the second quarter, you can see that Europe accounts for 30%, Asia 48%, and the Americas 22%. Notably, in the second quarter of last year, Europe was experiencing geopolitical conflict, so the base was very low. This year, European demand has returned to normal, and the revenues are back to the normal share. Looking to the next slide, which is our outlook for the third quarter. we are forecasting uh 20 quarter over quarter growth for pcs and 10 quarter over quarter growth for components so overall as i said asus has completed our operating transition and we are now returning to normal profits in our operations So we anticipate entering a growth stage in the coming quarters. More specifically, for the second half of this year, we are forecasting the first stage of growth as market demand returns and new products and platforms launch in the next year. in addition asus's market leading introduction of the rog ally handheld will will drive enough growth momentum to achieve stable growth for the next half of the year looking forward to 2024 we are looking at even faster and more accelerated growth, driven by factors including our organizational restructuring strategy and our investment in newer, faster-growing strategic sectors. We expect that these factors will drive further growth in 2024. So to sum up, in the second half of this year, we will see stable growth, but in 2024, we will see more significant, faster growth. This will conclude my presentation. Next, let me introduce our co-CEOs to discuss our operating strategies and outlook. Thank you. Good afternoon to our friends from the investors and the media. Thank you for participating in today's conference. I am co-CEO SY Xu, and I will talk to you next. In 2022, the end of the pandemic brought a slump in the market, but in 2020, The first quarter of 2023, ASIS has completed our inventory and we have returned to profit in the second quarter. We are seeing a return of market demand and we are seeing gradual improvement in revenues and profits in the first and second quarters. However, the speed has been slightly slower than we've expected. ASIS's innovation and execution will continue to drive revenue and profit growth for the second half, and on this basis, we expect an improvement in margins, and we are seeing positive trends, and we will continue to work hard to achieve this. This June, ASIS began a reorganization of our PC-related business units, as has been reported in the media. So now I will give a more in-depth exploration of this topic. This reorganization is based on our One PC strategy. Our two major focuses will be on consumer and commercial sectors. So our original gaming and consumer business units will be integrated into one consumer-facing business units, which will be led by Mr. Zhang Yangguang. We have decided to integrate these two units because from a value stream perspective, these two units provide several similar products and share supply chains and retail channels. So we hope that by integrating these two units, we will be able to maximize coordination internally for R&D, as well as with our upstream suppliers and strategic partners. This will allow us to better respond to consumer demand and maximize our synergy, our value stream, and strengthen ASIS's leadership position in the PC market. We expect the new business unit to flexibly respond to market and user needs and use design thinking to respond to the opportunities and challenges of the future. For example, in 2024, it is expected that AI power PCs or AI aware PCs will bring new experiences in productivity and entertainment. In terms of commercial PCs, our mobile BU head, Mr. Zhang Kaishun, will add this to his portfolio of responsibilities, and he will also bring in outstanding managers to head up this BU. His team has done very well in the mobile division in terms of design thinking and innovation. With his addition to this BU, we hope that he will strengthen our product and development and improve operations so that the unit is more agile, more flexible, more teamwork focused, and creates maximum synergy. This restructuring is part of our continuous transition and evolution. We hope that it will help us accomplish our one PC strategic goal so that we can become a leading PC brand in both brand strength and market share. AI has been a hot topic recently, and in this sector, Asus is one of the few companies that can provide comprehensive solutions and become a total solution provider. as a provider of these solutions our r d strength and industry experience allows us to cover everything from ai infrastructure cloud computing and on the edge itop software integration capabilities The media reported a few days ago that the leading AI server provider, NVIDIA, has introduced the L40S GPU OVX server. Asus is one of the first suppliers for this product, and this proves the trust that our partners have in us. in terms of end user computing devices as i said ai powered pcs will bring new user experiences asus is working with industry partners and we are confident in becoming a leading brand for ai pcs The AI-driven industry revolution will bring good growth opportunities for ACES. Despite uncertainties in the market, we will work to seize the opportunity and step up our strategies in terms of retail channels, products, and the industry as a whole. the goal of our organizational restructuring is to achieve our growth targets looking at our 2022 revenues gaming accounted for 45 percent consumer products accounted for another 45 percent and enterprise products accounted for 10 percent so looking at these numbers and looking to multiple drivers of growth, we are focusing on growing our commercial PC and server sectors. We are looking to achieve significant growth over the next five years. For commercial PCs, we are looking to achieve a CAGR of about 50%. 