Dear investors and friends from the media, welcome to LITEON Technology's 2023 Q2 physical earnings conference. In addition to explaining the operating results of Q2 and H1, we also hope that everyone will better understand LITEON's growth strategy after completing many operational adjustments and transformations in recent years. Our meeting will begin when everyone is seated. Today's agenda consists of three parts. I'll first explain the results and financial performance of Q2 and H1. Next, President Anson will explain the company's operating outlook and growth strategy. The QA session is open for questions and further explanations.
For those who are here for the first time, this page provides you with an introduction to the three major business segments, which are: Optoelectronics, including optoelectronics, opto-semiconductors, and Automotive Electronics; Cloud and IoT, mainly used in data centers, servers, networking products, AI, IoT, et cetera; IGC, used in notebooks, workstations, desktop computers, game consoles, et cetera. LITEON Technology's net sales in Q2 was $37.3 billion. Gross profit, $8.7 billion, with a GP rate of 23.3%. Operating expense, $4.4 billion, with a rate of 11.7%. Operating profit, $4.3 billion, with a rate of 11.6%. Overall, net sales in Q2 was up 9% QoQ and down 13% YoY. If excluding the imaging BU that was disposed of last year, the net sales decreased by 7% QoQ.
Demand for consumer electronics remained weak in Q2, but the net sales of high-value and high-growth businesses, such as cloud computing power supply, Automotive Electronics, 5G networking products, continue to grow YoY. The GP benefited from the increasing proportion of high-end products, close supply chain cooperation, and optimization of operating efficiency. The GP rate was up by 4.5 percentage points QoQ and 2.9 percentage points YoY. The operating expense was up by 2% QoQ and down by 1% YoY. The increase is mainly due to R&D investment. In Q2, R&D expenses accounted for 5.2% of the net sales, and the amount increased by 10% YoY. Among the R&D investment, cloud power supply, Automotive Electronics, and 5G networking products accounted for a higher proportion. The operating profit doubled QoQ and was flat YoY.
The operating profit rate increased by 5.3 percentage points QoQ and 1.4 percentage points YoY. Net other income was $970 million, an increase of $150 million and $300 million QoQ and YoY, mainly reflecting rising market interest rates, so net interest income increased. The profit before tax was $5.3 billion, and the profit attributable to parent was $4.2 billion, an increase of nearly 80% QoQ respectively. The EPS was $1.84, an annual increase of 6%. In terms of the operating results in H1 2023, the net sales in H1 was $71.5 billion. The gross profit was $15.1 billion, with a GP rate of 21.1%. The operating expense was $8.6 billion, with a rate of 12.1%.
The operating profit was $6.5 billion, with a rate of 9.1%. In YoY terms, if excluding the imaging BU that has been disposed of, the net sales decreased by 10%. In H1, despite the restructuring of the electronics industry, high-value businesses continued to grow. The operating GP increased by 2.3 percentage points YoY, and the operating profit rate increased by 0.4 percentage points YoY, which all reflect the synergy of flexible and resilient operations and high quality growth of the high-end businesses. The operating expense increased by 2% YoY, in which R&D accounted for 5.3% of the total net sales, with an annual growth rate of more than 10%, mainly focusing on improving the value of core products and investing in new businesses.
The net other income was $1.8 billion, with an annual increase of $1.5 billion. The main difference is that in H1 last year, there was a recognition of an investment evaluation loss for Vizio of about $1.2 billion, and the impact on us in H1 this year was greatly reduced. In addition, in response to market interest rate hikes this year, net interest income increased. In H1 this year, the net profit before tax was $8.3 billion, and the profit attributable to parent was $6.6 billion. The EPS was 2.86, an annual increase of 8%. In Q2 2023, the net sales and profits of the three major segments all grew QoQ. In Q2, the two major segments, Optoelectronics, including Automotive Electronics and cloud and AIoT, accounted for 57% of the net sales.
