Hello everyone. Welcome to our Q3 2020 investor conference. We have released our financial numbers yesterday. As usual, we will have our IR Rodney to report the financial numbers of Q3. After that, we will have a Q&A session.
Thank you for coming to our virtual investor conference. As usual, all the financial numbers are reported based on IFRS, and the consolidating numbers have been reviewed by CPA. Our Q3 revenue was up 10% QoQ, which is seasonal, and 7% year-on-year. Thanks to some cost savings and mix improvements, our GP margin in Q3 was 31.9%, with GP up 21% year-on-year and 7% quarter-on-quarter. Ratio wise, the GP margin was slightly lower than the previous quarter, which was mainly because in Q2 we had some one-off incomes, which we talked about that in the previous quarter.
The mix improvement wasn't that different compared to Q2, that's why the GP margin in Q3 was slightly lower than Q2. Same as Q2, with limited traveling and physical trade shows during COVID-19. Q3 SG&A was down 10% year-on-year and only up 3% quarter-on-quarter. While R&D expense just moderately increased by 4% year-on-year and 3% quarter-on-quarter. As a result, R&D expense as a percentage of sales decreased to 8.6% in Q3 from 9.2% in Q2 and 8.8% a year ago, which was the lowest level in five quarters after the second quarter of 2019.
SG&A as a percentage of sales also dropped to 9.9% from 10.6% in Q2 and 11.8% a year ago, which was the lowest rate in 21 quarters since the first quarter of 2015. The OpEx ratio declined to 18.5% in Q3 from 19.8% in Q2 and 20.6% a year ago, which was the lowest in 11 quarters after the fourth quarter of 2017. With the better operating leverage, OP made a record high in Q3, which was up 89% year-on-year and 13% quarter-on-quarter.
OP margin also hit a new all-time high at 13.4% compared to 13.1% in Q2 and 7.6% a year ago. Sales wise, in terms of the performance by segment, sales wise, the demand for power electronics remained pretty strong and infrastructure sequentially pick up a little bit in Q3, while the demand for automation turned a bit softer. Please note that, in terms of the earning by segment, please note that we made a slight change on the way we categorize or distribute segment incomes.
In the past, there was a minor difference between the sum of each segment's incomes and the total OP number on the income statement. That difference was the expenses of corporate functions, which were not included on this page. Going forward, the sum of each segment will equal to the OP number on the income statement.
The percentage of PE increased to 58% in Q3 from 54% and 53% in Q2 and a year ago. Automation was slightly down to 12% in Q3 from 15% in Q2 and 13% a year ago. Infrastructure also contracted a little bit to 30% from 31% and 34% in the previous quarter and a year ago, respectively. The non-operating profit was around TWD 913 million in Q3, which was within the normal range. In Q3, we had TWD 11.4 billion profit before tax, up 75% year-over-year and 11% quarter-over-quarter. Our EBITDA in Q3 was TWD 15.5 billion, which was up 49% year-over-year and 9% quarter-over-quarter.
Our Q3 tax expense was about TWD 2.2 billion, representing a 20% effective tax rate. The net profit after tax in Q3 was TWD 8.4 billion, up 64% year-over-year and 10% quarter-over-quarter. The EPS in Q3 was TWD 3.23. Now we have a look at the accumulated numbers of the first three quarters. The revenue was TWD 204.1 billion, up 2% from a year ago. The GP margin increased to 30.8% from 27.3% a year ago, with GP up 15%. Our R&D expense ratio moderately increased to 9.1% from 8.6% a year ago. SG&A as a percentage of sales decreased from 11.6%- 11%.
The OpEx ratio slightly dropped to 20.1% from 20.2% a year ago. Thanks to the higher GP margin, the OP margin grew to 10.6% from 7.1% a year ago, with OP increasing by 55%. Here again, we also changed the way we categorize our profit by segment, as I just mentioned before. Year-over-year, we want the fastest revenue growth in power electronics, followed by a mild increase in automation, but some contraction in infrastructure. Profit-wise, with the improvements in overall operations, we saw strong profit expansion in each segment.