15% rather, so that we can achieve growth, two-time growth in 2027. And for servers, we are looking for Kager of 40% and a growth of five times by 2027. In terms of gaming, we are also looking for continued growth. This year, we have reached number one in market share for gaming. but we will continue to innovate and reach out to new customer communities so that we can expand to new blue ocean markets. The ROG Ally is a good example. We are seeing that many of our peers are introducing similar products, which proves that we have a very precise handle on the market. We will continue to use our product innovation, our brand position, and our user value to achieve long-term growth. Now, let me introduce my co-CEO, Mr. Samson Hu. Thank you. Thank you, SY. Good afternoon to our friends from the investors and the media. I am Samson Hu, and I will talk about our various business groups and our outlook. Looking at our system business group, in the second quarter, we are still facing poor consumer confidence and cautious IT spending from enterprises. So the demand from end users remains at a low level. The system business group saw a decline of 5% to 10% year over year this quarter. However, in gaming PCs, we have continued to strengthen our leadership position in the market. Our market share has grown for three consecutive years in gaming. And in the first half of this year, we have reached number one in market share for gaming PCs at over 25%. We are also continuing to improve our product lineup to provide more high or rather to increase the share of high added value products. The share of high added value products is now over 60%, which far exceeds our peers on the market. So this will allow our business in these sectors to become healthier. We will also continue to leverage our in-house advantage in R&D to cooperate with our key strategic partners and expand our strategic planning, for example, into AIPCs, as S.Y. mentioned. This will change and improve the experience for users, both in terms of productivity and entertainment. And we believe that this is a huge growth opportunity for the industry and for Asus. Looking to the next slide, it's on the open platform business group. The second quarter is a traditional low season for this business group. And we are now facing a transition phase for platforms. So this business group saw a 5% decline year over year. But we can see that shipments for motherboards actually grew by 10% year over year. But for graphics cards, Uh, the, uh, it, the shipments declined by 12%. However, a silver lining is that ASP grew by 5%. However, in terms of components, Asus is still the market leader. In addition to our gaming product lines, in terms of components, we are also expanding into the creator segment. So we have introduced the ProArt series of motherboards and graphics cards. All of this will drive further growth in the future. The market response to these products, both in terms of graphics cards and communications, have been very well reviewed. And as SY said, we have been aggressively expanding into server products. In the second quarter, revenue in the server segment grew by 40% year over year, including AI servers. And as we said, we are looking for growth of 500% in the next five years. In terms of our AIoT business group, revenue grew by 60% year over year in the second quarter. We are continuing to take strategic measures to accelerate the growth of this business, First of all, we have used 5G plus AIoT to improve smart manufacturing. We are working toward customer-centric, data-centric, and demand-driven AI solutions to drive a transition in manufacturing. This has been used in our own plants, for example, through digital twinning and through the establishment of factory war rooms. This year, we also held our first partner alliance conference in Europe, connecting over 60 partners, including system integrators and other partners in various domains. to build deeper relations in AIoT and to establish a strategic alliance in the market so that we can expand ACES' brand influence and future opportunities in the AIoT field. Please look at the next slide. Our gaming product lineup extends across several business units, and it has been a major strategic focus for Asus. For the previous quarter, the gaming product line continues to account for over 50% of our revenues. The ROG brand position, our total solutions, and our community engagement continues to be our golden triangle as we lead the industry. The new products, including RTX 40 series graphics cards and gaming laptops, continue to perform excellently in the second quarter. They continue to be market share leaders in this quarter. In terms of innovation, as you all know, we have launched our first gaming handheld, the ROG Ally. The market response has been tremendous. Since the pre-order period, the product officially launched in June, which touched off another sales craze. In one of our major retail channels in the United States, it reached number one in terms of PC gaming products in June. our gaming product lineup will continue to explore new communities to broaden our influence in the sector. In terms of sustainability, in our daily operations, sustainability and ESG remains a major topic. and we also believe that it brings new business opportunities. Over the years, ACES has used data-driven metrics and technology management to achieve sustainability through our core competencies. As we've said, we have four major focuses on climate action, circular economy, responsible manufacturing, and value creation. And this is a major part of daily work for all of our business groups. For example, introducing more environmentally friendly materials, improving energy efficiency, establishing recycling systems around the world, et cetera. All of these efforts have now borne fruit and have been recognized. If you look at the next slide, you can see that ACES has been recognized through