The three major business segments continue to optimize product and client mixes. Among them, among them, the net sales of the Optoelectronics segment, including Automotive Electronics, was $7.9 billion, up 4% QoQ. This is mainly due to the recovery in demand from Optoelectronics, opto-semiconductors, and EV clients. The GP of high-end products exceeded 30%, operating profit $760 million, up nearly 60% QoQ. Cloud and AIoT net sales was $13.2 billion, up 9% QoQ. This is mainly due to the increasing proportion of high wattage, high efficiency, and high density, high-end power supply required for cloud computing. The GP of high-end products exceeded 25%, operating profit $1.6 billion, doubled QoQ. In IGC, the net sales was $16.1 billion, up 12% QoQ, which reflects the recent PC urgent order effect and product mix optimization.
The GP of high-end products was over 18%. Operating profit, $2.7 billion, up nearly 50% QoQ. As for the balance sheet, among the current assets in Q2, in YoY terms, accounts receivable down by $8.6 billion and inventory down by $7.4 billion. In current liabilities, bank borrowings down by $8.2 billion YoY, accounts payable down by $5.7 billion YoY. Our working capital management includes accounts receivable, accounts payable, and inventory levels. In YoY terms, the number of inventory days decreased by nine days, and the cash conversion cycle by 15 days, reflecting the improvement of working capital management. The net cash position was $50.5 billion, down by about $3.3 billion QoQ, mainly due to the cash dividend distribution of $7 billion from Q4 last year.
Through active working capital management and free cash inflows from operation, we prepare for and help the future improvement of business performance, investment, and growth of core businesses. The BDPS increased from NT$ 33 to NT$ 35, up 6% QoQ and YoY, which shows that the intrinsic value continues to increase. Operation overview for Q2 and H1 of 2023. In H2, the net sales was NT$ 37.3 billion. The growth came from cloud computing, power supply, Automotive Electronics, and 5G networking products. GP benefited from the increasing proportion of high growth, high value businesses, close cooperation with the supply chain, and optimizing operating efficiency. The GP increased by 2.9 percentage points to 23.3% YoY. The OP rate increased by 1.4 percentage points to 11.6% YoY.
In operating expense of Q2, R&D investment accounted for 5.2% of the net sales, an annual increase of more than 10%. We continue to focus on investment in cloud, Automotive Electronics, 5G, and new businesses. In Q2, the net profit after tax was TWD 4.2 billion, EPS TWD 1.84, an increase of 6% YoY. At noon today, the BOD just approved a cash dividend of TWD 2 per share for Q2, 2023. The net sales in H1 this year was TWD 71.5 billion, GP rate 21.1%. The OP rate was 9.1%, with a YoY increase of 2.3 and 0.4 percentage points, respectively. EPS TWD 2.86, a YoY increase of 8%. This concludes the financial report for H1, 2023.
I'm now handing over to President Anson. He will explain to you the company's operating outlook and long-term growth strategy. Thanks.
Good morning. This is really the first time in three years I've seen so many investors, shareholders, and media friends who participate in our earnings conference. Since taking office three years ago, the new management team has made every effort to promote LITE-ON's transformation and a market-oriented growth strategy. We actively invest in R&D, and at the same time, we highly integrate resources such as business, manufacturing, and procurement. The main purpose is to meet the needs of clients as much as possible and maintain a highly flexible and resilient functional organization to continue our net sales growth.
Looking back three years later, on this basis, LITEON has precisely selected its tracks and concentrated its resources on developing high-value and high-growth businesses such as cloud computing, Automotive Electronics, and 5G networks, et cetera. This allows us to successfully grasp the time to market. In the new cloud power supply application field, we enter a new market and obtain a good market position. Under such a successful model, we will continue to replicate this successful experience in the development of various new businesses to speed up the development of new businesses. For example, the 5G networking products business has been difficult to promote in the past three years due to the pandemic. Since the lifting of pandemic restrictions, networking products, 5G business has performed well in Q2.