In terms of the non-operating profits, we had about TWD 2.7 billion. The significantly higher non-operating profit a year ago was mainly because of the non-cash disposal gain of DET. In total, we had TWD 24.4 billion pre-tax income, up 7% from a year ago. Our EBITDA was TWD 36.6 billion, which was up 9% from a year ago.
The EPS in the first three quarters was TWD 6.95, which was flattish from the same period last year. If we exclude the non-cash and one-off disposal gain from DET, the EPS in the first three quarters was up 34% from a year ago. Okay. The first question is, do you have any idea about the customers' CapEx for the 5G and data center infrastructure in 2021?
We do see some good demands and progress for the 5G as well as the DC, data center deployment. In terms of the 5G deployment compared to the first half, we do see better demand, and faster deployment. But it still depends and subject to different countries, from country to country.
Okay. The next question is regarding the EV business. As we see some recovery in the EV market, do you think that is a short-term rebound or this trend can be sustainable?
We do see some recovery and pretty good demand for the EV business in the third quarter. The main reason behind that was because many of our customers, those OEM guys, They will open their factories after the second quarter, so that help a lot. Besides one of the most famous EV maker in the U.S., we do see more and more traditional OEM guys. They are going to have more new models for the EVs. As we can see, there are more and more infrastructure, those EV chargers and quick chargers for the EV cars right now.
The prices of those EV cars, both the pure EVs or hybrid EV, the price are going down compared to a few years ago. Also, this kind of business is largely or like a high correlation, or is largely policy-driven. I think the trend for the EV is pretty clear and concrete. We have no doubt of the outlook or the demand for the EV cars in the future going forward. Because this kind of auto industry, the lead time is pretty long. The components we are making now are basically for the orders which we received in like three, four years ago. We are pretty upbeat about the outlook for our EV car in the long run.
How do you see the pricing trend of raw materials such as IC and copper? Can we transfer the inflation to the customer, the price inflation to the customers for the sake of offsetting the negative impact on margins?
Currently, the pricing of raw materials remain relatively stable. At least we didn't really see any abnormal fluctuation at the moment. Our strategy is always to enjoy higher and more stable margins by differentiating ourselves with better technologies and products. We will continue to work on this.
Can you share with us the outlook of each businesses for the next year? Also, can you give us a quantified number, like how much you benefited from the factory automation this year?
For the next year, I think there are still many swing factors. Including the uncertainty of the progress of COVID-19 as well as the political environment changes. It's hard for us to really make a forecast. For the factory automation, I will have our CEO to answer this question.
After we acquire Delta Thailand, we have done a lot of automation within our Thailand factories. We transferred our technology and know-how from how we did factory automation in China to Thailand. We do believe there is still some room for us to further improve the automation level in Thailand.
Can you share with us your solutions of energy efficiency for the data centers, and how much you might benefit from this trend?
I think the strong demand for data center are driven by many different factors. For example, that more and more people, they are watching the streaming videos on the internet, as well as that there are more people enjoying playing online gamings. Especially for this year, many people, they are required or they have to work from home or study from home due to the pandemic of COVID-19. I have no doubt of the long-term demand for data center deployment.
What we do for our data center customers is we always strive to achieve as high a power efficiency as possible. Because the power consumption or the expenses related to that has always been one of the biggest headache and burdens for the data center guys. One of the most achievable ways to really reduce those kind of expenses is just to improve your power efficiency. In that case, you are able to consume less power and less energy, and also use less air conditioning. That's what we do for our customers with our power efficiency energy solutions, and our cooling design for our data center customers.
How do you see the outlook and the deployment of EV chargers?
I think, again, we have no doubt for the long-term trend or demand for the EV chargers. As you can see, there are more and more OEM guys, they are having new models for the EV cars. In that case, you will need more and more infrastructure for the EV cars. For this year, I think that the case is abnormal because the pandemic of the COVID-19. This business is kind of under pressure. I think that for the longer term or for the long run, there is no doubt of the demand for this business.
Can you share more details with us regarding your Clean Energy-related businesses? Do you participate the development more of the Taiwan green energy industry?
Yes, we do aggressively participate in the green energy development in Taiwan. We not only provide the wind powers as well as our solar inverters. We also have what we call energy storage system business. Because for those kind of green energy or renewable energies, it's not only about how you convert the energy, it's also about how you temporarily store the energy. That's our solutions. We not only provide the converters, we also have the energy storage system.