major ratings and awards. For example, this year at Computex, ACES received nine major Expert's Choice Awards. The Expert's Book won a special award for sustainability. And for two consecutive years, ACES has been named by the Financial Times and Statista as one of the Asia-Pacific climate leaders. And also, to ensure that we can communicate our performance in sustainability, ACES has published three very detailed sustainability reports this year, including our TCFD, the Climate-Related Financial Disclosures Report, and the Environmental Profit and Loss Report. These sustainability reports have received recognition from the Asia Sustainability Reporting Awards for three consecutive years as well. So this concludes my presentation on our performance and outlook. Thank you to our co-CEOs and CFO. Now we will begin our Q&A session. If you have any questions, please click on the question mark on the left side of the interface and ask your question. We will collect and answer these questions. Okay, so we're seeing the first question is from DigiTimes and KGI. The question is, India has now placed new restrictions on PC imports. How is ACES responding to these restrictions, and are there any plans for local manufacturing or collaboration with local manufacturers? Okay, I'm Samson Hu. Let me answer this question. India is a very important market for Asus. And in fact, we are now the number one in terms of market share for gaming. And for overall consumer laptops, we are number two in market share. So it's a very important market in India. ACES has always worked with local OEMs to manufacture laptops and desktops, and we are complying and participating in local PLI programs, and we remain in very close communication with local governments in India. So regardless of whether we're talking about existing PLI policies or the new import license rules, or any other factors that will require us to adjust local manufacturing share, we can quickly respond. So these new restrictions will not affect our business in India. This is a quick update on this issue. Thank you. Okay, thank you. So let us look at the next question. It's asked by several participants, including JP Morgan and Morgan Stanley. What is the outlook and plans for AI servers for ACES? And currently, AI server chips are facing a shortage. How will ACES respond to this, and what are the shipping targets for ACES? Looking at the current AI server demand and prices, does Asus expect that perhaps the 500% growth target might even be exceeded? Okay, let me answer this. Asus has been in the PC industry for a very long time, so we have very good relationships with all of our upstream suppliers. including Nvidia, which is facing shortage issues, as well as AMD, which is going to introduce new chips for AI servers later this year. And of course, Intel also has a solution as well. So all of these companies are longtime partners of Asus. So Asus is now in a good position to obtain these chips. And of course, because Asus has an excellent reputation in terms of our internal R&D engineering capabilities, we are sure that we will be able to innovate and differentiate our products. As for the speed of growth in AI servers, as I said, we have set an internal goal of over 40% in terms of CAGR. of course ai servers are ai server prices are very high right now but that's because it only has a single supplier we believe that as more suppliers enter the market and there is more supply prices will decline so the high prices currently are not what our planning is based on. That's why we set the goal of 500% over the next five years. Okay, the next question is from CMO Investment Fund. So what is the difference in AI-powered PCs from regular PCs? Are there any changes in terms of hardware design? Okay, this is an excellent question. Let me give a brief answer. So as you all might know, AI really works in, there are two parts in how AI works. The first is training. And then after the AI is trained, you can now do inference. So when we talk about AI PCs, usually the focus is on inference. Specifically, improving the PCs capabilities for inference so that this can be done on the client side. This will improve the experiences for the users in both productivity and entertainment. So in terms of component and specification changes, the capabilities for inference must be built into the PC. So this means that CPU or silicon vendors we'll need to provide a dedicated computing unit that is dedicated to inference. So this new unit, some people call it the IPU, the Inference Processing Unit. Some call it the VPU, the Vector Processing Unit, because essentially AI inference is a form of vector computing. So in terms of architecture, the main difference will be a dedicated unit in the CPU. And in terms of the software, the user experience software-wise, future OSes and third-party apps will also see some changes to better use the improved inference capabilities in PCs. This will improve the overall productivity and entertainment experience. Okay, the next question is from EE Times. Asus mentioned that the orders for new AI Server products are full until 2024. So can you comment on what the clients are and what regions? And when will the NVIDIA shortages resolve? Okay, let me answer this question. In an investor conference, it's probably not appropriate to comment on specific customers. So unfortunately, I cannot answer in specifics. However, you can see that a lot of this has been reported on the media already. So you can refer back to these reports. so as for the nvidia gpu shortages a lot of this is because of the limits on tsmc's advanced packaging capable capacity and i'm sure that tsmc is working to solve this issue but this is beyond asus's control so we can't comment on this either However, we do know that AI servers is a very hot product segment right now. So any part of the supply chain that