In particular, 5G small base stations have successfully entered the Southeast Asian, Japanese and European markets outside the Taiwan market as the pandemic eased. In the future, LITEON will gradually develop the new businesses that we have targeted with such a model, and transform into a growth-oriented enterprise more quickly. Julia also mentioned just now that overall, the environment, industry, and market in the first half of this year are undergoing continuous corrections. In terms of our own businesses, nearly 40% of-- about 40% of LITEON's products belong to the ITC and consumer products industries. As mentioned in Julia's report just now, our market is also affected by these corrections. Originally, we were still optimistic about Q2 and the second half of the year.
Right now, it seems that in the industries that we just mentioned, including general purpose servers, things might be slightly below what I told you back in Q1. We have also made some adjustments inside the company. We have strived to enhance our products, which is basically about low quantity, high variety, high wattage, and high added value. Through improving product mix, we hope that our businesses can stay away from market impact. On the other hand, in terms of cloud computing, Automotive Electronics, 5G and AIOT, positive growth still remains. We are still quite optimistic about these three major business segments. We've just seen the earnings from Q2, and in Q3 and in Q4, we believe that there is still a chance to grow QoQ. When it comes to Q3, I'm sure that you are concerned about where the growth will come from.
Let me tell you this. In the three major business segments of the company, each one of them will still have a chance to grow QoQ. This is why, as I said, we will continue to enhance and optimize our product mix. In terms of growth, what might be slightly different is in cloud computing, high-end cloud computing. The differences are bigger and more obvious. In terms of Automotive Electronics and 5G, we are still moving towards the direction of positive growth. The reason why we can say this is because, over the last two years, we told you that the company's operation has always focused on growing profits and growing net sales at the same time. We have specially asked ourselves internally that our growth, profit growth should be higher than net sales growth.
Over the past two years, you've seen that we've walked exactly on this path. At the same time, one very important thing is that we continue to enhance, to increase our R&D investment. If you have paid attention to our R&D investment in the long run, you can see that over the last two years, the percentage of our R&D investment has gone up significantly. Through these new markets, products and tracks, we hope that with R&D resources, we want to implement our products as fast as possible on these markets and tracks. I mentioned that growth will come from cloud computing, Automotive Electronics, and IoT and 5G. Previously, I also told you that in the future, energy will play a very important role. We have started our planning. We start from energy storage.
We talk about energy storage, save and control, and transformation, and IoE, Internet of Energy. We start from energy storage. That one goes faster than the other aspects. Last but not least, ESG. Our sustainability report this year was just published, and back in May, we mentioned the 5-by-5 carbon reduction action. What does that mean? Well, by 2050, we promise to achieve zero carbon emissions. Actually, we started back in 2014 already, not just this year. Every year, we ask ourselves internally to reduce carbon emissions by 5%. For our new generation products, the carbon footprint along our supply chain needs to reduce by 5% as well. 5-by-5 represents such goals that all of our employees should aim to achieve. It's easy to remember, and in the future, we strive to achieve such goals.
I'd also like to advertise for our LITEON Little Shop. They have launched some summer edition products. Later, after you visit our demo room, you will see LITEON Little Shop just next to it. If you have time, you can go there to have a look at our eco-friendly products that are impressive and inno-inno-innovative, innovative. In terms of corporate governance, we have once again won the Taiwan Stock Exchange recognition. We are once again among the five-- top 5% companies. This recognizes the company's performance in ESG. This is what I want to share with you as well. Dear investors, media friends, and shareholders, if you are interested, you can scan this QR code on the screen to better understand what LITEON has done in terms of sustainability. This concludes my initial presentation before answering your questions.
The floor will be open for questions, and we will provide you with more explanations. Thank you.
Thank you, Anson. The QA session. We open the floor for questions, and we will provide further explanations. Dorris from Merrill Lynch, please.
