Asustek Computer Inc Regs

Hello, welcome to the ASUS 2024 Q2 Online Investor Conference. Today's conference will be held by ASUS Tech Computer Co-CEO S.Y. Xu and Jamsung Hu alongside CFO Nick Wu. The conference will be divided into two parts. In the first part, CFO Nick Wu will start by outlining our quarter financial results. Next, our two CEOs will go over our operational strategies and business outlooks. For the second part, we will be conducting a Q&A. You are welcome to raise any questions you might have in the panel on the left, and we will collect them and answer them towards the end. Let us start with CFO Nick Wu. Thank you. So let's go to slide five of our online PowerPoint. This is our quarter two 2024 brand income statement. For quarter two, we saw a very positive financial result. For quarter two, we were able to achieve 136 billion NT income. That's a quarter growth of 19% and year-over-year growth of 27%. While our revenue came to 10.6 billion, which is a quarter-over-quarter growth of 130% and year-over-year growth of 776%. As for our post-tax revenue, that came to $11.8 billion, that is 117% growth quarter-over-quarter and 365% growth year-over-year. Our EPS came to $15.9 trillion. Our margin came to 18.3%, while our up margin came to a very positive 7.8%. There are several major drivers to our success for this quarter. Firstly, of course, that would be the increase in our sales volume, improvements to our product combinations, and the increase in their margins. Another major driver came from improvements to our operational management, which includes inventory management. This includes both for our inventory and inventory of our retail channel partners. For Q2, we've also had a quite special income segment that accounts for about 1 billion NT. This comes from the licensing fee from our intellectual property licensing in the mobile communication technology industry. ASUS has been investing and accumulating IPs in this sector for more than 10 years. And since a few years ago, we've been solving our licensing issues. and fee as a service now because ip licenses takes a longer amount of time to execute and to turn into profit so for the past few years i think we have seen more than 1 billion nt in income from ips per year but it just so happens that in quarter two of this year we have been able to confirm the IP licensing fees for certain major projects, which is why for this quarter we were able to achieve 1 billion NT income from licensing fees alone. Hopefully that in the future we will be able to continue to have such 1 billion NT minimum income from intellectual property licensing fees. And I do believe that this is rare, but also very worth investing in company assets, which is why ASUS will continue to invest in this particular segment. Going to the next slide, these are some of our non-op items. Major items here include interest income, at 685 million, while our investment income came to 704 million NT, while our dividends came to 805 million. Now, what's worth noting here is that for some of the companies we invested in, the dividend distribution time was moved forward from quarter three to quarter two, which is why for quarter two right now, we've been able to see that 1.8 billion dividend income. So based on current visibility, we are also anticipating another one billion NT dividend income for quarter three. So in total, our non-op item for quarter two came to four billion in total. Moving on to the next slide, this is our brand balance sheet. I think one of the major changes here is that from last quarter, we had an inventory worth 128.2 billion. that grew to 144 145.3 billion for this quarter that's a 13 point 13 quarter over quarter growth and one of the major contributors to that comes from the ai server segment and for quarter through three and going forward i think that will continue to be a contributing factor Besides that, we also anticipate products like AIPC, Microsoft Copilot Plus PC, graphics cards and motherboards all contributing to our future product cycles. So we anticipate that for quarter three of this year, it will be It will be the beginning of a new product lifecycle and based on our current inventory management strategies and examinations from our internal business groups, we think that everything is proceeding as planned and we will continue to monitor the situation and make changes as needed. As for other parts of the company, I think everything has held relatively stable. As for our cash and equivalents, it has fell slightly to $40 billion due to inventory management needs. Moving on to the next slide. This is our Q2 2024 revenue mix going by business groups. Our system business groups accounted for 56%, open platform 41%, and AIoT 3%. Going by revenue mix by region, we see Europe accounting for 27%, the Americas 25%, and Asia 48%. Moving on to the next slide. These are some of our business outlooks for quarter three 2024 and beyond. For quarter three, I think that is a quarter that we have made a lot of preparations for. which is why right now for Q3, we are maintaining a fairly optimistic stance, and particularly for the PC segment, we think that there may be a quarter-over-quarter growth of 15% to 20%, while the components and servers segment may have a quarter-over-quarter growth of 5% to 10%. Because the AI server sales volume has reached a relatively high peak for this quarter, which is why we