Can you share with us about the growth outlook for Q4 and Q1 of next year?
Again, I would say that because Q4 and Q1 are the traditional lower seasons for the company, sequentially, there might be some small decline. Compared to the previous year, I think that we will do our best to maintain some growth. Again, because there are still too many swing factors and uncertainties in the macro environment, it's really hard to forecast.
As we know, the U.S. is going to have their election for the President. Do you have any idea, if Mr. Joe Biden wins the election, how is this going to impact Delta's business? What if Mr. Donald Trump wins this election? How are you going to be impacted?
We can hardly really forecast the impact. I think this is the reason why we always try to maintain a relatively diversified portfolio, including our product portfolio and our production locations or even our customer composition. We try to reduce the risks to the company.
What is the driver for DET's strong operating margin improvement, despite the gross margin decline? Is there more room for further improvement, or it's already at a satisfactory operating efficiency level?
I think as our CEO just mentioned, that after we acquired DET, we have done a lot of things, including streamline the production lines, we also improved the factory automation level in Thailand. Also, they have pretty good business mix and economic scale in Q3. Hence, the margins were strong. Also, because of the tariff issues, after we acquired Delta Thailand, we also shifted some of the productions to Thailand. I think for those reasons, they all attributed to the stronger performance of Delta Thailand.
Assuming a 5G smartphone consumes more power, will it become an opportunity for Delta?
Of course, because in Delta, we are power management or a power converter, as per whatever devices consume more powers, we would benefit from it. If you look at the new generation smartphone of the big smartphone maker, that the 5G smartphones, they don't necessarily consume more power. The power management is for sure much more complicated than the 4G phones. As a result, we think that it would be a good opportunity for us if we could fulfill the customer's requirements.
How is the 5G deployment progress? Do we see any speed-up or slowdown in different regions? How could we expect the progress in the next one to two years compared with 4G deployment? Can you compare 5G base station power consumption versus 4G?
I think we more or less mentioned or answered some of these questions before. I think the main or the major issue of 5G development right now is still the lack of killer applications. It doesn't mean that there are no killer applications now, and there are not going to have in the future.
What is the content value for a 5G smartphone compared with a 4G? "Is there any further capacity expansion plan for passive components into 2021?"
Well, it depends on the design of the phones. As far as I know, the 5G smartphones are using relatively more passive components compared to 4G phones. It could be a wide range. The only thing we are sure is the increase of the component costs. As for the value, pricing will be another variable. In terms of the capacity, I think that we are almost running our full capacity right now. Given our expectation of future growth, we will continue to expand, but the pace will be subject to customers' demand.
How do you expect the outlook for PC and server into 2021? Do you expect strong demand to continue?
I think this year, due to the work from home demand, the trend, the demand has picked up a lot. I think that in terms of the sustainability for this IT or PC and the server demands, I think that the more important thing is not about the outlook or the demand for this kind of products next year, it's how we manage our inventories and production. By which I mean that-
What if the demand is below the company's expectation for the next year, then how are you going to do with your inventories?
I think that the more important thing is not to really to forecast the demand. It's how about we manage well our inventories and productions.
"How is the IA growth outlook in 2021?"
For IA, I think the China market has recovered since Q2, but outside of China, it is still suffering from the pandemic of COVID-19.
Okay. What's the progress of current India plant constructions?
With the pandemic, the operation in India is still slow. We plan to complete our Indian factory construction in March of this year. As you know, because of the pandemic in India, there was and there is some delay in terms of the construction plan in India right now. At this moment, we expect the plant to be completed in early next year. Because many cities in India are still locking down, we will see.
The next question is regarding the M&A. What's the potential M&A in the next stage? Will you focus more on the production side of diversification or getting into new products industry?
I think we continue to look for appropriate M&A targets and are in talks with some-- After DET, I think we are not looking at any production diversification. I think that if there is any deal, it's going to be for the technologies or customer access.
How do you see the impact from the pandemic in the European countries and the U.S., and what are the businesses of the company are impacted the most?