Hello, Anson and Julia. This is Dorris from Merrill Lynch. I have three questions to ask. Should I ask them together or one by one? Well, either way. Okay. All of my three questions focus on AI server power supply. My first question is: currently, this product line accounts for how much of the company's net sales? For this year, next year, and in two years' time, does the management team have any forecasts or expectations for this product's percentage? We know that the GP of AI server power supply is much higher than regular servers.
Could you give us some directions in terms of how high it can reach? If we want to benchmark against our current products, where the highest level is Optoelectronics, is it possible for AI server power supply to achieve that level? Third, indeed, there's only LITEON and another company that are leading in AI server power supply technologies. How can LITEON compete with this major competitor to enlarge your market share and to maintain your distance, the distance between you and the companies in the third and fourth positions?
Thank you for your questions. We all know that AI has been hot and popular recently, these questions are also a bit hot and difficult to answer, but I will try my best according to my understanding.
The company's AI plannings started three years ago already, so we didn't just start this year, and we have had this opportunity to present our products and technologies to our clients. However, we only started to enter into business in H1 this year. We had a little bit of shipment in H1 this year, so we are still in a beginning rising phase. I can tell you that if you look at H1 and H2 this year, and if we only look at AI server power supply, our growth in H2 will be a few times higher than that in H1. As for the percentage, right now, it is still very low, but the quantity is still low. If you look at the amount, this year, it will be around between 5% and 8%. This is our initial estimation.
As for next year and in two years' time, as technologies become more mature and as GPU supply problems get resolved gradually, I think that the demand next year can be more optimistic. It can increase by 10%-15%, roughly. We believe that the AI trend is an inelastic demand. It's not like an optional product. We are quite optimistic. When we look at the development trend over the next two years, AI will enjoy a higher percentage. You also asked about general purpose or regular servers. As AI grows, some demand will shift from general purpose to AI servers. The reason is because there's always a prioritization in investment, in my opinion. Right now, most people on the market first put capital on AI, but it doesn't mean that general purpose demand will go down.
Indeed, this year, the demand has gone down by around 10%. We still believe that next year, it will return to normal. As the market returns to a normal and rational level, it will return to a positive growth track, so there shouldn't be a problem. It's not that AI servers will replace all the general purpose servers. As for your question about our competitor, I want to correct one thing. In terms of AI, we believe that we are leading. We don't really lag behind our major competitor. Of course, if you look at high-power cloud, AI servers to calculate, of course, we are about neck to neck with our major competitor. This is a fact, but we are leading in terms of AI technologies. We have spent two years-three years trying to do two things well. The first is that...
Well, the major functional difference between general purpose and AI servers is that general purpose is 12 V output, and AI power supply is 54 V output, which means that the efficiency has to increase. For example, general purpose servers, the market requirement is 96% conversion rate, but now for AI, the market requirement is 97.5%, which is quite challenging. Even though it's just 1.5 percentage points, this is why we have spent so much time trying to further advance our technologies. Second, as high current increases, the instantaneous current requirement is also higher than that for general purpose servers. Due to these two factors, technologically, AI server power supply is more challenging, but we are ready. We don't just look at our competitor.
We don't know what they will do, but we can be sure about that we are taking the lead. This is how I would answer your questions. Thank you.
Hello, Anson and Julia, I have a few questions. Let's first return to the earnings of Q2. If we look at different segments, ICT's OP margin rate in Q2 was very good. Could you further explain? I know that you mentioned product mix, improvement, and supply chain cooperation, but I want to know if it can last. Second, Cloud and AIoT's OP margin in Q2 was very good, and we know that there are two units in this segment. In Q2, IoT and Cloud both performed well, or IoT was just average, but Cloud performed better. I want to know such details.
Second, I want to ask about charges, because a lot of people in North America are moving towards Tesla's NACS specs. Anson, from your industry observations, how do you look at this? What is the impact on the industry development? For example, people may need to pause to modify product specs, so in the short run, things may not be that good, but in the long run, the market will still move ahead, or maybe this is not the case. What do you think? Also back to LITEON itself and LITEON's businesses. In the past, LITEON worked more on car makers, and now the focus is more on operators. In terms of your businesses, what are the-... different impacts and changes between operators and car makers.