have the growth estimates that we have right now. Now we will move on to our strategy and outlook section that will be conducted by our two co-CEOs. Thank you. Fellow institutional investors and media, good afternoon. I would like to thank everyone for attending our investors' earnings call. I am ASUS co-CEO, SY Xu. I will be discussing our 2024 business strategies and outlooks for the first half and for the second half. For the first half, ASUS has undergone significant changes, leveraged AI solutions to increase our overall operational capabilities. And we have achieved significant financial results for the second half of 2024, we will be leading the first wave of AI PC product cycles, developing multiple AI platforms and solutions, and to aid in the development of the entire AI revolution in order to secure our lead into the PC market. Entering the age of AI, ACES has a comprehensive slogan of ubiquitous AI and incredible possibility, which means that we want to create AI solutions that will cover everything from the public cloud to the private cloud, from general AI to personalized AI and to everything including plugins and personalized experiences. We will also be providing AI tools like our chatbots, MuteStrip, StoryCube, and a lot of other ACES AI tools that will use proprietary technology to help optimize user experiences. And in order to accelerate these AI applications, ASUS AI PCs are specs with excellent performance in the diverse product line that leverages the built-in CPU, GPU, and MPU for all matters of AI tasks. We will be working with AMD, Intel, Qualcomm, and Nvidia to provide comprehensive AI solutions. I think that the birth of the AIPC is a significant inflection point for the PC market. And we anticipate that the PC market will be entering a growth cycle that will last for several years. For 2024, we were the first to introduce a cloud platform and highly comprehensive line of AIPCs. We are confident in our abilities to secure a minimum 25% market share. Based on our existing sales volume and collected data, we have a leading position in places like the United States, Canada, and Australia. And our data shows that we do have a market share of over 20% in all of these major markets. We will update these data as we get our hands on them. What's more important is that the AIPC Product upgrade lifecycle will last for several years, which is why we will be able to leverage our existing leads to increase our mindshare and market share. The ACES Server Business Group has also performed quite well. We have once again increased our 2024 revenue target. We previously had set a 5x growth in 5-year target back in 2022, which meant that we were hoping to achieve this for 2027. but it seems that we will be achieving that sales target ahead of schedule. This is of course the result of our constant dedication to the AI server market. We will continue to invest in our AI server market AI Server products and we're confident that for the next product lifecycle, we will be even more competitive and become even more dominant. The AI Server segment now offers everything from server blades to rack servers to multi-chip platform solutions so that we can satisfy the needs of a wide range of customers. The AIoT segment in ASUS has also saw excellent results. For August of 2024, in Taipei's automation exhibition, we will be focusing on exhibiting three solutions focusing on smart manufacturing, smart factories, and smart cities. The first major solution is automated robot inventory management system. This uses AMRS and WCS technology, 5G technology and ALT technology to reduce workload by 40%. and these solutions will be appropriate for more than 99% of the tasks, vastly increasing warehouse management accuracy and realizing smart logistics. Another major solution is our AI powered robot arm system, which works with built-in AI sensors and APIs to implement an AI vision-based fault detection system that can significantly increase our detection accuracy and increase automation and lowering our model learning barriers. Now we will move on to Samsung Who for detailed strategies and outlooks. Thank you. I am Asus Co-CEO Samsung Who. Now I will be going over the operational strategies for each of our business groups. Firstly, for the system business group, for Q2, our year-over-year growth was 5% to 10%. This can mainly be attributed to improvements in management and our excellent products. This, of course, also includes appropriate management of our retail channel inventory, improvements to our product combinations, as well as realization of the life cycles for new products coming to market. For Q2, ASUS continues to maintain its leading position in the gaming notebook market. We are also constantly expanding and optimizing gaming experiences for our users. Also, during early Q2 2024, we were among the first to introduce a comprehensive and cross-platform Microsoft Co-Pilot Plus personal computers. We are confident that we will be able to achieve a minimum 25% market share among this first wave of Co-Pilot Plus PCs and cementing our lead. I think that for 2024 will only be the seminal year for AIPC, which is to say that the AIPC product upgrade cycle will last for several years, which is to say that this is an opportunity that ASUS will definitely hold on to and thereby expanding both our market share and our mind share as we continue to provide the best