I think that we both suffer and benefit from the current situation of lockdowns in many cities and countries. For example, for those like our ICT infrastructure or our building automation business, because for those kind of businesses, you need to go to the site and to implement the devices or investigate the site. That's the reason why those markets are slow, and those businesses are under some pressure and suffering right now. On the other hand, because of the lockdown in many cities and regions, we also benefit from the work-from-home trend in our Power Electronics businesses.
In terms of the production geographic breakdown by China, Thailand, and others, how will this change in three years?
I think it hasn't really changed since our last analyst meeting. China is still our main production site, and especially during the pandemic, and it's actually one of the most stable production sites among all the factory sites.
China still accounts for about 70% of our total production value, and DET accounts for about 20%, with the remaining about 10% in Taiwan, Slovakia, and a few other places.
How much impact came from the foreign exchange fluctuation in Q3?
We are largely naturally hedged, the foreign exchange fluctuation had actually little impact on our gross margins.
Will we see a stronger sales momentum in 2021, thanks to further global demand recovery?
I think, for that question, I can hardly forecast things even for tomorrow, how can I really forecast things for next year? The only thing I can say is, whatever things happen, that I think we are doing our best to equip ourselves, and also we are preparing ourselves for whatever is going on.
Is there more room for further improvement, I mean for DET's, for Delta Thailand's margins?
I think I just answered the questions just now, and of course, there is still some room for improvement.
Do you keep your CapEx guidance for 2020 unchanged, and what's your CapEx guidance for the next year?
Yes, other than India where things are delayed, we continue to execute our expansion plans either for R&D or for capacity. I think this year's CapEx, we're pretty close to our budget plan. For next year, that we don't have the summary yet, but most of the construction or capacity expansion plans are carried over. The CapEx won't be significantly different from this year's.
The next question is why the gross margin didn't really hit another record high as your OP margin or revenues did.
Rodney just talked about the reasons behind that, because in Q2, we had some one-off incomes. The problem is it wasn't really that different compared to Q2. That's why the gross profit margin Q3 was slightly lower than Q2.
How do you see the impact of locking down the cities?
This is a real dilemma, because if you lock down the cities, definitely they are going to have some pretty negative impact on the economy. If you don't lock down the cities, the pandemic of COVID-19 may get worse.
Can you share with us about your dividend payout? Will your dividend payout number of the next year will be the same of this year?
It's still too early to say, because we can't really answer this question at this moment. The dividend number has to be discussed and approved in a Board meeting in the next year. I can't really answer the question at this moment.
Do you think that you're able to bundle different kinds of cooling products, like your vapor chambers or heat pipes, or your cooling fans together in order to provide better products or solution for your customers?
It really subject to the design and the requirements of the customers. Of course, if we are able to provide more and more solutions or our products, we are happy to do so.
Do you have any idea for your market shares in data center market?
It also depends on how you really define data centers, because when we talk about the data centers, it's not only about the hyperscale data center guys. Many enterprises, they also are building up their data centers now. It's really hard to calculate or have an aggregate number of the market shares. We do what we can do to achieve higher market shares or to get more shares as possible.
Can you give us more colors regarding your cooling fans business?
Traditionally we were selling a lot of fans into those IT-related applications. Nowadays, we are not only selling our cooling fans into those IT devices, also selling our fans into the auto market. We are selling our ventilation fans into the consumer markets. I think that even though for some of the products or for some of the device, Maybe, for some of those kind of devices, there are some fan-less device, but I think that there are so many applications that we have the opportunity to penetrate into.
Do you think that you are able to get more shares in your telecom power business in the U.S.?
I think that we have actually pretty high market shares in the U.S. We have businesses with those main operators in the U.S., especially after we acquired Eltek.
Can you please give us more colors of your solar inverter business?
In the U.S., because of global warming, I think that they are pretty aggressive on this kind of green energy development. We actually have some good business, and we are selling our solar inverters into the U.S. market as well.
The final question is regarding the passive components. Where are you going to complete your factory in Tainan, the southern part of Taiwan?
I think the construction is going to be completed in early next year. Very likely in the first quarter. The construction is likely to be completed in the first quarter of next year. We start to be really able to produce more components, I think, probably in mid-2021.
Thank you everyone for joining this virtual investor conference.
Thank you.