Okay, you also have three questions. You did your homework. You saw that ICT's GP went up.
At the same time, the cloud, GP and OP also went up. According to Julia's presentation, Automotive Electronics GP also went up in Q2. How did ICT's GP go up in Q2? Well, as I said at the beginning, product mix. We all know that our consumer products, such as game consoles, desktops, and notebooks, we have the largest market share worldwide. We are number one in terms of global market share. How can we continue to grow? Well, we have to change the product content. In the past, our operation focused more on major customers and mainstream models, because we thought that we were better at mass production. This mentality has gradually changed over the past two years to three years.
Our consumer products, such as game consoles and even, including keyboards and mouses, we are moving towards the higher end with lower quantity and higher variety. In Q2, our high-end products had grown from 30% to roughly 40%. This means that our ASP has been going up. As you may know, the higher-end the product, the higher its GP, because it's more difficult to make technologically, so there are fewer competitors. The same applies to cloud. Of course, cloud also benefited from the AI product mix in H1. Through such a product mix, our GP gradually went up. We don't want our competitors to know our GP, so I cannot really answer your question clearly. Bear with me. Chargers, in North America, people are starting to move towards NACS.
This is the North American Charging System, and this is the same as Tesla. This simply means that we have to meet such specs. If we want to do that, then our design of hardware and software needs to change, which shouldn't be a big problem. This is simply about satisfying customization requests, for example, in terms of system, software, et cetera. When things are unified... Let me give you a simple example. We have a unified charger, more and more, type C. There is a advantage to that. The demand can rapidly increase with such a unification. From our perspective, in the long run, this is actually good news. In the short run, the impact is that we need to make some specs adjustment. Let me also tell you that in Q3, we will launch D.C. chargers, which work exactly with this system.
This is actually not news. About two quarters ago, we knew this trend on the market. We planned accordingly in advance. There isn't a big impact on us. Previously, for two years, we focused on level two wall-mounted chargers from 7.5 KW to 22 kW chargers. We mainly supplied to service providers. Gradually, over the past one year, we have moved towards car makers to supply our solutions and mainly on DC chargers. We believe that when we look at the future growth trend, compared to level two, we believe that level three will enjoy greater growth. We will have to work closely with car makers. This is how I would answer your three questions. Thank you.
Hello, Anson and Julia, this is Sharon from Morgan Stanley. I have two questions to ask.
First of all, I would like to verify something. Anson talked about AI server power supplies contribution. You said that in H2, it would be 5%-8%. Is it against the total power supply, or is it against the entire company's net sales?
Let me answer you first. I was referring to high power or higher, higher-end power supply, because there's also middle power, right? What I meant was high power. AI is above 3,000, 5,000 watt, which is a different segment. Here, we don't consider it as part of the ITC products, we consider it as part of the cloud computing product. I was saying that in the high power business in H2, in terms of net sales, this is the percentage range.
I'm trying to understand, if we use this slide and its categorization in the cloud and AIOT segment, how much is it? High power. High power accounts for how much of the net sales in this segment? Well, if we look at Q2, it accounts for 36% of the company's net sales. If we look more closely, cloud related is 60% out of it, while AIOT accounts for 40% of the net sales of this segment. Anson was talking about high power for server used in cloud computing, in terms of net sales. Okay, in this 36%, there's 60%, and out of it, 5%-8%, right?
Yes. Thank you. My second question is also about what Anson said. You are moving towards 3K, 5K watt in your development.
When we look at power supply units, things are going towards higher voltage. In terms of if we look at things from the perspective of data center operation, in addition to servers, there is power supply needs in large data centers, right? Could you share with us from LITEON's perspective, what are your plannings in addition to power supply units, what are your plannings related to data center power supply, and how fast can they contribute to your net sales?