products and services for our customers. Going to our next slide. For our open platform business group, our Q2 2024 revenue was 50% year-over-year growth. This can be divided into two segments. The first segment being motherboards and graphics cards. The revenue growth was 10% to 15% year over year. The largest contributor would be, of course, from the servers business revenue growth that demonstrated a multi-fold growth in this quarter. we saw a new high for the server business segment In fact, servers now account for double digits in terms of our brand total income which is definitely a significant shift Now given that our open platform business group is already in a leading position in multiple market segments, we will continue to deliver stronger growth in premium segments, and we will continue to design products from a user-centric perspective so that will become even more accepted among premium segments such as gamers, power users, and creators. At the same time, our server business segment, given that it is performing quite well, we will be hoping to become among the industry leaders for that segment too. As for the AIoT business group, in Q2, we achieved 150% growth year-over-year. Now, this is something that some of you may already know, which is that we introduced the AI NUC into our product lineup since late last year. Thanks to these NUC products, we were able to vastly expand retail channels and our market receptability for our ASUS AI NUCs. We have introduced a series of AI-powered NOCs that hope to satisfy demands from average consumers to enthusiasts. We even hope to tap into the industrial PC market, if possible. As for the smart medicine segment, we've also made some breakthroughs, most notable of which would be the ASUS EndoAIM Endoscopy AI Solution. This was recently awarded the Best AI-Assisted Software Solution Award from the 2024 MedTech Breakthrough Awards. And in fact, we've already seen 16 hospitals adopt our endoscopy AI solution, including major hospitals like FCJU Hospital, Kaohsiung Veteran General Hospital, Yida Hospital, Yangming Hospital, and Jiao Tong University Hospital. Moving on to the next slide. For the ASUS ROG branding, I think it is now well recognized as a leading gaming brand. As previously mentioned in Q1, we already had a 25% market share for the gaming notebook segment. If looking at just the premium lightweight notebook segment, we actually have an incredible 70% market share. As for market reception, just in Computex Taipei of this year, we were awarded over 30 different media awards for our products. And our next generation of handheld console, the LIX, was also reviewed very favorably. As for product innovation, ROG Alla X incorporated many of the customer feedbacks that we have been collecting over the past year. We have made improvements such as expanding our battery capacity to 80Wh, and to increase our memory to a maximum of 24GB, our total console performance can be considered market leading. Our product lineup is also continuing to expand, including things like long-lasting ROG Extreme wireless gaming keyboard. There's also the carbon fiber built ROG Harper Ace Extreme gaming mice. These are all gaming peripheral products that we are expanding. As for the community management aspect, this is a part of our brand that we are constantly putting our attention in. We are trying to break into gaming, entertainment, sports, music, anime and other lifestyle markets with our ROG brands. For example, recently ROG collabed with PUBG Mobile, the mobile game, and introduced many ROG phones and ROG Saga product placements that achieved incredible 40 million views. ROG was also among the first to introduce so-called MBTI gaming cards. So the aim is to use AI to provide a personalized solution and to also cultivate brand loyalty. I think many of these efforts demonstrate that our commitment to the ROG brand is highly successful and worthy of continuous investment. And lastly, let's move on to the ACEs commitment to a sustainable future. As ACES continues to cultivate each of its business groups, we are remaining committed to our goals for sustainable growth trajectory. In our recently self-disclosed 2023 sustainability report, we talked about four major pillars of our sustainable strategies, including climate action, circular economy, responsible manufacturing, and value creation. This demonstrates our medium to long-term commitment to meeting the net zero manufacturing goals. Some of the more notable things we achieved include things like our reduction in carbon emissions in 2023 compared to 2022. Our near-term science-based emission reduction targets were also validated by the SPTI. At the same time, we now see that our eco-friendly product revenue exceeds qualified revenue of over 90% in 2023, and that the average energy efficiency of our key products exceeded Energy Star standards by 42% in 2023. These are just some of the feats that we have achieved in our commitment to achieving a sustainable future. That concludes my presentation. Thank you. Once again, I'd like to thank our co-CEOs and our CFO. Now we will be entering the Q&A segment. If you have any questions, please raise them in the left-hand panel. We will collect them and answer them as we see them. So the first question we are seeing comes from JP Morgan and Morgan Stanley. The question is about the licensing fee income for quarter two. Which