can get on this train will see higher profits. So I'm sure that everybody will be working very hard to resolve these issues. Okay, the next question is from Morgan Stanley. So it seems that the ROG Ally is seeing excellent sales and demand. So will ACES adjust the outlook for shipments and margins upwards? Are there any further updates? Okay, thank you for your interest in the ROG Ally. We will continue to maintain the outlook that we disclosed last time, specifically that the ROG Ally will account for five to 10 billion NT dollars in revenue per quarter. This remains unchanged. So in the future, the revenue will fluctuate based on seasonal factors, but it will continue to fall between five to 10 billion NT dollars. As for margins, We continue to expect that the ROG allies margin will fall within the range of our ROG gaming laptops. The next question is from the Economic Daily. In addition to India, are there any plans for ASUS for manufacturing outside of China? Will ASUS invest directly in any overseas manufacturing plants? Okay, let me answer this. So in terms of non-China manufacturing, during the U.S.-China trade war with the erection of new trade tariff barriers, all companies, including ASIS, have have been required to make some response to these changes. So ASUS and our partners have already begun our efforts to build up our manufacturing capacity outside of China. This is established practice for us already. More specifically, in terms of motherboards and other component products, a lot of them are already manufactured in Vietnam. And as for PCs, we have manufacturing in India, as I mentioned. So a certain share of our PC products are already manufactured in India, and we will continue to evaluate based on the political, economic, and geopolitical environment to continue to adjust our share of manufacturing in and out of mainland China. Okay, the next question is from UBS. So ASIS's gross margin has improved in this quarter, but we also see that the sales allowance remains at a relatively high level, which is 17% of revenue. So when will the sales allowance return to a more normal level? Let me answer this. It's true that due to the needs of logistics and sales channels, we will continue to face the need for sales channels to adjust their inventory. So in the short term, we will need to make allowances for this. But we do believe that the sales allowance rate has peaked in the second quarter and that it will gradually normalize over the next two quarters. In the second half of this year, with the traditional high season, with our new platforms and new products and other sources of sales momentum, such as the ROG Ally, the demand will grow and the revenue and profit will see stable growth over the next half of the year. Okay, the next question is also from UBS, which is, it seems that ACES has a better outlook for the third quarter compared to other companies. So what is expected to drive the sales momentum? Are there any regions or specific products? And also, is there a clearer visibility for fourth quarter shipments? Let me answer this. Asus's growth momentum will continue to come mostly from gaming and consumer products because commercial PCs continue to account for a relatively low share of our shipments. So the growth momentum is still in gaming and consumers. This is for a few reasons. First of all, in our retail channels, inventory has been significantly reduced. As our CFO said, our sales channel inventory reduction has been proceeding as we planned. And also, the third quarter has always been a traditional high season. There are seasonal factors for higher demand, so we are foreseeing higher shipments compared to the second quarter. And of course, ASIS's internal goal has always been to outperform the market average. So our business units will provide more competitive products for the market, which will help us achieve better shipment growth than our competitors. As for our fourth quarter shipments, visibility remains low at the moment. We will have a more specific update in the next conference. Okay, the next question is from Chunyi Investment. market research firms uh are forecasting a pc a wave of pc upgrades in 2024 and 2025 and this will result in higher pc shipments how does asus see this issue okay let me answer this i think our outlook for 2024 uh we can approach this from two perspectives From the macroeconomic environment, we believe that in 2024, the economic climate will improve compared to these two years. So this is obviously a positive factor. Another approach we can take is from the PC industry. So trends including, for example, the AI PCs. uh we believe that this market segment will mature by the third quarter of next year so this will become a driving factor for the market by then and also after the pandemic driven demand in 2020 and 2021 in 2024 these products will enter a replacement cycle and this is also a positive driving factor So both in terms of the macroeconomic environment and the PC industry are seeing good growth factors. So we do believe that 2024 will. will quite possibly grow even further compared to 2023. However, to put a number on this growth is still quite difficult at this point in time. Currently, we are seeing growth of high single digits in terms of percentage. And whether we can achieve double-digit growth, I think that remains to be seen. Thank you. Okay, the next question is from Morgan Stanley. So you mentioned that in your organizational restructuring, the head of your mobile business group will also lead your commercial PC business group. So how will this change your mobile business strategy? so in my presentation i mentioned that the new commercial pc uh business unit will be headed by the mobile uh business unit head but this will be in addition to his portfolio of responsibilities so he will continue to be in charge of the mobile uh unit So in terms