Okay. For this question, in addition to cloud computing power supply, we have two major plannings. The first one is institutions. We already had enclosure institutions, but in the past, we only worked on relatively lower-end products. Over the past two years, that percentage has been going down.
We are going through such a transformation towards cloud or rack design capabilities. This year, actually, there was a little bit of business this year, but not much. This is why we didn't mention it specifically, but we did send out some samples to CSP clients, which they are evaluating, including AI. Second, previously, we also mentioned this, both general purpose or AI servers are both going towards higher voltage. One important thing is that space cannot be further enlarged. No one would want to make the specs larger. Rather, people are trying to make things smaller in order to leave space for other things. Heat becomes a very serious headache. You can see that on the market, there is a lot of discussion about heat, and different cooling mechanisms, such as liquid cooling or eventually immersion cooling or water cooling.
We believe that as power voltage becomes higher and higher in the future, we must have to go towards water cooling or immersion cooling. No one can predict for sure right now, because it depends ultimately on the client's design specs and what kind of value our solutions can provide. Actually, LITEON started our planning last year, and our first generation products were displayed in the OCP exhibition. After that, we thought that there would still be a lot of room for improvement. In October, we will launch our second generation solutions, which we, we will launch in the OCP in the Czech Republic. These are the two major things that we can see right now.
Hello, Anson and Julia, I'm Anne from Nomura. My first question is about consumer products margin that you just talked about.
Well, improving product mix, was it due to the fact that in Q2, there were some PCs, notebooks, urgent orders? Can we see that, too, in H2? During the opening, Julia talked about the cooperation between vendors to reduce costs. Will there still be room for that in the future? Right now, market is not very good, so some clients, they want you to reflect cost reduction for them. Can it, can it also happen in H2?
Well, to answer your first question, in terms of consumer products, be them adapters, desktops, or gaming keyboards and mouses, our growth mainly comes from the increasing percentage of high-end products. For example, gaming adapters. They go from 300 W to 500 W.
As for desktops, in addition to the existing desktop computer, products and applications, we also go into workstations, which can go as high as 1,000 W. These are the things that we've only started to approach over the last two years. In the past, we thought that the volume was not high, so we didn't really want to do it. Over the last two years, the demand has been going up, so we also started these. It has to do with product mix rather than urgent order effect. If the percentage remains, then in H2, it can be at the same level as Q2, or even better, because traditionally in Q3, it's the high season for such products. Right now, of course, the market demand is relatively weak.
Some clients may ask for support from us, which we think is normal. There's nothing strange about it, because it's always been like this. This has to do with the market mechanism. When prices went up, we also reflected that with our clients. The same applies to now. What we need to do well is that we want to make sure that our products are competitive, and we want to optimize our design, our supply chain, and our manufacturing, so that we can maintain our necessary GP. When clients come to us to ask for cost reduction, price reduction, we don't think that it's necessarily problematic. We think that it's normal, and there isn't really an impact.
Okay, very clear. My next question is about cloud power.
AI power, as Anson just said, only started this year. If I remember correctly, last year there were quite a few cloud clients which may not be related to AI. They had 3,500 W, this year, probably 4,000 W. It's in the range that you mentioned. Is it part of the 5%-8%?
Yes, because we realized that some clients use them for GPU and AI servers, so we consider them as part of the 5%-8%. If that's the case, these clients last year already had a large market share, right? No, I have to clarify this. This only started mass production this year. Last year, our growth mainly came from networking and communications, the wattage was not that high.
It's below 3,000 W or even just 2,000 W, 1,000 W. Last year, high wattage had a low percentage relatively, but this year, because of general purpose clients or pure AI clients, which are new, their wattage is higher. At the beginning of this year, the volume wasn't high, but it's been going up. We believe that in H2, it will continue to go up. For such clients, if they are still general purpose, but if they use DPU plus CPU, is it also part of the 5%-8%? That is not used for AI. It's purely for general purpose. Yeah, right. I'm a bit confused right now, because the wattage is above 3,000 W as well. We shouldn't use 3,000 W as a definition, because there are also things above 3,000 W for general purpose.