business group does that fall under? So I'll answer it this way. The income from the licensing fee falls under the systems business group because it is considered a part of the smartphone department, and the smartphone department falls under the systems business group. The truth is that for the past several years, we have continued to have income from our IP licensing fees. It's just that the time that it comes in is not consistent. It sometimes comes in quarter one, sometimes for 200 or 300 million. But it is for Q2 this year that we were able to see a larger income from that item, which is why we mentioned the licensing fee in particular for today's conference. for our second financial related question from JP Morgan Morgan Stanley is that for quarter two how much did the price recovery from the inventory contributed to our gross margins So I think that our inventory management has returned to a fairly positive state right now, which is why that we were able to achieve gains from the price recovery on our inventory. So looking at quarter two, I think the contribution from these price recoveries from our existing inventory may account for perhaps one or two percent. Now let's look at our next question. The next question once again comes from Morgan Stanley. So for quarter two, how much did the ROG Ally accounted for in terms of the income? So the ROG Outline has been introduced for about one year at this point. That, I think, is more or less at the end of life for the first-generation product, which is why its sales has more or less steadied to a point. Which is why when we announce the LIX on Computex, that's something that we think will begin to contribute in Q3 and Q4 as it reaches a new volume peak going forward. But from a more macroscopic angle, I think that you can see a lot of competitors now joining the handheld console market, which really proves our forward thinking by introducing this product one year ago. We of course welcome the competition. We have long invested in the gaming industry and we have acted as a leader in this industry. And because we are highly confident in our in-house R&D capabilities, we are confident that for the gaming industry, we will continue to maintain our lead in spite of the competition. And of course, as we introduce the next generation ROG LIX, that will, of course, contribute very positively to our quarter three and quarter four financial results. Thank you. The next question comes from the Commercial Times. The question is, if you look at AI PC products that have an integrated MPU, what does ASUS think the AI PCs will account for in terms of its total notebook volume sales? And from 2024 to 2025, do you anticipate what degree of growth for the AI laptops? So I think we need to take a step back and look at the fact that AI PCs are defined very differently from each vendor. For example, Intel thinks that if you have an MPU, that's an AI PC. But for Microsoft, they define their Co-Pilot Plus PCs differently. So for Intel, based on their definition of an AIPC, they are anticipating 300 million to 400 million units moved for the totality of 2024, and you can calculate the percentages from that. But for us, we are optimistic that for 2025 and 2026, the AIPC segment will increase significantly. We anticipate that by 2026, the AIPC segment will account for more than 60% of the notebook market, which is why that pace of growth will be very, very fast. But again, going back to the issue of definition, if we go back to the stricter Microsoft definition of Copilot plus PC, that's actually going to pan out lower because Accounting for the fact that there's limited OS support, based on the Microsoft definition, only Qualcomm's offerings qualify for that Microsoft definition of Co-Pilot Plus PC, which is why that product segment by that definition is relatively limited. Based on the data that we have collected thus far, ASUS is actually performing quite well even in this segment. As we mentioned previously, ASUS hopes to achieve a minimum 25% market share in the AIPC market. And based on our collected data right now, we do have at least 20% market share right now. So we are moving towards our target as anticipated. Our next question comes from Merrill Lynch. The question is about how servers now account for double-digit incomes for quarter to 2024. And the question is, what's the precise number? And also, how much of that comes from AI servers in particular? And also, what are some of your main customers for your AI servers? And what industries do they come from? Okay, so I'll answer this question. As we mentioned previously, for Q2, our server business revenue is now at a point where it accounts for double digits in terms of our total brand income. So that's going to be somewhere between 10% to 15%. So that's my response to the first question. For the second question, for our server business group, I think that yes, AI servers do account for the vast majority of that. You can think that maybe 80% to 90% of our server business group is moving AI server products. As for what industries do our clients come from, I think this is, again, as we have given before, it's mainly regional cloud solutions providers. Some of those are local data centers. We also have government clients, educational clients, academia, and a small amount of enterprise CSPs, but mainly it's regional CSPs. In terms of the breakdown by region, Asia, of