of mobile, we have two major product lines, ROG and Zenfone, and we will continue to provide these two product lines. But internally, we will improve the leveraging between these two product lines so that both lines can be supported with more streamlined R&D resources. so that these resources can also be used to support our commercial PC unit. So from the end user perspective, there will be no change in our phone lineup. Thank you. The next question is from several investors, including KGIB and CTBC. So the question is, what is the current share of revenue for the server product segment? And what are the prospects of future growth and what is the range of margin of the margin for AI servers and what contribution it will make to profits. So yes, it seems that there's a lot of interest in our server business. And obviously we are very ambitious in this domain. Uh, as we've repeated several times, we are aiming for 500% growth in five years. Currently, servers account for a relatively low share of our revenues. It's in the low single digits in terms of percentage. And there's also a question on the margins of the server products, and this is very important to us. Servers is a strategic business for us, and we hope that in the future it will bring both revenue and profit growth for ACES. So ASIS will use our core competence in R&D, and we will also choose our customers and channels wisely for our server products so that we can build a healthy profit margin in this sector. The next question is from KGI. In the long term, will ASIS maintain its goal of 10% higher growth compared to the market as a whole? Let me answer this. Over the past few years, we've emphasized that our ambition is to beat market growth by 10 percentage points or more. And this ambition will continue for the next few years. So what supports this ambition is our Abilities. The expectations regarding our capabilities. For example, as we've emphasized many times, we have the biggest in-house R&D team in the industry. So in terms of innovation, we can definitely support this ambition. As for our individual product lines, we definitely see the gaming product line supporting our growth momentum in the future. And the consumer laptops with our OLED product line and the Creator product line, they're all doing very well. So that's a very solid foundation as well. So as for the commercial segment, in the past few years, it's been a major focus for us. We've invested a lot on this, so we are very optimistic in terms of its contribution to ACES's growth. So overall, whether we're talking about R&D, channels, our overall product lines, we are very confident that our ambitious goals can be continued to be reached in the future. Okay, thank you. It seems that All of the questions that have been asked have been answered. If there are any further questions that you would like to raise, once again, please enter them through the online interface. We have one question from Morgan Stanley. Asus is going to invest in new businesses including commercial PCs, servers, etc. Is R&D expenditure going to increase? Can we expect higher R&D operating expenses in the future? Let me answer this. I think to answer this question, we need to once again discuss how we set goals internally and how we control expenditures. So regardless of whether we're talking about the strategic business units or the business units that are already in stable operations, we use the same management practices, which is by the end of each year, every business unit must set goals for the coming year, including for revenue and profit. And to calculate the profit, they need to calculate their expenditures as well. So their need for staffing will depend on their operational goals. And this is how we can control the expenditures for each business unit. Of course, when a new business unit is just starting up, when it's in the growth stage or the investment stage, we can, we may be able to allow for some mid or long-term investments. But eventually, there must be business results to justify the increased expenses and staffing to the company. So under this system, we're able to control the expenditures of each unit. And we believe that there would never be a business unit that loses control over its R&D expenditures. Thank you. Thank you. So it seems that we've answered most of the questions that have been asked through the web interface. And you are also welcome to contact our IR team for more in-depth discussion or for topics that have not already been addressed. Now let's invite our co-CEOs for some closing remarks. Okay, first of all, I'm very happy that all of you took the time to participate in today's conference. This year, due to the uncertainty in the economic outlook and the post-pandemic slump, it's been a challenge for the PC industry. But we're also seeing opportunities in AI-aware PCs and AI servers. So ACES has responded to this challenge through our organizational restructuring and long-term investments so that we can seize these opportunities and we hope that you will continue to provide asus with support and encouragement thank you okay i'm samson hu thank you to all of you for your long-standing support and advice for asus as sy said the macroeconomic climate and the pc industry are in a time of transition at least for this year but we do believe that in addition to responding to these short-term challenges I do think we've already passed the bottom of the valley. We will continue to improve our competitiveness and make the investments necessary to seize future opportunities. So as we said, we have reorganized our core business, our PC business, and we have accelerated our strategic businesses in servers and AIoT. And I believe that all of this will create new momentum for Asus's operations in the future. Thank you. Thank you. This concludes our investors conference for today. Have a good weekend.