If we look at our major client, they, they use it for general purpose, basically. For things that are for AI, the starting voltage is higher, so we don't really use voltage to determine whether something is AI or not. We look at the application. Okay, this 5%-8% is AI purpose clients, excluding general purpose, even if it's above 3,000 W. Right. We look at the application to determine whether something is general purpose or AI. Sometimes the power is used for networking, and it's around 2,000 W. It really depends on the application to determine what it is. Sometimes there's edge computing, right? Which is related to AI, but the wattage is below 2,000 W.
Do you consider it as part of AI?
No.
Okay, the definition of this segment is really above 3,000 W with a purpose of AI.
Right. It's used for AI computing servers.
What about inference?
No, we don't consider it as part of it.
Okay. Very clear.
Thank you so much. Thank you. Well, I can add one point here. Later, if you have time, you can come to our showroom, where we have a clear categorization. We have power for AI servers, we have power for networking and telecom, and we have PSU plus PBU power. We show them separately. Seeing is believing.
Thank you.
Hello, Anson and Julia. I have one question to ask. I don't know if you have already explained this, because I arrived a bit late. In Q2, the GP and OP improved significantly. When I look at the product mix, the three major segments haven't changed much.
I'm curious, from Q1 to Q2, the GP improved by a few percentage points. What are the main reasons? Is it because under the main segments, there have been some adjustments of the items, or is it because of something else? Can such a GP be sustained in the future? In theory, in H2 and next year, AI power should account for a higher percentage, which should be a favorable factor, right? Could you share with us the reasons behind such an improvement?
This is a good question. Indeed, compared to Q1, the GP improved quite a lot in Q2. There are three main factors. First of all, material cost improvements. This has to do with product mix. Those with good material cost sell more, and those with a good GP sell more.
Second, in H2, RMB was quite favorable to us because it was depreciating, and we have many materials that are bought from mainland China. This was a big plus to us in Q2. Third, in terms of raw materials, we had some cost reduction because we know that, just as what we said a while ago, clients came to us to ask for price reduction, we also negotiated with our suppliers accordingly. In Q2, the price reduction was more significant than in Q1. There's our manufacturing cost that plays a role. Over the last two years, if you have paid attention, the cost has gone from 15% to 13%, with a one percentage point of reduction for material costs.
Over the past two years, we have transformed ourselves using some digital tools to keep reducing our loss. This is where we perform quite well in terms of manufacturing costs. Third, our inventory loss is also an important factor. In the past, there were some headwinds in the supply chain, so we prepared for quite a lot of inventories. According to our accounting rules, after a certain time, certain period of time, we need to list such inventories to prepare for potential loss. In H1 this year, many of our colleagues spent a lot of time trying to resolve this issue. In H1, we consumed almost all the inventories that had been accumulated. It's difficult to say which factor accounts for how much percentage, but due to these three factors, our GP improved significantly in Q2.
Let me also tell you this, over the past few years, we have optimized our products, so low GP things have been going up... Low GP things have been going down, and high GP things have been going up. 20 and 10 are the goals that we strive to achieve internally. I'm sure that in Q3 and Q4, we will continue to maintain such a GP. Of course, there are product mix and exchange rate factors, but I'm sure that we will be able to maintain the GP at this level. Thank you.
Thank you for the answer. 23% is something that you think that you will be able to maintain in H2 and next year? Supposing that the exchange rate remains constant at a certain level, you are confident to maintain the GP target?
Well, not necessarily 23%.
We just said that there are market changes, and we adapt accordingly. For example, we may provide more rebate or price reduction for clients. In management, these are necessary measures. As I said, 20 and 10 are the bottom lines that we will not give up on.