course, accounts for the largest percentage, but we do also have some regional CSPs from Europe and the Americas. So in terms of our investments into cloud solutions providers, we do have high hopes that besides being able to serve as tier two and tier three CSPs for our clients, we hope to be able to break into the market of tier one cloud solution providers. For the next question, I see that we have a lot of institutional investors and media asking. Let's answer the one from eSpring Investments. So the question is, how does ASUS treat its growth margin and revenue margin targets for the second half of 2024? And also, do you think that for the IP licensing fees, there will always be 1 billion per year income going forward? So for quarter one, I think we already mentioned our projections for the entirety of 2024. We were hoping that for the second half, we were hoping to raise our margins to 4% to 5%. But quarter two ended up being a quarter with a lot of extra income, which is why we were able to have a significantly higher margin than we previously anticipated. But despite that, I think we're going to maintain the same margin targets for the second half of 2024. We will continue to optimize our internal operations to see if we can't deliver results better than expected. As for the 45% margin target for Q1, that is again the ultimate goal that we are aiming for. About the licensing fees, I think that's something that our CFO talked about. That $1 billion is likely to be, yes, a yearly income going forward, but then I think that most of that licensing fees are coming from technologies in the 3G, 4G, 5G essential intellectual property licensing. and I think as many of you know we have very large communication needs right now in a variety of devices because even things like cars right now are using 4G or 5G communication and so we do anticipate that going forward there's going to be more and more companies needing licenses on these IPs for their devices so we are optimistic about the licensing fee growing even higher in the future although that's not something that we know we can know for sure how high the number can be but I think at a minimum 1 billion per year is possible or is achievable I'll supplement the explanation a little bit in that if you're going to do a financial model estimate, I think you can just assume that this is going to be 1 billion minimum income per year going forward. And as our co-CEO mentioned, it's probably going to grow going towards the future. So that's something to keep in mind. The next question comes from DigiTimes. Firstly, we would like to congratulate ASUS on having such positive results for Q2. The question is for the two co-CEOs. Based on the product lines that exist right now, your highest-grossing products are motherboards, graphics cards, notebooks, or servers. Okay, so I think the answer is probably more or less as everyone expected. For quarter two, if purely from a revenue perspective, the increase, the most significant increase came from servers. As many of you know, we did not have very high revenue in terms of our servers last year, but this year we saw this multi-fold growth, which is very impressive. But if we look at it from a more income perspective, I think a lot of these PC notebook incomes, I think they do contribute much more in terms of our total revenue income. Motherboards and graphics cards, they have always performed well in the past, and they are continuing to perform quite well. So for Q2, they are performing about as well as they have always been, which is why things are the way they are. Thank you. OK, we are also seeing discussions about our server business groups. So let's take the question from DigiTimes and answer that one. So recently, Nvidia has released news about modifying its cycles for the B200, G200, GB200 chips being delayed for another quarter. So as it delays the release of these chips, is the volume going to go up, especially for H100 and H200? Is that going to impact ASUS in any way? OK, so I'll answer this one. So firstly, ASUS is always working very closely with its partners, especially NVIDIA. So whether it's the H100, H200, or the Blackwell chips, For products using these, we are always working very, very closely. We are always hoping to follow the schedules of our vendors as closely as possible. To be more specific, our AI server business group will probably come from the H100 and H200 chips. As for the Blackwell chips, as we mentioned in the previous earnings call, we were among the first wave of collaborating partners. Right now, the Blackwell products are in the state of submitting samples to VDI and having them be validated. So even though there's a lot of talk on the market about modification of skills or into the delays, but I don't think that's really something that's appropriate for us to answer. That's a question that ultimately should be answered by Nvidia. But what I can say is that we are following the footsteps of our partners very closely. Okay, so here we have questions about the PC and IPC market. So let's go for the question from Merrill Lynch again. So for Asus, you have set a 15% to 20% quarter overgrowth for season 3 PCs. Is that based on the sales volume or based on revenue? Also, is it true that AI PCs tend to have a higher retail price than PCs? Which is so... for the units moving in season for quarter three how much of that will come from AIPCs and