Understood. Well, before Q2, for a few quarters, you were slightly below 20%, such as 18% or 19%. Let me ask my question in a different way. Can we look at Q2 as a turning point, after which your GP will be above 20%? As for OP, in the past, it was in single digits. Maybe after Q2, you are more confident about that being above 10%.
Yeah, we are quite confident about that.
Previously, we told you that we would try to improve our GP, but whether or not it can be at 23% or higher, well, regardless, ultimately, we transfer that money earned towards our OpEx. For example, an increase of 1 percentage point that will be invested in our R&D, because the new tracks that we have selected require R&D resources more. For GP, GP will continue to go up, but we will maintain the OP level. This is how we will do. Thank you.
Can I ask you, could you talk a little bit about photocouplers? LITEON is leading quite a lot in this area, and for a few quarters, the market was not good. How do you look at the next two quarters in terms of operation and outlook? Thank you.
This is also a good question.
You pay attention to photocouplers, which is part of our Optoelectronics. Right now, the consumer market and the ITC market are not quite good. Our visible light products, starting from Q1 last year, started to go down. Our photocouplers are used in ITC products or in industrial automation products. Photocouplers were also affected as a result. It wasn't until Q1 this year that we saw the bottom, which means that there was about one year's correction. In Q1, we saw the bottom because we started to see demand coming in Q2. In Q2, the net sales of Optoelectronics turned out to be better than in Q1. If we look at Q3 and Q4, according to the current projections, things can be better than in Q2. In addition to photocouplers, visible light products and invisible light products are also going up.
There's an interesting phenomenon. We can look at this component as a leading indicator because it reflects things earlier. It goes up earlier, and it goes down earlier as well. Internally, in LITEON, we use it as a leading indicator. What I can tell you is that in Q1 and in Q2, this product was bottoming out and started to rebound. I think from the market's perspective, maybe you can see things more clearly than I do, but internally, we are seeing that it's going up and recovering.
I have one question. Well, in the past, you did provide some the YoY growth for your core applications. I don't know if you have numbers from Q2, such as cloud computing, et cetera.
Let me share with you very quickly the numbers.
We just mentioned that when we look at Q2 and the high-value, high-growth, businesses such as cloud power supply, 5G networking, and Automotive Electronics, in Q2, they all had YoY growth. Cloud power supply was a, was more than 20% YoY growth. As for Automotive Electronics, it was about 10% YoY growth. IoT is more moderate, and it was, in single digit.
Another question. You did talk about Q3, but could you share with us the QoQ patterns for Q3 based on past experience and past... and, and, ups and downs, and also for the entire year of 2023, if you exclude the imaging BU that has been disposed of, what are your latest thoughts?
Well, for Q3, last year was an exception because things were going down quarter- after- quarter, because in the previous year, things were going up quarter- after- quarter.
If we average those two years, the track was similar to the past. Because of the COVID-19 pandemic, the one-year cycle has become a two-year cycle because people have to try to digest the inventories or the needs accumulated. We've realized that last year was quite exceptional. Things were going down from Q1 to Q2, et cetera. As we said, we have to look at the tracks. Let me emphasize this once again, different tracks have different situations. To answer your question, the tracks where we have growth are cloud, Automotive Electronics. These are the growing tracks. When it comes to consumer products or ITC products or general purpose servers, consumer products declined quite a lot in Q2, almost 30%. PCs declined between 10% and 20%. As for general purpose servers, they declined by 5%-10% as well.
The patterns and rhythms really depend on different tracks. That would be more precise. In general, it would be hard to differentiate good and bad things because some things go up, some things go down. We need to look at different markets in order to be more accurate.
Okay, this concludes our earnings conference today. All the data will be put onto our official website. Thank you for your participation. We would like to invite you to come to our showroom. We have dedicated guides to show you our high-value, high-growth businesses. Thank you so much.
Yeah. You can take this opportunity to understand what we do. Thank you so much for your participation.