also our last question besides the ARM platform x86 are also supposed to release also AIPC related products so how is that competition going to impact the pricing and the volumes moved Okay, so I'll answer this one. Now, as we mentioned previously, we think that the PCG shipping will definitely increase 15% to 20% quarter over quarter. That's, of course, based on our sales volume. That's based on our client-server business group estimates. But then again, going back to the issue of definitions, right now, only Qualcomm's products qualify strictly for the Microsoft definition of an AI PC, which means that Intel and AMD will be late to the party, so to speak, and they only have perhaps slightly over one quarter's worth of time to move units, which is to say that we're only estimating hundreds of thousands of units for them. In terms of retail pricing, yes, I think it's important to acknowledge that AI PCs are priced higher than traditional PCs. One of the factors contributing to that is that AI PCs tend to be specced higher than their traditional counterparts because there are certain definite hardware requirements for running AI solutions, AI software. For example, AI models tend to have hard requirements for memory. If you don't have enough memory, then your AI solutions are going to be very stuttery and it's going to deliver on a very poor user performance, which is why we are modifying the specs of products accordingly. And owing to those modifications or improvements to the specs, there's going to be that price differential. This is again something that a lot of the media has been asking about in previous earnings call AIPC products will tend to be 100 to 150 USD more expensive So of course AIPCs will aid in our volume and sales The next question comes from JP Morgan. For quarter two, we saw gains due to price recovery on inventory. Now, given current invisibilities, can you give us some insights into that? So currently, we see that ASUS is in a state where we've been much healthier than before, which is to say that based on our operational strategies, based on things like inventory costs, our retail strategies, our promotional campaigns, a lot of our strategies, all of that is now coming to fruition, which is to say that when all of that comes together, that is going to be reflected very positively on our financial results. And some of the more tangible positive benefits of that would be the price recovery on our inventory. So starting from Q2 to the second half of 2024, we are anticipating the improvements in our internal operations. may lead to even better results going forward, and as our cash and cash equivalents may improve going forward as a result of that. So based on these two factors, I think all signs point towards a very optimistic result, whether it's because of our inventory or because of our cash and equivalents. But if you look at just from a very quantized perspective, then the Later quarters may not see as big of an improvement as these imminent quarters to follow. But because we are going to release new products, we're going to have better products on the market and all these factors, we do think that the company is nonetheless experiencing, going to continue to experience its current growth trajectory. Originally, for 2024, we had set a margin goal of 4% to 5%. Now, because for quarter two, we had some unexpected positive results, we are currently set to hit those targets ahead of schedule. For the second half of 2024, we are definitely going to go for the higher end of 45% as our goals by the end of 2024. Thank you. I think that we have examined most of the questions that have been raised. We seem to have answered most of the more relevant questions that have been raised. I would like to once again thank everyone for attending our investors relations conference today. I would like to have our two co-CEOs give us a quick conclusion to today's conference. Firstly, I would like to once again thank everyone for attending our earnings call. I think one of the more notable items that appeared today would be the licensing fees. And I think that really reflects positively on our ASUS's dedication to R&D. As for the AI PC, I think the generative AI PC is definitely going to be a once-in-a-century inflection point for the PC market, which is why we are actively investing into the AI PC market. We are investing into further R&D in hopes that we can turn these generative AI technologies into value-added services for our customers. We hope that we'll be able to live that ubiquitous AI and unlimited possibilities slogan in the future. We hope to deliver on better products and services. I would also like to thank everyone for participating in today's investors' earnings call. For ASUS, our management team and our operational team is working very hard to deliver excellent results for this quarter, and we are happy with the financial results that we presented today for the second half of 2024 and for 2025. I think it is quite clear that technology is developing very quickly. We are going to see client-side AI, AIoT, edge computing. A lot of these technologies and solutions are positive driving factors for the PC market as a whole. which is why ACES is going to leverage its impressive R&D capabilities to cement its leading position in the market. Thank you. Thank you. This marks the conclusion of our Investors' Earnings Conference. Thank you.